10 August, 2017
Italy’s resident non-domiciled program.
The Italian government has recently implemented a tax package and fast-track VISA procedure to attract wealthy individuals that want to relocate to Italy.
This package includes a € 100,000 flat tax on all foreign income for individuals who become Italian resident after at least a 9-year period of residence outside of Italy. This flat tax is paid on an annual basis for a maximum of 15 years.
The tax package is integrated by a fast-track visa procedure for investors and their relatives.
According to the Res Non-Dom Regime, eligible taxpayers can choose which country or countries income to tax with the substitutive flat tax (the so-called “cherry picking” principle). Any income sourced in the “non-chosen countries” (if any) is excluded from the Res Non-Dom Regime (as well as the Italian sourced income) and, therefore, is subject to ordinary Italian taxation and will benefit from tax credit on taxes paid abroad (under ordinary limitations) and from relevant tax treaty protection (if any).
The € 100,000 yearly flat tax
As a rule, Italian tax residents are subject to income tax on their worldwide income, to a 0.2% tax on the value of certain financial assets wherever located and to a 0.76% tax on the value of real properties situated in Italy and abroad.
The new package allows certain resident taxpayers to opt for the payment of a yearly flat tax of € 100,000 in lieu of:
- income tax on non-Italian source items of income (under Italian laws income includes capital gains);
- the 0.2% tax on the value of foreign financial assets;
- the 0.76% tax on the value of foreign real estate.
Since Italian taxation on financial income is normally levied at a 26% rate, a € 100,000 substitutive tax corresponds to the ordinary taxation on approximately € 385,000 of financial income (without considering that the tax is also substitutive of wealth taxes on foreign financial and real estate assets). Assuming a return on investments of 2%, the burden of the yearly € 100,000 substitutive tax is equivalent to that associated to the ordinary taxation for an amount of foreign financial assets of approximately 13.9 €/mio (13,889,000 x 2% x 26% + 13,889,000 x 0,2% = 100,000).
Income from foreign sources can be remitted into Italy without any additional taxation.
Exemption from gift and inheritance tax
Italian taxes apply at rates ranging between 4% and 8% on any assets, wherever situated, transferred by Italian resident persons as a gift or upon succession. The expectation is that these rates may sharply increase in the near future.
The election for the substitutive tax regime allows a full exemption from gift and inheritance taxes on all foreign situs assets held by persons who have elected for the special regime (in the years when this regime is applicable).
Exemption from any reporting requirement
Italian resident taxpayers are subject to reporting requirements with respect to any assets (both financial and not financial) held abroad. This causes a significant leakage of confidentiality, which may be avoided by transferring all foreign assets to Italian based financial intermediaries. The reasoning is that such financial intermediaries are themselves subject to reporting obligations and/or to the obligation to deduct taxes at source on income and wealth of their clients.
The election for the substitutive tax regime exempts from all such reporting requirements even if the relevant assets are held abroad without the involvement of any Italian based intermediary.
As a matter of fact, taxpayers electing for the substitutive tax regime would be guaranteed full confidentiality vis-à-vis the Italian tax authorities in relation to their non-Italian wealth. To a certain extent, information may automatically flow to the Italian tax authorities pursuant to the Common Reporting Standard (CRS), but taxpayers may keep financial assets in jurisdictions that have not adopted the standard (one of these jurisdictions is the United States of America).
The substitutive tax for each family member
The election for the flat tax is personal and does not cover by itself taxes otherwise due by other family members. However, the same regime may be extended to some or all of the family members and in such a case the amount of the tax is reduced to € 25,000 for each additional person.
Family members are defined for this purpose very broadly and are not limited to the spouse and children.
Taxpayers opting for the substitutive tax regime may apply the ordinary tax regime with respect to items of income arising from one or more specified States.
This may allow taxpayers to benefit from treaty provisions with respect to the related items of income. The same election for the ordinary regime is not foreseen with respect to taxes on wealth and to gift or inheritance taxes.
The substitutive tax regime applies on an optional basis for a maximum period of 15 years. It is revocable at any time by the taxpayer.
The law does not state that any future changes in law will not affect those taxpayers who have already elected for the special regime.
Persons eligible for the substitutive tax regime
The election for the substitutive tax regime is allowed to any Italian resident person who has not been resident of Italy for at least 9 out of the last 10 calendar years. Eligible persons are both Italian and non-Italian citizens.
The first election for the special regime requires the filing of a ruling request with the Italian tax authorities. Such request aims at avoiding that persons may benefit from the special tax regime even though in substance they met the Italian tax residence test in more than one out of the last ten years.
The pieces of information to be included in the ruling request will be exchanged with the tax authorities of the jurisdictions where the applicants had been resident in the relevant years.
The ruling request should not include any description of the wealth of the applicant, unless relevant for assessing whether he/she was resident in Italy in a given period.
Exception to the rule
The substitutive tax regime does not cover capital gains on qualified shareholdings realized by the taxpayer in the first five-year period. Qualified shareholdings are those representing more than 20% of the voting rights or 25% of the capital of the relevant company. The thresholds are reduced to 2% and 5% per cent for listed companies.
Dividends from such shareholdings fall instead within the scope of the substitutive tax regime.
Foreign source income: carried interest
The substitutive tax regime is applicable with respect to foreign source items of income and to foreign situs assets. Income from participations in non-Italian resident companies is regarded as non-Italian source income. Similarly, foreign source income includes any income from investment vehicles and funds established outside of Italy. The rule applies even if the relevant management company is Italian resident (at least where the funds are EU based).
As for carried interest, the qualification of the relevant income depends on the way it is structured. In principle, carried interest “embedded” in financial instruments has the same qualification as ordinary income arising from such instruments. This is particularly attractive for funds’ managers who own financial instruments in foreign vehicles and receive the carried interest through such instruments.