Favorable tax regimes for individuals transferring their tax residence to Italy Tax Alert Special edition Tax Alert Special edition 2 AT A GLANCE Excellent reasons that might lead foreign individuals to consider transferring their tax residence to Italy in the light of the new beneficial tax regime Italian Law no. 232/2016 introduced, inter alia, an optional tax regime for eligible individuals transferring their tax residence to Italy as well as a simplified procedure to obtain a residence permit or Italian visa. The foreign-sourced income of an eligible individual who is tax resident in Italy is subject to simply an annual 100K€ flat tax irrespective of the amount of the foreign-sourced income and without remittance obligations into Italy. The regime may be extended to family members of the eligible individual by paying an additional 25K€ flat tax each. Under the regime, eligible individuals are entitled to cherry pick which foreign-sourced income will be covered by the regime. Moreover, with respect to their foreign assets neither the ordinary reporting obligations nor the wealth taxes usually levied on foreign assets apply. The regime may be revoked at any time, so a person could transfer their tax residence even for only a year, but as a rule it expires after fifteen years. Additionally, any transfer of the assets held abroad by the eligible individual are exempt from inheritance and/or gift taxes in Italy regardless whether they are made inter vivos and/or mortis causa. Tax Alert Special edition 3 1. THE INCOME TAX REGIMES FOR INDIVIDUALS NEWLY RESIDENT IN ITALY Art 1(152) of Italian Law no. 232/2016 (amending art 24-bis of the Italian consolidated income tax law) essentially mitigates the ordinary worldwide taxation principle by granting a favorable tax regime to eligible individuals.1 To this end, an eligible individual (i) must establish his tax residence in Italy according to Italian tax law, and (ii) must not have been tax resident in Italy for nine years out of the ten prior to applying for the regime.2 Under the regime, foreign-source income of an eligible individual is subject to a 100K€ substitutive annual flat tax irrespective of the amount of income he earned abroad and without remittance obligations to Italy.3 However, his Italian-source income remains subject to the ordinary rules. Foreign-source income of the eligible individual is not subject to any additional income tax in Italy. However, since the substitutive flat tax cannot be offset by income taxes paid abroad on the foreign sourced income covered by the regime, the eligible individual is entitled to cherry pick the country or countries where he has foreign-sourced income to be covered by the regime; so income tax paid in a country not included in the optional regime may be offset by means of the relevant foreign tax credit. As a sole exception to the regime, capital gains on substantial shareholdings4 realized in the first 5 years of application of the regime - even if they meet the conditions to qualify as foreign-source income - are subject to income tax under ordinary rules with the benefit of a foreign tax credit (general conditions and limitations apply). 1 As a general rule an individual is resident for tax purposes in Italy if, for 183 days (184 for leap years) a year, one of the following conditions is met: he is registered in the Register of the Resident Population; he is not registered in the Register of the Resident Population but his domicile or his residence is established in Italy; he is cancelled from the Register of the Resident Population and moved to a black listed country (may be rebutted by the taxpayer). Although a permanent home is essential, there is a consensus in identifying the tax residence of an individual as being the place where his personal and economic relations are closest, this being deemed to be the “center of vital interests”. Individuals resident in Italy for tax purposes are subject to personal income tax on their aggregate worldwide income calculated depending on the relevant applicable class of income (e.g., income from real estate, capital gains, miscellaneous income). 2 Situations of dual tax residence may be evaluated in light of the tie-breaker rules set under tax treaty conventions in force between Italy and the prior residence country of the eligible individual (e.g., permanent home, center of vital interests, habitual abode, nationality). 3 Ordinary income tax rates are applied on a sliding scale, ranging from 23 to 43 per cent (additional regional tax and municipal tax also apply). Capital gains from substantial shareholdings realized by Italian residents are generally subject to the applicable ordinary tax rate (23 to 43 per cent) on 49.72% of the net amount of the gain. Capital gains from non-substantial shareholdings are generally subject to 26% withholding tax. Capital gains from shareholdings in black listed companies may suffer restrictions. As a general rule, Italian tax law provides for a foreign tax credit with respect to taxes paid abroad by residents on foreign sourced income. 4 Interests in listed companies (representing more than 2% of the voting rights or more than 5% of the capital) and interests in non-listed companies (representing more than 20% of the voting rights or more than 25% of the share capital) qualify as substantial shareholdings. Tax Alert Special edition 4 The regime cannot be combined with other beneficial tax regimes granting a partial exemption from Italian personal income tax (e.g., such as those granted to highly qualified workers opting to transfer or to move their tax residence or domicile back to Italy). The regime would apply to all foreign-source income earnt by the eligible individual starting from FY 2017. 