Doubling of HNWI Flat Tax from Euro 100k to 200k
An Italian Government Press Release reports that the Italian Council of Ministers, in a meeting on 7 August 2024 approved the text of a draft Decree introducing a series of urgent tax and other measures. Decree-Law of 9 August 2024, no. 113 was published in the Official Gazette on 9 August 2024 (24G00136) (GU Serie Generale no.186). The Decree is expressed to take effect from 10 August 2024. The Decree was converted into law by Law 7 October 2024, no. 143 without any relevant modification.
Article 2 of the Decree makes a simple amendment to art 24- bis of the Italian Income Tax Code which is the original article of the Code implementing the HNWI Euro 100,000 flat tax regime.
The full text of the Article 2 is as follows:
“Article 2 – Measures concerning substitute tax on income produced abroad realised by natural persons who transfer their tax residence to Italy
1. In Article 24-bis, paragraph 2, first sentence, of the Consolidated Income Tax Code, Presidential Decree Republic of 22 December 1986, No. 917, the words: ‘Euro 100,000’ are replaced by the following: ‘Euro 200,000’.
2. The provisions of paragraph 1 shall apply to persons who have transferred their residence to the territory of the State for the purposes of Article 43 of the Civil Code after the date of entry into force of this decree.”
The Decree makes no provision for adjustment of the flat Euro 25,000 due annually by family members of those who move to Italy and opt for the flat tax regime.
The increase therefore applies to anyone transferring their civil residence (i.e residence within the meaning of art 43 of the Italian Civil code) on or after 10 August 2024. Taxpayers who are already on the regime at the 10 August 2024 are not impacted by this change.
Art 43 of the Civil code states simply:
“Residence is at the place where the person has his or her habitual abode”
The reference is thus not to the definition of tax residence under Art 2 of the Income Tax Code which provides a wider series of tests of tax residence (physical presence, centre of family interests, habitual abode and registration as resident). Nor is the reference specifically to the date of registration as resident in the list of the resident population (“Anagrafe”).
On the basis of this concept of habitual abode, it seems that anyone who has already, at the date of 10 August 2024, made arrangements for accommodation (purchased or rented) in Italy which may fall within the definition of habitual can still access the Euro 100,000 tax for the duration of the special regime. The concept of “habitual” means that whether accommodation constitutes an habitual abode will only be determined after a certain period of time. The use of “habitual abode” as the determining factor is therefore somewhat vague.
Given that the concept of tax residence in art 2 of the Income Tax Code provides that one of the tests of tax residence is where the taxpayer has their habitual abode in Italy for the greater part of the tax year, anyone who claims that they had a habitual abode before 3 July 2024 will be Italian tax resident under Italian tax rules for the whole of FY 2024.
And the consequence of being tax resident for FY 2024 is that the individual either pays the special Euro 100k relief for FY 2024 (so the first year of the fifteen) or is liable to Italian tax on worldwide income and assets under normal rules for the whole of FY 2024.
This means that, at the time of writing, the only possibility of accessing the annual Euro 100,000 for the duration of the relief is where the facts and circumstances allow the induvial to be considered to have an habitual abode in Italy before 10 August (by reference to real estate purchase documents, rental agreements, and probably evidence such as utility bills or other evidence that the property was actually being utilised as a residential abode up to that date).
For anyone who cannot meet the habitual abode test before 10 August 2024, the cost of accessing the regime rises to Euro 200,000 annually, but remains Euro 25,000 for family members.
Background
Italy’s 2017 Finance Law introduced a tax regime designed to compete with the other special tax regimes around Europe that provide a special limited tax regime. The regime is targeted at attracting high net worth individuals to Italy. It requires a lump-sum payment of Euro 100,000 per annum in lieu of income tax at normal rates (and wealth tax) for individuals. The new rules apply to individuals shifting their tax residence to Italy from FY 2018 onward. They exclude non-Italian income and gains from the normal charge to tax, while tax will be due at the usual rates (up to 43% plus local income taxes) on Italian source income and gains. Individuals opting for the regime will also be exempt from the requirements for the tax reporting of foreign income and assets. There is also exemption for the annual wealth taxes on foreign real estate and financial assets (IVIE & IVAFE) and from Italian inheritance tax on non-Italian assets.
A circular from the Tax Agency has been issued containing implementing procedures – the taxpayer may obtain an advance ruling for admission to the new regime – completing a form to be submitted to the authorities in advance for confirmation that the regime will apply. Differently from the UK’s regime there will be no problem in actually bringing funds (remittance) from abroad into Italy even where those funds have not been taxed in full. Indeed the intention of the legislator is to foster investment in Italian businesses and assets. However, like the UK rules, income from an Italian source or deemed to be Italian source income, will generally be liable to Italian tax under normal rules and not covered by the annual flat tax.
