«I'm here because it's a brand new challenge for my career. It's a big club [Juventus F.C.] and usually players of my age go to Qatar or to China, with all due respect, so coming to such an important and outstanding club at this point in my career makes me very happy».

With this statement Cristiano Ronaldo - the Portuguese professional football player – explained his decision to join Juventus F.C., one of Italy’s leading football clubs and winner of the past 7 Italian football leagues. Ronaldo has signed a four-year contract with Juventus, earning a net annual salary of roughly € 30 million ($ 35 million), which means, on the basis of current Italian marginal tax rates, a gross salary of € 55 million ($ 64 million). Fiscal treatment is an important consideration for footballers and professional athletes who relocate to new jurisdictions. In this respect, Italy’s recent tax law changes may have influenced Ronaldo’s choice to relocate to Italy.

Flat tax for new residents in Italy

The Italian Budget Law no. 232/2016 of 2017 introduced a significant tax incentive regime for high net worth individuals who wish to relocate to Italy.[1] With the introduction of a new article in the Italian Income Tax Act (D.P.R. no. 917/1986), article 24-bis, certain “new-resident” taxpayers who relocate to Italy may opt for a yearly € 100,000 flat tax on their foreign-source income in lieu of Italian ordinary taxation on an arising basis on foreign-source income and gains.

This favorable tax regime can apply to both Italian citizens and foreigners who have not been Italian tax residents for at least nine of their previous ten years.[2] Eligible new residents can choose to pay the € 100,000 flat tax in lieu of Italian income and wealth taxation on foreign-sourced income and foreign-situs assets. This exclusion includes both foreign earned income (i.e. salaries and wages, director’s fees etc.) and foreign passive income (i.e. dividends, interest), as well as the income and assets held through offshore trusts, foundations and similar holding structures. There is an exception in the case of capital gains realized upon the disposition of significant foreign shareholdings in the first five years of residence in Italy, which are otherwise subject to ordinary taxation in Italy.[3] Italian-sourced income is excluded from the flat tax, and is taxable under the ordinary tax regime, with the highest marginal tax rate of 43%[4] (not including additional regional and municipal income taxes).

The Italian Controlled Foreign Corporation (“CFC”) rules (that generally adopt a look-through approach for the attribution of foreign income) do not apply to taxpayers who elect to relocate under the new regime. There is also no “remittance basis” of taxation, so that remittances of foreign source income to Italy do not trigger taxation. New residents are also exempt from foreign asset reporting requirements, including filing the RW reporting form (except as it applies to foreign qualified shareholdings)[5] as well as the Italian wealth tax on foreign real estate (“IVIE”) and foreign financial assets (“IVAFE”).

In general, no foreign tax credit can be claimed in Italy to offset the € 100,000 substitute tax.  However, a new resident can elect to exclude from the flat tax regime income sourced from selected countries (adopting a “cherry picking” approach). In this case, income from those jurisdictions becomes fully taxable in Italy, allowing the taxpayer to benefit from a foreign tax credit in Italy to the extent there has been dual taxation of the same income. According to guidance issued by the Italian Revenue Agency, a taxpayer who relocates to Italy pursuant to the flat tax regime should be treated as a “resident” of Italy for tax treaty purposes.[6]

Gratuitous transfers of assets and rights located outside of Italy are exempt from Italian gift and inheritance tax. In other words, according to the new regime, non-Italian situs assets can be gifted by a new resident without triggering Italian gift taxation.[7] Conversely, gifts or bequests of Italian situs property would be subject to Italian gift or inheritance taxes (the highest rate for transfers to unrelated third parties is 8% with no exemption amount).

The regime is valid for a maximum period of fifteen calendar years and is revocable, without triggering payment of penalties, at any time.[8] Once revoked, participation in the regime cannot be reinstated. An advance tax ruling may be filed with the Italian Revenue Agency to ascertain, on a preliminary basis, eligibility for the regime. Upon acceptance, the Italian Revenue Agency will inform the tax authority of the country of the taxpayer’s last residence of the relocation.

It is also possible to extend the tax regime to an applicant’s family members, upon payment of an additional € 25,000 for each family  member.[9]

Professional Athletes

Italy’s new tax regime may be particularly appealing to professional athletes and sportsmen.[10]

Generally, a professional footballer who has entered into a sports performance contract with an Italian football club is treated as an employee of that football club[11] and, consequently, earnings from his services qualify as subordinate employment income.[12] This income is taxed in Italy if the services are performed in Italy.[13] Therefore, this is generally treated as Italian-sourced income, taxed under ordinary Italian tax rates and excluded from the € 100,000 flat tax. On the other hand, amounts paid by the football club as a discretionary bonus for services performed wholly and exclusively outside of Italy (e.g., a prize for winning an international football competition that was held outside of Italy or compensation for taking part in a football tour in the United States) could be treated as non-Italian source income that is within the scope of the € 100,000 flat tax payment, and that would not otherwise be subject to tax in Italy.

