Italian “Flat Tax” for New Residents
1. Main Features
The Flat Tax is an optional tax regime for new residents of Italy. Taxpayers entitled to opt in, are individuals that:
– transfer their tax residence to Italy; and
– have not been Italian tax residents in at least nine out of the ten years preceding the first year of effect of the option.
So, for instance, in order to access the Flat Tax in 2018, the taxpayer must have been non-Italian tax resident in at least nine years of the 2008-2017 period.
The Flat Tax consists of paying a lump-sum substitute tax of EUR 100,000 per year, in lieu of ordinary taxation, on all non-Italian-sourced income and non-Italian assets. Italian-sourced income and assets are instead subject to ordinary taxation.
No further taxation applies on repatriation to Italy of non-Italian income and assets.
Furthermore, no Italian inheritance and gift tax applies on non-Italian assets.
Finally, no foreign assets reporting is required.
Relevant provisions are:
– Article 24-bis of Income Tax Consolidated Act (ITCA) introduced by article 1(152) of Stability Law for 2017
– Implementing regulations by Revenue Agency Director
– Revenue Agency Check List and Related Instructions
– Revenue Agency Circular 17/E of 23 May 2017
2. The Flat Tax
Each individual gaining access to the Flat Tax is exempt from ordinary taxation on all of his/her non-Italian-sourced income (except for capital gains on non-Italian non-portfolio shareholdings realized in the first five years after the transfer). Instead, the taxpayer is required to pay a substitute tax of EUR 100,000 per year. The substitute tax must be paid by the deadline for paying the balance of income taxes, which is currently 30 June of the year following the relevant tax year. So, for instance, the substitute tax due with regard to 2018 must be paid by 30 June 2019.
The Flat Tax can be extended to relatives and, in this case, the amount of the substitute tax is increased by EUR 25,000 per year for each additional relative included in the Flat Tax regime. So, for instance, a non-Italian resident husband and wife transferring their tax residence to Italy would be required to pay an overall substitute tax of EUR 125,000 per year (on average, EUR 62,500 per year each). Relatives who can benefit from the Flat Tax are listed in article 433 of the Italian Civil Code, namely:
(1) spouse;
(2) sons and daughters, including adopted sons/daughters, and, in their absence, their immediate descendants;
(3) parents and, in their absence, their immediate ascendants; adoptive parents;
(4) sons and daughters-in law;
(5) father-in-law and mother-in-law;
(6) brothers and sisters (either blood brothers and sisters and unilateral brothers and sisters).
As a general rule, no foreign tax credit is granted for taxes paid abroad. Individuals wishing to benefit from a foreign tax credit for taxes paid in one or more foreign countries may carve out from the Flat Tax income derived from such countries through a specific option. Under this option, which the taxpayer may apply with regard to only one state or some foreign states (i.e. it can be exercised on a “cherry picking” basis), the income derived from the carved-out state(s) is subject to ordinary taxation and a foreign tax credit is granted in respect of the taxes levied in that state(s).
Individuals gaining access to the Flat Tax are also exempt from Italian wealth taxes on the value of foreign real estate and financial assets held abroad (IVIE and IVAFE), as well as from foreign asset reporting (quadro RW). This exemption does not apply to assets in carved-out States and to non-Italian non-portfolio shareholdings (Revenue Agency Circular 17/E of 23 May 2017, Part III, para. 5.2).
Foreign assets are also exempt from Italian inheritance and gift taxes in the years of application of the Flat Tax. This exemption does not apply to assets in carved-out States (Revenue Agency Circular 17/E of 23 May 2017, Part III, para. 5.3).
In respect of Italian-sourced income and Italian assets, ordinary taxation is applicable. In fact, individuals accessing the Flat Tax are not prevented from carrying on any sort of activities in Italy.
Repatriation to Italy of foreign assets and/or income is possible at any time and does not trigger any further taxation in Italy.
3. Duration of the Flat Tax regime
The Flat Tax regime is granted for a maximum period of 15 years. The option can be revoked at any time by the taxpayer.
The option is forfeited if the substitute tax is not paid in a timely manner. The effects of the Regime for previous tax years are, however, permanent.
No second option is permitted in case of revocation or forfeiture of the original option.
Repatriation to Italy of foreign assets and/or income is possible at any time and does not trigger any further taxation in Italy.
4. Preliminary Ruling
Individual wishing to explore the possibility to access the Flat Tax regime may:
– use the Revenue Agency Check List and Related Instructions; see below for the Check List at a glance
– file a preliminary ruling request to the Italian tax authorities asking for prior approval.
In the Ruling procedure, Italian citizens who – in previous years – had transferred their residence to blacklisted countries (article 2(2-bis) ITCA), may give proof they were actually resident therein (Revenue Agency Circular 17/E of 23 May 2017, Part III, para. 1).
5. Tax Treaty Entitlement
The possibility for individuals benefiting from the Flat Tax, to invoke tax treaty benefits in states other than Italy, should be explored when considering to opt for the Flat Tax. The carve-out option for one or more states could be of help in this respect, but a convenience analysis should be carried out.