Italy as the new tax Eldorado for private individuals
The Law Decree No. 34/2019 (Growth Decree) - definitively approved by the Italian Parliament on June, 28 2019 - introduced new tax incentives referred to inbound workers, entrepreneurs, sports stars, researchers and professors who transfer their tax residency to Italy. The new provisions are aimed at attracting individuals (including wealthy individuals) and new capital resources by providing more appealing tax incentives which will give a real boost to human capital relocation in Italy. These new measures extend the actual range of Italian tax incentives for individuals who currently reside abroad, opening new opportunities for tax and wealth planning purposes.
The Italian Law currently provides five different attractive tax regimes for new resident:
- workers and entrepreneurs;
- professors and researchers;
- high net worth individuals and families;
- retired individuals moving to the South of Italy;
- professional sportsmen (players, coaches, sport managers).
Special tax regime for inbound workers and (individual) entrepreneurs
Starting from FY 2020, an individual such as an employee, a self-employed professional, a manager or an individual entrepreneur shall be subject to Italian personal income tax (IRPEF) on only 30% of the income (getting a 70% exemption) deriving from the activity performed in Italy if collectively he/she:
- becomes an Italian tax resident, pursuant to Italian tax law. Note that individuals are considered as Italian tax resident if, for the greater part of a given tax period, they are enrolled in the Italian register of the resident population, have their residence in Italy or have their domicile in Italy pursuant to Article 43 of the Italian Civil Code. For instance, individuals who are enrolled in the Italian register as of July 4th, 2019 are considered Italian tax resident starting from 2020 and, therefore, can benefit from the new tax incentives as from tax period 2020;
- has not been tax resident in Italy for the previous two years before transferring the tax residence to Italy;
- endeavors to remain in Italy as a tax resident for the following two years; and
- mainly works or performs the activity in Italy.
For individuals who meet these criteria, Italian personal income tax can be reduced to 13% approximately (30% of taxable income *43% highest personal income tax rate).
The tax exemption is increased to 90% – and, consequently, only 10% of income shall be subject to income tax – if inbound workers move their residency to one of the southern Italian regions (i.e. Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sardinia or Sicily). In this case, the individual income tax can be reduced to approximately 4.3% (10% of taxable income *43% highest tax rate).
The new incentives apply for five years and can be extended for further five years (in total ten years) – with a 50% income exemption in the extended period – subject to some additional conditions: a residential property is purchased in Italy in the previous 12 months since the acquisition of the Italian residence or in the following 12 months, or there is a dependent child; if there are three dependent children, the exemption in the extended period is increased to 90%.
Special regime for inbound professors and researchers
Starting from fiscal year 2020, researchers and professors that relocate their tax residency in Italy shall benefit from a 90% exemption of their taxable basis on income arose from the activity performed in Italy.
The benefit applies for the year in which the professor or researcher is qualified as tax resident in Italy and for the following five periods (for a total incentive period of 6 years). Based on the new provisions introduced by the Growth Decree, the total incentive period could be increased up to eight years, if the taxpayer:
- has purchased a house in Italy in the previous twelve months since the Italian residency acquisition or in the following twelve months; or
- has one underage son/daughter (should the children be two or three, the professor/researcher shall benefit from the above-mentioned regime, respectively, up to eleven or thirteen years).
Tax assessment exemption (for the past)
Furthermore, the Decree clarifies that Italian inbound workers, professors and researchers who have not cancelled their name from the list of Italian resident population (so called "Anagrafe della Popolazione Residente") can also apply for the special regimes above, to the extent they have been tax residents of a foreign country pursuant to the provisions of a Double Tax Treaty for the prior two years.
In other words, the lack of registration in the "AIRE" (Register of Italian population living abroad) before the relocation does not represent an obstacle to the eligibility for the mentioned regimes.
In this connection, the Decree introduces - both for workers and professors/researchers - a specific provision that nullifies the tax assessments - not yet defined - served to such individuals by the Italian Tax Authorities to recover the relevant tax benefits due to the omitted registration in the AIRE.
The new special regime for professional sportsmen
The Growth Decree also extended the above-mentioned exemption for inbound workers to professional athletes who decide to relocate to Italy.
If all the conditions issued for inbound workers are met, athletes can be subject to taxation only on the 50% - instead of 30% as for general inbound workers - of the income received from the activity performed in Italy for a 5-years period.
Professional athletes can also benefit from the additional tax advantages (which provide an extension for a further 5-years period) in case of purchase of a residential property in Italy or if they have a dependent child. On the contrary, the further advantages (90% income exemption) related to the relocation in the South of Italy are not applicable to athletes.
The regime applies to a specific option made by the athlete and upon the payment of an amount equal to 0,5% of the taxable income which shall be paid according to the specific provisions of a Ministerial Decree which has yet to be issued.
As a matter of fact, the incentives could apply to coaches and sport managers relocating to Italy as employees of Italian clubs (as well as self-employed professionals). This would make Italian sport clubs more competitive at an international level.
The tax incentive for inbound workers and professional athletes is an alternative to the tax incentive system aimed to attract HNWIs relocating to Italy (EUR100,000 taxation on a yearly basis on all foreign-sourced income), as follows.
