Italian tax regime for new resident HNWIs

Regulatory framework

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Law No. 232/2017 (“2017 Budget Law”) provides a special and optional regime for

individuals – irrespective of their citizenship – planning to transfer their tax residence to

Italy (the “Regime”).

• Article 1, para. 152-159, of the 2017 Budget Law

• Introduction of the new Article 24-bis of Presidential Decree No. 917/1986, Income Tax

Consolidated Act (the “ITCA”)

• Implementing rules No. 47060 of 8 March 2017 issued by Italian tax authority (the

“Implementing rules”)

• Circular letter No. 17/E of 23 May 2017 issued by Italian tax authority (the “Circular letter”)

Main features of the Regime:

• Exemption from the worldwide taxation principle for new Italian resident individuals

• Flat tax on foreign-source income (the “Substitute tax”)

• No Italian IHT on foreign assets

• Exemption from fiscal monitoring fulfillments with respect to assets held abroad

• Exemption from wealth taxes on foreign assets

• Fast track VISA procedure

The conditions

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Pursuant to Article 24-bis of the ITCA, individuals who transfer their tax residence to

Italy under Article 2, para. 2, of the ITCA may opt for the Substitute tax on foreign

income received, subject to the following conditions:

the individuals must have been non-Italian resident, under Article 2, para. 2, of the

ITCA, for at least nine out of the ten FYs prior the first year of Regime’s validity, and

the individuals must exercise the option for the Regime.

Whether for the purpose of assessing the transfer of residence to Italy or for the

purpose of verifying the absence of residence, Article 24-bis makes reference to Article

2, para. 2, of the ITCA.

How to opt for the Regime

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The Implementing rules and the Circular letter clarified that the advanced ruling filing is

not mandatory.

• The Italian tax authority must reply to the ruling request within 120 days after the submission.

Such deadline can be postponed by 60 days, if the Italian tax authority asks to the taxpayer

additional information and/or documentation.

• In the absence of a reply within the deadline, a positive reply is deemed to be issued.

Italian tax authority stated that individuals can apply for the Regime upon:

i. submission of the income tax return related to the FY of the moving of tax residence to Italy

under Article 2, para. 2, of the ITCA, or

ii. submission of the income tax return related to the FY following that in which the tax residence

has been moved to Italy under Article 2, para. 2, of the ITCA.

The tax return must be submitted within 30 September following a given FY.

Tax residence for individuals

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Pursuant to Article 2, para. 2, of the ITCA, an individual is deemed to be tax resident in

Italy when, for the greatest part of the FY [temporal requirement],

i. he/she is enrolled in the Registry of the Italian resident population. It is a formal condition; or

ii. he/she holds his/her residence in Italy for civil law purposes. The residence is the habitual

abode; or

iii. he/she holds his/her domicile in Italy for civil law purposes. The domicile is the place where a

person established the main seat of his/her business and interests.

The three above-mentioned conditions are alternative to each other.

The FY corresponds to the calendar year and no split year rules are provided.

Under the domestic legislation, the status of (non) tax resident refers to the whole FY,

not to a part of it.

• Exception: in case a specific provision is provided by a DTT entered into between Italy and a

foreign State (e.g., Switzerland and Germany).

Rebuttable presumption of residence

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Article 2, para. 2-bis, ITCA provides a rebuttable presumption on the basis of which

Italian citizens, who transfer their tax residence to black listed States, are still

considered as Italian residents, unless otherwise proven.

• Black listed States are those listed in the Ministerial Decree dated 4 May 1999 as implemented

and amended from time to time (i.e., Alderney, Andorra, Anguilla, Antigua and Barbuda, Aruba,

the Bahamas, Bahrain, Barbados, Belize, Bermuda, the British Virgin Islands, Brunei, the

Cayman Islands, the Cook Islands, Costa Rica, Djibouti, Dominica, Ecuador, French Polynesia,

Gibraltar, Grenada, Guernsey, Hong Kong, the Isle of Man, Jersey, Lebanon, Liberia,

Liechtenstein, Macau, Malaysia, the Maldives, the Marshall Islands, Mauritius, Monaco,

Montserrat, Nauru, the Netherlands Antilles, Niue, Oman, Panama, the Philippines, St. Kitts and

Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Sark, the Seychelles, Singapore,

Switzerland, Taiwan, Tonga, the Turks and Caicos Islands, Tuvalu, Uruguay, Vanuatu and the

United Arab Emirates).

• Rebuttable presumption

• Reversal of the burden of proof on the taxpayer

Also Italian citizens against whom the rebuttable presumption applies can opt for the

Regime. In such a scenario, the filing of the advanced ruling could be advisable.

