The Italian Budget Law for 2017 (Law No. 232 of 11 December 2016), with the specific purpose of attracting high net worth individuals to Italy, introduced the new article 24-bis in the Italian Income Tax Code (“ITC”) which regulates an elective tax regime for individuals who transfer their tax residence to Italy.
The special tax regime provides for the payment of an annual substitutive tax of EUR 100.000,00 and the exemption from:
- any foreign income (except specific capital gains);
- tax on foreign real estate properties (IVIE ) and tax on foreign financial assets (IVAFE);
- the obligation to report foreign assets in the tax return;
- inheritance and gift tax on foreign assets.
Eligibility
Persons entitled to opt for the special tax regime are individuals transferring their tax residence to Italy pursuant to the Italian law and who have not been resident in Italy for tax purposes for at least nine out of the ten years preceding the year in which the regime becomes effective.
According to art. 2 of the ITC, residents of Italy for income tax purposes are those persons who, for the greater part of the year, are registered within the Civil Registry of the Resident Population or have the residence or the domicile in Italy under the Italian Civil Code. About this, it is worth noting that persons who have moved to a black listed jurisdiction are considered to have their tax residence in Italy unless proof to the contrary is provided.
According to the Italian Civil Code, the residence is the place where a person has his/her habitual abode, whilst the domicile is the place where the person has the principal center of his businesses and interests.
Exemptions
The special tax regime exempts any foreign income from the Italian individual income tax (IRPEF).
In particular the exemption applies to:
- income from self-employment generated from activities carried out abroad;
- income from business activities carried out abroad through a permanent establishment;
- income from employment carried out abroad;
- income from a property owned abroad;
- interests from foreign bank accounts;
- capital gains from the sale of shares in foreign companies;
However, according to an anti-avoidance provision, the exemption does not apply to capital gains deriving from the sale of “substantial” participations that occur within the first five tax years of the validity of the special tax regime. “Substantial” participations are, in particular, those representing more than 2% of the voting rights or 5% of the capital of listed companies or 20% of the voting rights or 25% of the capital of non-listed companies.
Any Italian source income shall be subject to regular income taxation.
It must be underlined that, under the special tax regime no foreign tax credit will be granted for taxes paid abroad. However, the taxpayer is allowed to exclude income arising in one or more foreign jurisdictions from the application of the special regime. This income will then be subject to the ordinary tax rule and the foreign tax credit will be granted.
The special tax regime exempts the taxpayer also from the obligation to report foreign assets in the annual tax return and from the payment of the IVIE and the IVAFE.
Finally, the special tax regime provides for the exemption from the inheritance and gift tax with regard to transfers by inheritance or donations made during the period of validity of the regime. The exemption is limited to assets and rights existing in the Italian territory at the time of the donation or the inheritance.
Substitutive Tax and Family Members
The taxpayer must pay an annual substitutive tax of EUR 100,000 regardless of the amount of foreign income realised.
The special tax regime can be extended to family members by paying an additional EUR 25,000 substitutive tax for each person included in the regime, provided that the same conditions, applicable to the qualifying taxpayer, are met.
In particular, the extension is applicable to
- spouses;
- children and, in their absence, the direct relative in the descending line;
- parents and, in their absence, the direct relative in the ascending line;
- adopters;
- sons–in-law and daughters-in-law;
- fathers-in-law and mothers-in-law;
- brothers and sisters.
How to apply
The option shall be made either in the tax return regarding the year in which the taxpayer becomes resident in Italy, or in the tax return of the following year.
Qualifying taxpayer may also submit a non-binding ruling request to the Italian Revenue Agency, in order to prove that all requirements to access the special regime are met. The ruling can be filed before the transfer of the tax residence to Italy.
The Revenue Agency shall respond within 120 days as from the receipt of the request. The reply is not binding for the taxpayer, but it is binding for the Revenue Agency.
If no ruling request is filed, the same information provided in the request must be provided together with the tax return where the election is made.
Termination
The option for the special tax regime is automatically renewed each year and it ends, in any case, after fifteen years from the first tax year of validity. However, the option can be revoked by the taxpayer at any time.
In case of termination or revocation, family members included in the election are also automatically excluded from the regime.
After the ordinary termination or revocation, it is no longer possible to apply for the special tax regime.
The author of this post is Valerio Cirimbilla.