(This article was updated in 2024 according to the increase of the fixed tax).
In 2016, the Italian government issued a new tax package to attract individuals with high net worth who wanted to relocate to Italy. 2017 was the first tax period affected by the new system, and in 2018, the first applications were sent.
The new law includes a € 200,000 substitutive flat tax (€ 100.000 till 2024) on all foreign incomes for individuals who become Italian residents. The essential requirement is to become an Italian resident after at least 9 years living outside Italy.
The maximum duration of this taxation option is 15 years and it is revocable at any time by the taxpayer. On the other hand, not paying the yearly flat tax in time drives the forfeiture of this substitutive regime, without any possibility of opting again for it.
The yearly flat tax
Under the Italian ordinary rules, Italian tax residents (individuals) are subject to a progressive income tax on their worldwide incomes (“worldwide taxation principle”). The main income tax “Irpef” includes rates from 23% to 43%, but, with some additional local taxes, the highest rate can achieve even 47-48%. A complex system of deductions of life expenses reduces the final average tax impact.
In addition, there are:
- a 0.20% rate tax on the value of some financial assets wherever located;
- a 0.76% rate tax on the value of real estate properties owned in Italy and abroad.
According to the flat tax system, the new resident taxpayer can opt for the yearly payment of € 200.000 instead of the ordinary taxation explained above.
The “Cherry Picking” principle
According to this new package, the new Italian residents, not domiciled taxpayers, can choose which country or countries' income to tax with this substitutive flat tax. All the incomes coming from non-chosen countries (if any) are excluded from the flat tax regime, and, therefore, they are subject to ordinary Italian taxation and will benefit from a tax credit on taxes paid abroad (under ordinary Italian and international treaty regulations and limits).
So, a new resident who opts for the flat tax regime may apply the ordinary tax regime with respect to incomes arising from one or more specified countries. All the incomes from one excluded country are taxed with ordinary rules; the taxpayer cannot pick each income, only all the incomes from a specific country. This system may allow a new resident to benefit from international tax treaties concerning related incomes.
A Country excluded from the Flat Tax system can not be included again in the new taxation system, and all the related incomes will be ordinarily taxed until the end of the flat taxation option.
All the Italian source incomes (if any) are subject to ordinary Italian progressive taxation and all the other Italian tax fulfilments.
Favourable?
In general, the proper calculation is not a simple exercise:
Foreign sources of income can be remitted into Italy with no additional taxation (or burden withholding taxation).
Other advantages and exemptions
According to Italian tax rules, resident taxpayers must fulfil a tax reporting procedure concerning any financial asset, real estate property, car, plane, helicopter, ship, yacht, fine-art items, high-value jewellery, etc. (financial and non-financial assets) directly held abroad, even through a third party, or under trust mandate etc. This means small taxation (resumed above) and a significant leakage of confidentiality about those assets.
The option for the new substitutive flat tax grants a total exemption for this kind of assets reporting procedure, with guaranteed complete confidentiality. Italian tax authorities obviously have the power to investigate the taxpayer's position from a worldwide point of view.
This complex and non-confidential reporting procedure remains for the assets in countries that are not “cherry-picked” (excluded).
The flat tax for family members
The option for the flat tax is absolutely personal and does not cover taxes otherwise due by other family members. However, the same flat tax regime may be extended to some or all of the family members, paying a reduced € 25,000 yearly flat tax for each additional family member. Family is very broadly defined and is not limited to wife and children.
Eligible foreign new residents
The option for the new flat tax system can be done only by a person who has not been a resident of Italy for at least 9 out of the last 10 calendar years before.
This is a robust anti-abuse measure for Italian citizens who moved abroad because of our high ordinary taxation, which now could be attracted back.
Ruling procedure
The first option for the substitutive regime could require a ruling procedure with the Italian tax authority. The eligible new resident must declare (and prove) that he meets all the requirements of this new regime, and above all, being not an Italian tax resident for the last 9 out of 10 years, the previous tax residency, the excluded Countries (if any), etc.
There will be an exchange of information with the jurisdictions' tax authorities regarding where the applicants have been residents in the relevant years.
The ruling application does not include any detailed description of the wealth or income of the applicant if not relevant for understanding whether he was resident in Italy during the previous 10 years.
The exception to the rule
The flat tax system does not cover capital gains on qualified shareholdings realized by the taxpayer in the first five-year period. Qualified shareholdings represent more than 20% of the voting rights or 25% of a company's capital. The thresholds for listed stock market companies are reduced to 2% and 5% per cent. Ordinary Italian taxation is applicable for these capital gains.
After this five-year holding period, the flat tax also covers these capital gains, becoming even more interesting in the long period of tax planning.
Dividends from such shareholdings fall instead within the flat tax regime.
Exemption from gift and inheritance tax
The option for the flat tax system allows a full exemption from inheritance and gift taxes on all foreign situs assets held by persons elected for the special regime (in the years when this regime is applicable).
For further clarification, tailored advisory, or to start the application procedure, do not hesitate to contact us; we can assist You and Your family.