Starting from 2017, high-net-worth individuals that want to relocate their tax residency in Italy can opt for a substitutive taxation equal to EUR100,000 on a yearly basis with reference to all foreign-sourced (non-Italian) income (only the proceeds from sale of qualified shareholdings made during the first five years after the relocation are excluded).
The regime applies if the taxpayer has not been an Italian tax resident during at least nine out of ten years before the first year in which the applicant relocates tax residency to Italy. If this condition is met, the regime grants a fifteen-year exemption from individual income tax (IRPEF) on foreign source (non-Italian) income subject to the payment of a yearly EUR100,000 substitutive tax, which however does not contemplate a tax relief on taxes paid abroad.
Moreover, the new resident shall not be subject to Italian wealth taxes (i.e. IVIE and IVAFE) on foreign assets for the entire regime duration and to the ordinary reporting regime for foreign assets set forth under Italian law (RW Form). Inheritance and gift taxes will not be applicable to foreign assets held by the new Italian resident, while Italian assets will be taxed normally.
The application of the regime is also granted to the applicant's relatives who relocate to Italy. They are subject to a substitutive tax equal to EUR25,000 on all foreign-sourced (non-Italian) income received.
The option for the regime can be made (i) directly within the income tax return or (iii) by filing an advance ruling request before the Italian Revenue Agency (suggested option).
Professional sportsmen - "Res-non-Dom" or tax incentives for inbound workers?
As mentioned above, the "res-non-dom" regime may be an alternative to the tax incentive system for inbound workers/professional sportsmen.
The new regime for inbound workers could allow a substantial saving on their annual Italian salary, while the res-non-dom tax incentive could allow a substantial saving on foreign-sourced income (e.g. dividends from foreign companies, royalties, etc.).
In other words, the EUR 100,000 tax incentive targets an elite of sport stars with international assets and investments (for example, revenues from sponsorship contracts such as payments received by an American sportswear company for sponsorship activities carried out exclusively in Brazil and dividends paid from “star companies”), while the new regime as recently modified by the Decree provides for a general set of rules potentially applicable to all sportspeople transferring to Italian clubs.
An example may clarify the difference between the special regimes.
A Brasilian top football player is currently tax resident in Spain. Should he decide to move to Italy and play for an Italian football club in Serie A, he could benefit from the new Italian tax regime designed for inbound workers that relocate to Italy from 2020.
His employment income (the income he receives from the Italian football club) would be subject, for five years, to Italian personal income tax on a portion equal to 50% of the income getting a 50% tax exemption.
In moving to Italy, the top player would also have another option to mitigate his personal tax treatment. He may opt for the res-non-dom regime, by paying the one-off EUR100,000 tax per year, regardless of the amount of income received from foreign source. Remittances of foreign-sourced income in Italy will not trigger further taxation. However, in this case, Italian-sourced income (e.g. the income he receives from the Italian club) would be taxed under the ordinary tax regime (43% tax rate plus local taxes).
New resident retired individuals
As from January, 1st 2019, retired people that receive foreign pension income and relocate their tax residence to Italy are granted a 7% flat tax on all foreign-source income produced.
The new 7% flat tax regime is applicable to individuals:
- earning pension income and other similar remunerations paid by foreign (non-Italian) private/public entities;
- who transfer their tax residency to Italy from Countries having administrative cooperation agreements (e.g. DTA, TIEA, FATCA) in force with Italy;
- that have not been Italian tax resident for the five years before the one for which the option is effective;
- who actually transfer their tax residency in one of the municipalities with a population not exceeding 20.000 inhabitants located in one of the regions of Southern Italy (i.e. Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise and Puglia).
Individuals opting for the new flat tax regime are not subject:
- to reporting duties for their foreign (non-Italian) assets vis-à-vis the Italian tax authorities (RW Form) and
- to the Italian wealth taxes on foreign real estate and financial assets (IVIE and IVAFE).
The election for the new regime shall be reported in the income tax return related to the tax period in which the tax residency has been transferred to Italy and it is valid for the next nine years after the relocation. Nonetheless, the retired person is free to withdraw from the option at any time.
Moreover, the individual opting for the new flat tax regime can exclude certain countries from the application of the special tax regime under the so-called “cherry picking” principle and the taxable income produced in the "excluded" Countries will remain subject to Italian ordinary taxation rules benefitting in principle from the applicable tax treaty protection and tax relief on taxes paid abroad.
All the mentioned regimes represent a tax and wealth planning opportunity for employees and self-employed professionals, as well as for Italian companies willing to attract talented workers. In this respect, Italy could also become a "promise land" for celebrities or athletes aimed to mitigate their tax burden.
However, such opportunities should be carefully considered once an accurate preliminary tax and wealth analysis has been duly performed with the support of trusted professionals. Notably, the analysis should consider, inter alia, the source of income, the asset allocation, the previous tax residence of the new Italian resident, Italy’s tax treaty network and the solutions for asset protection and succession planning in Italy and abroad.
Moreover, a review of the immigration procedures (VISAs, etc.) and of the foreign residency status as well as the assistance on drafting the employment agreements in compliance with the mentioned regimes are crucial issues to be managed.