What is the flat tax regime?
Italy is offering a unique package of incentives to individuals who become new residents by moving from other countries regardless of their citizenship. The aim of this legislation is attracting HNWIs and their families and new investment opportunities.
The special tax scheme has four main benefits:
- a special flat tax (EUR100,000 on a yearly basis) applicable to foreign income;
- an inheritance and gift tax exemption on assets located abroad;
- exemption from Italian wealth taxes on assets located abroad;
- no disclosure obligations for the assets located outside of Italy.
Moreover, non-EU citizens can access fast-tracking of visas.
The individual moving to Italy can choose to pay an annual flat tax of EUR100,000 on their foreign income, and a lower amount of EUR25,000 for family members, which include: spouse, children, brothers and sisters, parents and parents-in-law, and sons and daughters-in-law.
In essence, ordinary taxation in Italy (up to 43%) will apply only on the Italian-sourced income and on capital gains from qualifying equity interests sold within five years of the flat tax option. Under the regime, foreign income can be remitted to Italy without paying any additional tax.
To qualify for the flat tax, the taxpayer must be tax-resident outside Italy in at least nine out of ten years before moving to Italy. If the person is eligible, the tax benefits will last 15 years, with the option of opting out early without any penalties (ie if their residence is moved back outside Italy).
To access the regime, a tax ruling can be filed with the Italian tax authorities. The tax authorities must provide an answer to the ruling in 120 days. The individual moving to Italy can also use the ruling to address some specific issues concerning the source of income, the applicability of double taxation treaties to peculiar situations, and for instance to demonstrate there would not be any tax advantage to sell the qualifying equity interest once in Italy.
Why is this an opportunity for crypto investors moving to Italy?
People venturing into the evolving world of cryptos, NFTs, smart contracts and DeFi can consider applying for this regime.
In the case of crypto investors, the Italian tax authorities treats cryptocurrencies in the same way as traditional currencies. In a recent ruling published on 1 August 2022, the Italian tax authorities confirmed the sale of cryptocurrencies held through an exchange platform managed by a US corporation and deposited in a cold storage wallet located in the UK can generate foreign-sourced income subject to the EUR 100,000 “umbrella” taxation.
More generally, according to the view of the Italian tax authorities, capital gains generated by spot sales of cryptos are subject to a substitute tax of 26% every time the average total deposits of cryptocurrencies exceed EUR51,645.69 euros for more than seven consecutive business days.
But under the flat tax regime, such capital gains, if realized outside of Italy, are covered by the flat tax of EUR100,000 euros and are not subject to the substitute tax of 26%.
In this context, the most relevant issue is how to determine whether the income is produced in Italy or abroad. If the crypto assets are held by a foreign custodian, it is easier to understand why those assets are “located” abroad and therefore generate foreign-sourced income. A tailored case-by-case analysis is always the recommended option to avoid undesirable liabilities and take full advantage of an accurate tax planning supported by qualified professionals.