10 Gen Beneficial tax regime for foreign-resident individuals who establish their tax residency in italy
The Italian Government to encourage foreign individuals to consider their relocation to Italy in order to receive a favorable tax regime enacted new Law, which will enable to implementation of these assumptions. In Italy’s Unified Income Tax Code a new article was introduced, which regulates a special, beneficial tax system for individuals that transfer their tax residency in Italy. The main intention of Italian authorities is to attract highly specialized foreign workers and investors to Italy through fiscal incentives. It seems that the actions that has been taken are only the initial steps towards promoting Italy as an attractive destination for foreign-resident individuals, who want to move to and invest money in this country. The new regulations that has been enacted with Law n.232 of December 2016 constitute the a significant change to the general rules
of worldwide taxation for Italian non-domiciled tax residents.
TAXPAYERS ENTILED TO SPECIAL TAX REGIME
The tax status of an individual is the starting point for applying the correct taxation in Italy. According to the Italian tax law, both Italian residents and non-resident individuals are subject
to taxation in Italy, but on a different basis. The new provisions apply to the individuals who are residents in Italy for tax purposes. A general rule states, that an individual is resident for tax aims in Italy if, for 183 days (184 for leap years) a year, one of the certain condition is met, namely:
1) registration in the Register of the Resident Population, held at the local municipality in the place where the taxpayer has established his/her own residence for general administrative and legal aims;
2) place of habitual abode (residence) – it is a case when an individual is not register on the Italian register of resident individuals, but he regularly in Italy (objective test) with the intention of living there for the indefinite future (subjective test);
3) main center of vital interests (domicile) – in this case, the physical presence of the individual is not required, the more important is the fact that an individual’s family, personal, financial and buisness interests are focused in Italy, in other words if Italy is a place for an individual where his personal and economic relations are focused he can be considered as a taxpayer who can benefit from new tax rulling although he doesn’t posess a permanent home in Italy.
In addition to this criterion, which must be met the new rulling set another requirements which must be also fulfilled by an individual. To beneficial tax regime are entitled individuals who:
1) transfer their residency to Italy and maintain this status for 15 years;
2) previous non-Italian tax residency for at least nine years over ten fiscal years preceding the transfer;
3) obtain a formal confirmation from Italian Tax Authorities.
BENEFITS GRANTED BY THE REGIME
The most important benefit that the new regime brings for individuals, who both elect this regime and meet the specific conditions, is the exemption from Italian individual income tax (IRPEF) on any foreign source of income. It is worth to highlight that the exemption not include capital gains which come from the sale of ‘’qualified’ participation that occur within the first
5 years of the special tax regime. To this ,,qualified’ participations will apply the ordinary tax rules.
After obtaining the status of ,,resident non-domiciled’’, taxpayers will be obliged to pay progressive tax rates only on Italian sources of income (e.g. income which is connected with employment in Italy, income from businesses set up in Italy). In other words only Italian source of income would be subject to standard income taxation. On non-Italian sourced income taxpayers must pay annual substitutive tax 100.000 euros (EUR), regardless of the amount of foreign income realised. It means that individuals who relocate their tax residency from abroad to Italy are allowed to opt for their non-Italian sourced income to be taxed in Italy through the application of a flat substitutive tax, at a abovementioned fixed amount. This fixed amount of tax substitutes income tax, local taxes and wealth taxes.
Special tax system can be also extended to family members of the eligible individual. The requirements that must be fulfilled are:
1) they meet eligibility conditions;
2) an additional EUR 25 000 flat tax per each family member is paid.
From this extension, in principle, can benefit: spouse, son(s), daughter(s) or their descendants, parents or their ascendants, sons-in-aw and daughter-in-law, parents-in-law, brothers and sisters.
According to the regime, one of the other benefit, which is worth to mention, is the exemption from inheritance tax on foreign assets. It means that in a case when an individual transfer his foreign assets and rights, they are fully exempt from inheritance tax and gift regardless of whether they are made upon death or during the donor’s lifetime.
Another benefit that special tax regime provides is the possibility for the individual and their family members to be entitled to have favorable procedure for the obtaining of a residence permit or Italian visa. For instance, this kind of visas will be issued without being subject to quota restrictions. Additionally, the process of submitting documents would be easier for them,
Abovementioned regulations, under the new tax regime, will also be extended for inbound workers and to self-employed. Individuals who meet the requirements to qualify for the new tax system will be entitled to special reductions. The taxable employment of them will be reduced to 50% for the tax year in which they transfer their tax residency to Italy and also the following four years. It is a significant change from the law which was in force in 2016. The previous legislation allowed only a reduction of taxable income by 30% for employees who work and live abroad and who are looking an employment in Italy for a long basis. Self-employed and inbound workers who want to benefit from this tax incentives have to meet specific criteria as:
1) obtaining a university degree;
2) having been employed or self-employed abroad during the last 24 months;
3) having been studied outside of Italy to obtain a university degree or postgraduate master degree during the last 24 months.
If a self-employed will meet the aforementioned criteria he can benefit from 50% tax reduction.
Based on the information provided above, the new tax regime that was entered in the force by Italian government is undoubtedly a good move to encourage workers outside of Italy to move and invest in Italy. It seems that, for the foreign investors, new law creates a great opportunity to set up and maintain businesses in Italy. This regulatory changes taken by Italian authorities are also intended to attract highly specialized workers. The proposed fiscal incentives can be a way to achieve this goal. Without saying, the new regime is profitable in situations where the income
is higher than certain threshold which may be identified once certain factors. Currently, we need to wait for the effects of this regulation in order to assess its effectiveness and to see if the taken fiscal incentives turned out to be attractive to the foreign workers and investors.