If you are interested in understanding whether you qualify for this regime and discussing if it is suited to your circumstances, please contact us here.
Table of Contents
Eligibility for the Regime
The Law allows individuals who have been tax resident outside Italy for nine of the ten preceding tax years to be exempt from Italian taxation on their non-Italian income and gains. This applies to all formerly non-resident individuals regardless of their nationality or residence, including returning Italian nationals.
It is a requirement of the regime that the flat tax is paid each year by the due deadline for income tax payments (usually 30 June of each year, but to be checked year by year) and the tax return for the year is filed by the normal due deadline (30 September subject to extension). The Tax Agency have stated that if the tax paid is not paid and the return not filed by the due deadlines, the individual is not eligible for the regime for the relevant year.
Effect of the Regime
The new regime means that while Italian sources of income and gains of these individuals will still be subject to Italian tax, foreign income will not – so long as the taxpayer pays an Italian substitute tax in an annual amount of Euro 100,000. This exemption can further be extended to family members at a cost of Euro 25,000 per member per annum. This regime can be used for up to 15 years – it is tacitly renewed each year, until the taxpayer opts to withdraw from the regime, moves his/her residence abroad or fails to make the annual payment.
Payment of the substitute tax covers not only income from foreign sources but also exempts the individual from the general requirement to report foreign assets (the Section RW compilation requirement) and exempts such individuals for each year that the Regime applies from Italian wealth tax on such assets.
It also exempts the individual from Inheritance tax and from CFC rules which would otherwise attribute profits of certain controlled foreign companies to an Italian resident controlling shareholder in certain circumstances.
Under the regime there is exemption from Italian Inheritance and Gift tax where an individual covered by the Regime dies, for all non Italian situated assets.
Exclusions from the Regime – Italian Source Income
The new regime does not cover any Italian source income such as
- income from employment, self employment or director’s fees for services performed on from Italian territory
- Rental and other income deriving from Italian property
- Royalties received from Italian tax residents
- Interest Dividends and other distributions paid by Italian resident payers
- Income from financial investments made through an Italian resident intermediary
Exclusions from the Regime – Gains on Signifcant Shareholdings
The substitute tax regime does not apply to the disposal of significant shareholdings in the first five years that the regime applies. This means that tax will continue to be paid in the normal way on capital gains on the sale of equity interests carrying more than 20% of the voting rights, or 25% of profits or capital on a winding up. Such disposals will generally be liable to Italian tax at the standard rate of 26% of the gain.
A Tax Agency Circular (17/2017) states that significant shareholdings in companies that can generate taxable capital gains if realized in the first five tax periods of validity of the option, must be reported the RW section of the annual tax return during the five-year period. This is an exception to the general rule that accessing the flat tax regime exempts the taxpayer from reporting foreign assets. It is not 100% clear if the exemption from IVAFE, wealth tax, applies to significant shareholdings which are so reported.
Application for the Regime
Annual Tax Return
Election for the regime is made in the annual Italian Tax Return for the first year in which the taxpayer is tax resident in Italy (prov. 47060/2017, § 1.2). The relevant section should state whether the election for the special regime applies:
– to the tax period in which the person transferred his tax residence to Italy;
– to the following tax period.
The Euro 100,000 tax (and tax for any family members) must be paid by the due deadline for the first year. The tax is to be paid in one instalment for each calendar tax year by the end of June each year following the relevant tax year.
Advance Request to Tax Agency for Confirmation of Access
On 8 March 2017, the Italian Tax Agency published guidelines – a form and explanatory notes on the procedure for request for advance ruling confirming access to the special regime, stating that application can be made to the Tax agency for a formal official ruling confirming that an individual may access the regime. The application should give an overall presentation of the case and contain the supporting documents with a translation in Italian for any non-standard documents not in the Italian language. The request for the ruling is not compulsory but is intended to allow taxpayers to resolve any doubts regarding eligibility and the scope of the Regime.
The Tax Agency have published a form to be completed by an applicant seeking ruling, designed to collate information regarding the applicant to verify eligibility based on the individual’s circumstances. The form asks for identification of and basic information on the Applicant and information on citizenship, tax residence and past jurisdictions or territories of residence. It also asks the applicant to select any territory or territories for which the applicant does not intend to exercise the option of payment of the substitute tax. the form is divided into 4 sections.
Application Form – Section 1
The Tax Agency have published the form to be completed by an applicant seeking advance ruling. Section 1 contains identification of and basic information on the Applicant.