Absence of tax residence in Italy

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In order to benefit from the Regime, it must be assessed whether the individual who

transfers his residence to Italy has effectively been non-resident for at least nine out of

the previous ten FYs.

The status of non-resident is met if none of the three connecting factors with Italy (i.e.,

enrollment in the Registry, residence and domicile) was met for most of the FY.

• Tie breaker rules

In order to evaluate the absence of residence in Italy, the applicants should collect the

evidences about their effective residence abroad.

The Substitute tax (1)

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Under the regime, taxpayers are required to pay the yearly Euro 100,000 Substitute tax,

in lieu of the ordinary taxation, on the foreign income received. The Substitute Tax

“covers” the entire foreign income received, regardless of the amount and the actual

taxation in the foreign State.

The Substitute tax must be paid in a lump sum, for each FY of validity of the Regime,

within the deadline for paying the balance of income taxes, which is currently 30th June

following a given FY.

The Substitute tax is not deductible from any other taxes or contributions.

The Circular letter clarified that taxpayers cannot regularize the omitted payment of the

Substitute tax.

The Substitute tax (2)

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Neither the former residence State of the applicant, nor the foreign-source State of

income “covered” by the Substitute tax are relevant for the applicability of the Regime.

The remittance to Italy of the foreign-source income “covered” by the Substitute tax

does not trigger any further taxation in Italy.

Italian source income is subject to the personal income tax (“IRPEF”) and taxed up to

43% (plus local surcharges)

• 12.5% / 26% WHT applies on the great majority of investment income

• An exemption is provided for capital gain on real estate held for more than 5 years

The Circular letter confirmed that the Regime cannot be combined (in the same tax

period) with the favorable domestic tax regimes provided for researchers/scholars (90%

exemption) and high-specialized workers (50% exemption) transferring their tax

residence to Italy.

Extension of the option to family members

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The taxpayer exercising the option can also extend the regime to one or more family

members listed in Article 433 of the Italian Civil Code, provided that the requirements to

be eligible for the Regime are met.

Family members who can benefit from the Regime are:

• spouse;

• sons and daughters, including adopted sons/daughters;

• other descendants;

• parents;

• sons and daughters-in-law;

• father-in-law and mother-in-law;

• brothers and sisters.

The amount of the Substitute tax is increased by Euro 25,000 per year for each

additional family member benefitting from the Regime.

Foreign sourced income covered by the Substitute tax

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As a general rule, income is deemed to be foreign-sourced when:

• the asset from which the income is derived is located abroad, or

• the activities through which the income is produced is performed abroad, or

• the payer is resident abroad.

Only the capital gains arising from the disposal of foreign qualified shareholdings are not

covered by the Substitute tax, if occurred within 5 years after the election.

• For Italian income tax purposes, a shareholding is considered “qualified” when the shares

represent, in total (i) a percentage of voting rights in the company’s ordinary shareholders’

meeting higher than 2% (for listed shares) or 20% (for unlisted shares), or (ii) a participation in

the share capital higher than 5% (for listed shares) or 25% (for unlisted shares).

• During the first 5 years period, capital gain on qualified shareholdings are subject to the

ordinary IRPEF regime. Accordingly, these capital gains are computed, for the 58.14% of their

amount, in the IRPEF taxable income, subject to progressive rate up to 43%.

• After such period, capital gains upon the disposal of qualified shareholdings in foreign

companies will be covered by the Substitute tax as well.

Optional exclusion – Cherry picking

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Pursuant to Article 24-bis, para. 5, of ITCA, the taxpayer may choose not to benefit from

the Regime in respect of income arising from certain States (excluded State(s)),

indicating them specifically when exercising the option or when modifying it.

• The ordinary IRPEF regime applies.

• The domestic tax credit on taxes paid in the excluded foreign source-State will be granted.

• The foreign capital losses occurred in the excluded State could be offset against the Italian

sourced income.

The Circular letter clarified that taxpayers can add further “excluded States” in each

yearly tax return. Such exclusion cannot be modified by the taxpayer in the following FY

(i.e., once a State has been excluded, it cannot be covered by the Substitute tax in the

following FYs).

Income received through interposed entity

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If non-Italian resident companies held by the new Italian residents are considered as

interposed and then disregarded for Italian tax purposes, the Italian source income

arising from the underlying assets of the company would not be covered by the

Substitute tax. On the other hand, if the non-Italian resident disregarded foreign

companies receive foreign source income, this would in any case be covered by the

Substitute tax. The same rules would apply to foreign trusts that are deemed to be

interposed pursuant to the guidance set forth by the Italian tax authority.

Pursuant to the Italian tax law, a foreign company is deemed to be Italian resident if its

central management and control is carried out in Italy for the majority of the tax year.