Furthermore, an important ancillary stream of income for professional athletes is income derived from the commercial exploitation of one’s image rights (e.g., revenue from sponsorship contracts). When the treatment of an athlete’s image rights is agreed to as part of the employment contract, the employment relationship will encompass such payments with the result that such payments should be treated as Italian-sourced subordinate employment income. If an athlete’s image rights are not addressed as part of the employment contract, the income that is attributable to the exploitation of the image rights may be categorized as “other income” under domestic Italian tax rules.[14] Such income is treated as foreign (i.e. not sourced in Italy) if it refers to assets located abroad, or to activities performed outside of Italy.[15] As an example, payments received by a football player from an American sportswear company for sponsorship activities carried out exclusively in China (and that are not related to the footballer’s performance vis-à-vis the football team), could be treated as non-Italian source income. Alternatively, if the athlete's image rights have been assigned to a non-Italian image rights company, the dividend paid from that company (i.e. the image rights company that manages the athlete’s image rights) could be treated as non-Italian source income if paid by the foreign entity, absent a finding of abuse.[16] In general, the CFC rules should not apply to taxpayers who establish non-Italian holding companies – such as image right companies - for the commercial exploitation of their image rights.[17][18]

Why not England?

England’s football league, the Premier League, is reputed to display a more dynamic and entertaining style of football than what is played in Italy. From a tax perspective, the UK also offers a favorable tax regime for incoming residents who are not domiciled in the UK – the Resident Non-Domiciled (“UK RND”) regime. Under the UK RND regime, taxpayers who claim the “remittance basis” of taxation are only subject to UK tax on non-UK income and non-UK capital gains when these are remitted to the UK. Foreign income and gains that are not remitted to the UK are not subject to taxation in the UK on an arising basis. Remittances are broadly defined to include foreign income and gains that are brought to, or received in, or used in the UK, or are used to pay for a service provided in the UK, by the taxpayer or for his benefit. Remittances of foreign “clean-capital” (i.e. previously earned income, as well as inheritances or gifts etc.) are not taxable in the UK.

The UK RND regime is only available for the first 15 UK tax years in which a taxpayer is tax resident in the UK (and provided the taxpayer does not acquire a UK domicile). Importantly, a tax year in the UK runs from April 6 to April 5 of the following year. After a taxpayer has been tax resident in the UK for at least 15 out of the previous 20 UK tax years, he/she will become deemed domiciled in the UK for all tax purposes from his or her 16th tax year of residence in the UK – meaning taxation of foreign income and gains on an arising basis (and not simply when these foreign income and gains are remitted to the UK), as well as exposure to UK inheritance tax at 40% on worldwide assets above a threshold of GBP 325,000 (subject to certain exemptions for spousal or charitable dispositions).[19]

Under the UK RND regime there is no equivalent to the Italian “substitute tax” until the 7th tax year of tax residence in the UK. The “remittance basis charge” is then equal to GBP 30,000 once the taxpayer has been UK tax resident for at least 7 of the previous 9 tax years increasing to GBP 60,000 if the taxpayer has been UK tax resident for at least 12 of the previous 14 tax years.

Perhaps the most significant difference between the UK and Italian regime is the complexity of the remittance basis of taxation. The rules relating to remittances can be administratively burdensome to manage for taxpayers who have offshore investment accounts or structures. Unlike the UK, Italy does not require special accounting or reporting to be undertaken by a taxpayer with respect to foreign source income or gains that are remitted to Italy.

What about Spain?

Like England, Spain’s La Liga, also has the reputation of being a highly entertaining football league. From a tax standpoint, Spain also offers favourable tax breaks for incoming taxpayers who transfer their tax residence to Spain. In fact, under the so-called Beckham Law,[20] incoming employees who were not previously Spanish tax residents for the prior 10 years and who relocate to Spain pursuant to an employment contract with a Spanish-based employer can benefit from favourable tax treatment for their first six years of residence in Spain. More specifically, dividend, interest and capital gains are taxed at a highest marginal rate of 23% (if in excess of € 50,000), while employment income is taxed at 24% up to € 600,000 and 45% for the amount in excess.

However, professional athletes, including footballers, have been expressly excluded from this regime starting from 2015.[21]