Application Form – Section 2
Section 2 contains general data such as information about citizenship, current tax residence and past jurisdictions or territories of residence. It also asks the applicant to select any territory or territories for which the applicant does not intend to exercise the option of payment of the substitute tax.
Application Form – Section 3
Section 3 consists of 20 “Yes” or “No” questions, constituting pointers for the possibility for the Applicant to access the new regime and enabling the authorities to ask further information. The emphasis is very much on ensuring that the individual has really been resident outside Italy. There are no questions regarding the new resident’s future intentions. The questions concern whether the applicant:-
1. has had a spouse and/or children who have been resident, domiciled or had their habitual abode in Italy;
2. has had any other family relatives have been resident, domiciled or had their habitual abode in Italy;
3. has had any stable personal, social, cultural, political relations with anyone resident in Italy;
4. has held any corporate office (e.g. as director, member of supervisory body or similar) of any company or entity which is tax resident in Italy;
5. has a child enrolled in a school or training establishment in Italy;
6. has had the habitual use of any real estate for more than 90 days in any tax period;
7. has had the availability, in whatever form of, including through a nominee, of moveable goods registered at a public registry;
8. has had any real estate, apart from that mentioned previously, made available to them. including via a nominee;
9. has had the benefit, including through a nominee, of any significant shareholding in any company with its registered office or a permanent establishment in Italy;
10. has had relations of any kind, including through a nominee, with credit institutions or other financial intermediaries located in Italy;
11. has been in receipt, including via a nominee, of income from land in Italy;
12. has been in receipt including via a nominee, of investment income payable by the Italian State or by Italian resident persons, excluding income and other receipts deriving from bank or post office deposit or current accounts;
13. has been in receipt of income from dependent personal services performed in Italy including income assimilated to employment income pursuant to subparagraphs a) and b) of paragraph 1 of Article 50 of the Income Tax Code
14. has been in receipt of income from self-employment including through a conduit structure, arising from activities carried on Italy
15. has been in receipt, including through a nominee, of business income deriving from activities performed in Italy, including through a permanent establishment
16. has been in receipt, including through a nominee, of miscellaneous income deriving from assets or activities in Italy and as well as capital gains on the disposal for consideration of interests in resident companies, excluding those referred to in subparagraph f) of paragraph 1 of Article 23 of the Income Tax Code
17. has been in receipt, including through a nominee, of income defined in Articles 5, 115 and 116 of the Income Tax Code attributable to shareholders, associates or non-resident participants
18. has been in receipt of any pension or similar welfare payment or any severance indemnity described in sub-paragraphs a) c), d), e) and f) of paragraph 1 of Article 17 of the Income Tax Code paid by the Italian State, or by any person resident in Italy or by any permanent establishment in Italy of a non-resident
19. has been in receipt of income which is treated as employment income pursuant to sub-paragraphs c), c-bis), f), h), h-bis) and i) of paragraph 1 of Article 50 of the Income Tax Code paid by the State, persons resident in the territory of the State or by any permanent establishment in Italy of a non-resident
20. has been in receipt, including through a conduit structure, of remuneration for the use of intellectual property, industrial patents and trade-marks, as well as processes, formulas and information relating to experience acquired in the industrial, commercial or scientific field, paid by the Italian State, or by any person resident in Italy or by any permanent establishment in Italy of a non-resident,
Application Form – Section 4
Section 4 seeks information regarding any family members who will be covered by the election to pay the additional Euro 25,000 per annum substitute tax.
Submitting the application
The form and accompanying summary background information report need to presented together with supporting documentation by hand, by registered mail with recorded delivery or by certified electronic mail. For this reason and given the technical references in the form, the Italian authorities are evidently expecting the documents to be prepared and filed by professional advisers.
The supporting documentation will include:
- Copies of identity documents and proof of residence
- Certificate of Tax Residence issued by foreign tax authorities covering the previous ten years, or other evidence of tax residence such as tax filings for relevant years.
- Documents supporting the background summary report (proof of income, assets etc.).
- Copies of documents relating to matters arising in response to the questionnaire (e.g .company registry filings relating to directorships contracts of employment, pensions, loans etc
See the original form here.
Further reading (in Italian)
Agenzia delle Entrate Web Page
Tax Agency list of legislative and regulatory provisions
Provision of 8 March 2017 – Procedures for the exercise, modification or revocation of the option referred to in paragraph 1 of Article 24-bis of the Income Tax Code and for the payment of the substitute tax (Published on 08/03/2017)
Tax Agency Circular no. 17 of 23 May 2017 – Special regimes for individuals transferring their tax residence to Italy – clarification and interpretation
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