1.2 Family members The effects of the application of the regime may be extended to one or more family members of the eligible individual provided that (i) they meet the eligibility conditions, and (ii) an additional 25K€ flat tax per family member is paid. The eligible family members, in principle, are: spouse, son(s) and daughter(s) or their descendants, parents or their ascendants, sons-in-law and daughters-in-law, parents-in-law, brothers and sisters. 1.3 How to apply for the regime Pursuant to art 24-bis, and according to certain government papers released at the time the provision was drafted, the eligible individual must apply to the tax authorities opting for application of the regime and to ascertain whether or not the eligibility conditions are satisfied. 5 Notwithstanding the above, the Italian Revenue Agency has clarified that such a tax ruling procedure is not compulsory in order to have access to the regime (Regulation dated March 8th 2017); seemingly interpreting the provision in accordance with the tax ruling system - in force in Italy since fiscal year 2016 - under which the taxpayer is not obliged to apply for a tax ruling procedure unless he applies for an anti-avoidance measure. With the same Regulation the Revenue Agency released a “check list” which either must be attached to the tax ruling application – if the eligible individual decides to file one anyway – or may be utilized by the eligible individual to self-assess whether or not the eligibility conditions are satisfied. Any eligible individual may elect for the regime by checking the option on their annual tax return with respect to either the fiscal year in which they transfer their tax residence or in the subsequent one. Family members may elect for the regime by checking the option on their annual tax returns with respect the fiscal year in which they transfer their tax residence. 5 Should the eligible individual decide to file a tax ruling application the tax authorities should reply within 120 days which may have a 60-day postponement. Tax Alert Special edition 5 Tax returns ordinarily must be filed by September 30th of the calendar year following each relevant fiscal year (e.g., for FY 2017 the deadline is September 30th 2018). 1.4 The payment of the substitutive flat tax The substitutive flat tax must be paid on an annual basis - until the regime is expired, revoked or terminated – by 30th June of the year subsequent to that of the exercise of the option for the regime. 1.5 Termination The regime is effective up to a maximum period of 15 years and can be revoked at any time. The regime is automatically revoked where (i) the substitutive flat tax is not paid on time, or (ii) the eligible individual or family members transfer their tax residence outside Italy. Following revocation, any access to the regime is barred for the future. Additionally, any revocation of the regime by the eligible individual implies its termination for the family members unless they decide to apply for the regime individually. 1.6 Other benefits granted by the regime 1.6.1 ASSETS HELD ABROAD BY ITALIAN RESIDENTS According to the regime, eligible individuals are not under a duty to disclose in their Italian tax returns financial assets and/or immovable properties held abroad. Additionally, they are not subject to the taxes ordinarily levied on the value of these assets (0.2%) and properties (0.4-0.76%). 1.6.2 INHERITANCE AND GIFT TAXES The transfer of foreign assets and rights owned by an eligible individual are fully exempt from inheritance tax and gift tax regardless of whether they are made upon death and/or during the donor’s lifetime. Thus, the application of inheritance tax and gift tax remains restricted only to assets and rights held in Italy. As a rule, these events are subject to inheritance tax and/or gift tax ranging from 4-8 percent essentially depending on the relationship between the deceased/donor and the beneficiary/donee. Tax Alert Special edition 6 1.6.3 FAST-TRACK FOR RESIDENCE PERMIT OR ITALIAN VISA Under the regime an eligible individual and eligible family members (if any) are entitled to benefit from a simplified procedure for the obtaining of a residence permit or Italian visa. Further regulations concerning this will be implemented shortly by the Ministry of Foreign Affairs and International Cooperation together with the Ministry of Home Affairs. Tax Alert Special edition 7 2. OTHER COMMENTS As for the income tax on individual, it goes without saying that the regime is favorable in situations where the income is higher than certain threshold which may be identified once certain factors (e.g., quality and quantity of income) are analyzed accordingly. The tax burden of the eligible individual (and his family members, if any) may significantly vary according to those and other factors, such as: (i) the existence (and applicability) of any tax treaties in force between Italy and other residence/income source countries; (ii) the right of the prior country of residence to levy any “exit tax” and the impact on foreign tax credit relief in Italy it may have. In theory, at this stage the regime may seems extremely favorable in situations where the right to tax the eligible individual foreign-sourced income is left only to the Italian country (e.g., pension and other similar remuneration ex art 18 of the tax treaty between Italy and US). As for the inheritance and gift taxes, the regime may have a clear favorable impact with respect to the transfers of foreign assets held by the eligible individual not only in situation whereby a donation would have been made during the donor’s lifetime but also in situations where entities such as a Trust are involved. This document provide only general information for clients and professional contacts of De Berti Jacchia Franchini Forlani. It does not constitute legal advice, nor does it purport to be comprehensive; accordingly, it should not be relied upon as such.