The Circular Letter clarified that such rule does not apply with respect to foreign

companies managed by new resident individuals benefitting from the Regime, provided

that the majority of the board of directors is not composed by Italian resident individuals

not benefitting from the Regime.

Applicability of the Italian CFC rules

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The Italian tax authority stated that the Italian Controlled Foreign Companies rules do

not apply to shareholdings in non-Italian resident companies held by the Italian resident

individuals, provided that the foreign company is resident for tax purpose in a State

covered by the Substitute tax.

Italian CFC rules shall continue to apply to cases where the foreign entity is held

through an Italian company; in such latter case the Italian CFC rules apply at the level of

the Italian entity.

Applicability of Treaty benefits

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DTTs apply to persons qualifying as “resident” of a Contracting State (Article 1 of the

OECD Model Tax Convention).

Article 4 of the OECD Model Tax Convention: the term “resident” of a Contracting State

«does not include any person who is liable to tax in that State in respect only of income

derived from sources in that State or capital situated therein».

Some DTTs do not accept a forfeit taxpayer as tax resident (e.g., DTT between Italy and

Switzerland).

The Circular letter clarified that individuals benefitting from the Regime are considered

as resident for the purposes of the DDTs entered into by Italy since they are taxed in

Italy on their worldwide income, although the foreign income received is subject to the

flat Substitute tax (unless the specific DTT provides otherwise).

Duration

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The Regime is granted for a maximum period of 15 FYs.

The option for the Regime is automatically renewed and is revocable.

No minimum period of application.

Opportunity to benefit from the Regime just for 1 FY.

The applicant or the family member to whom the option is extended could revoke the

option in the yearly tax return of the FY following the one in which it was carried out. If

during this period the obligation to submit the tax return is not fulfilled, a specific

communication must be sent to a specific office of the Italian tax authority within the

deadline for the submission of the yearly tax return.

Expiry and forfeiture

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A second application for the Regime is not permitted.

Expiry, revocation and forfeiture of the Regime in the hand of the main applicant trigger

the loss of the effects even for his family members.

In such a case, family members are entitled to exercise an autonomous option as main

applicant by paying the Euro 100,000 Substitute tax.

• In this case, the ordinary application period of the Regime (15FYs) is reduced by the number of

FYs during which the applicant has benefited from the Regime as family member.

• In case of exercising an independent option, the Regime may be extended to the new applicant’s

family.

Exemption from inheritance and gift taxes (1)

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As regards the territorial scope of application of the Italian inheritance and gift taxes, the

following rules would apply: (i) in case the deceased (or donor) was resident in Italy at

the time of death (or when the gift was made), inheritance and gift tax would apply on all

assets, wherever located; (ii) on the contrary, in case the deceased (or donor) was not

resident in Italy at the time of death (or when the gift was made), inheritance and gift tax

would only apply on Italian situs assets.

• Ordinary IHT rates range from a minimum of 4% up to a maximum of 8% depending on the

relationship between the deceased/donor and heir/donee.

Exemption from inheritance and gift taxes (2)

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Under the Regime, transfer upon death and gifts of assets located in a State covered by

the Substitute tax are not subject to Italian inheritance and gift taxes. Such exemption

applies regardless of the residence of the heir(s)/donee(s).

• Only assets located in Italy and in excluded States are within the scope of the Italian inheritance

and gift taxes.

• The domestic tax credit is not granted for taxes paid abroad.

The Circular letter clarified that transfer of assets to trusts can also benefit from the

exemption at stake. Inheritance and gift taxes are due only in case of transfer of assets

within the Italian territory. In case of extension of Regime to family members, exemption

applies also to transfers made by such family members.

Other benefits

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Under the Regime, taxpayers are exempt from wealth taxes (i.e., tax on financial assets

held abroad, “IVAFE” and tax on foreign immovable properties, “IVIE”) and they are not

subject to tax monitoring rules concerning assets held abroad.

The Circular letter clarified that qualified shareholdings are subject to reporting

obligation in the Italian tax return only during the first five FYs of validity of the Regime.

As regards cherry picking, in case of exclusion of one or more foreign States from the

territorial scope of application of the Regime, assets held in those Countries are subject

to IVIE and IVAFE as well. Also, these assets have to be reported in the Italian tax

return in order to fulfil the tax monitoring provisions.

Thanks for your attention

Raul-Angelo Papotti

CHIOMENTI

Partner, Head of the Tax Department

raul.papotti@chiomenti.net

Via Giuseppe Verdi, 2

20121 Milan - Italy

T: +39 (02) 721571

F: +39 (02) 72157230

15th Floor

125 Old Broad Street

London EC2N 1AR – United Kingdom

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T: +852 3192 7070