Italy: new tax rules for new resident

The Italian Government designed a new flat tax, under the new Article 24 bis of TUIR (consolidated law on income tax) introduced by the new Italian Budget Law 2017. The aim of this law is to revive the economic fortunes of Italy by making the country competitive with countries such as England and Spain, which have faired better in terms of cost savings and tax benefits. The Flat Tax law is designed to attract foreign persons and wealthy taxpayers that have never resided in Italy to invest in in the country by not only giving incentives by way of tax rebates, but also with the splendour of Italian culture and food.

For years, it has been reported that the British government have offered the wealthy from across the world a special “non-domiciled” status which has allowed them to take their fiscal residence in the capital and pay a tax of only £65,000.00 on income made abroad¹. However, in light of Brexit, foreign persons with the special status, those who have lived in the country for more than 15 years, will have to pay the same taxes as all other residents. This reform to the taxation of UK “non-domiciled” will affect 116,000 residents who contribute €8 billion to the British economy annually². This is where the Italian government may come in by establishing policies and laws to attract these high net worth persons and the investment they bring. Italy took the occasion to change laws and policies to became more competitive on the European market.

Conditions

Article 1, paragraph 152, Budget Law 2017, introduced Article 24-bis in the Italian Income Consolidation Code (“TUIR”). Pursuant to this Article, individuals not resident in Italy for at least nine of the ten taxable years prior to the first year of effect of the option can transfer their residence to Italy by exercising the option for a substitute tax on all foreign-source income and gains (the “Flat Tax”)³.

Whoever elects to take up residence in Italy can choose to pay only a fixed tax of €100,000.00. The deposit of this sum will be paid as a lump sum for each effective tax year no later than the date laid down by the Italian Government for the payment of the balance of income taxes⁴.

The flat tax is only paid on income made abroad, while any money made in Italy would be taxed at a normal rate. Income is considered of foreign origin, with a “mirror reading” of Article 23 TUIR (consolidated law on income tax) and with the exception of what is possibly provided for by international tax treaties, when (i) the asset generating the income is situated abroad, or (ii) the business generating the income was conducted abroad or, when (iii) the individual remitting the income is resident abroad for fiscal purposes. Moreover, according to the new Flat Tax, the new flat-rate regime can also be extended to one or more family members of the “wealthy-taxpayer.” In the latter case, the substitute tax is equal to €25,000.00 for each of the family members transferred in Italy⁵.

The option can also be exercised by Italian citizens living abroad in tax-havens States, who decide to return to Italy.

Operating Instructions

In order to be certain of meeting the requirements of the law, Article 24bis in the TUIR, taxpayer can submit a specific application to the Assessment Central Department of the Italian Tax Agency in advance online. The request can be delivered by hand, registered mail or electronically, using the Italian certified mail.

In such application, the taxpayer must indicate:

a) the biographical data and, if already granted, the tax code, in addition to the taxpayer’s home address in Italy, if he is already resident;
b) the status of non-resident in Italy for a period of time at least equal to nine tax years during the ten years preceding the beginning of the validity of the option;
c) the jurisdiction or the jurisdictions that have regulated the fiscal residence before exercising the option;
d) the foreign States for which the applicant intends to exercise the option of not using the substitute tax.

The taxpayer must also indicate the existence of the elements required to access to the tax regime, filling out a check list and presenting the supporting evidence. Thanks to the introduction of this kind of proportional taxation, the tax base of wealthy taxpayers will be taxed using the same percentage and not with an increasing tax rate related to an increase in income⁶.

The flat tax will allow for the application of a flat tax at the tax base of each taxpayer. Thus, it will be sufficient to fill a form showing how much the taxpayer must pay without the need for detailing the expenses deductible even with the benefit of the operators of the Tax Administration and the Tax Agency that will be relieved from the obligation of verifying the correctness of the statements by the taxpayer in terms of requests for deductions and deductions.

Associated Tax Advantages

The implementation rules clarified that a “new-resident” will not be required to disclose any assets held abroad before migrating to Italy in the ruling request or in the tax return. No disclosure of such assets held abroad is required during the regime as well, since a “new-resident” is not required to fill in the section of the tax return (section RW) in which normal Italian residents disclose their assets owned abroad. The new regime sets out an exemption from certain report obligations (“RW Form”) and wealth taxes (“IVIE and IVAFE”).