Important factors to consider in residence planning
Giulio Allevato, Jacopo Crivellaro
As of 2017, Italian and non-Italian citizens who have not qualified as Italian tax residents for at least 9 of their last 10 years of residence may opt for a new tax regime in connection with their relocation to Italy. Under the new regime, a yearly EUR 100,000 substitute tax on their foreign-sourced income is applied.
In short, eligible taxpayers who pay the EUR 100,000 substitute tax will not be subject to Italian ordinary tax rates (i.e. income tax at rates ranging between 23% and 41% on an arising basis) on their foreign-sourced income, irrespective of the actual amount of such foreign income. There is an important exception for capital gains realized from the disposal of ‘qualified shareholdings’ during the first five years since relocating to Italy, which are subject to Italian tax at the ordinary statutory rates.1 In contrast, eligible taxpayers will not be subject to rules on controlled foreign corporations and ‘sham’ foreign entities. Foreign-sourced income can also be remitted to Italy without triggering Italian taxation.
As a consequence of the ‘territorial’ nature of this new regime, foreign assets are not subject to reporting on Italian tax returns. In addition, Italian wealth tax on foreign real estate (IVIE) and Italian wealth tax on foreign financial assets (IVAFE) are not applicable. Similarly, gratuitous transfers of assets and rights located outside of Italy are exempt from Italian gift and inheritance tax. Therefore, an eligible applicant can execute gifts of non-Italian situs assets (such as bankable assets held in a foreign bank account or non-Italian real estate) without triggering Italian gift taxation.
A taxpayer can choose to exempt from the new regime all foreign-sourced income generated in one or more specific jurisdictions. In this case, the individual would then be subject to Italian ordinary taxation on the foreign-source income in question. A taxpayer who has elected to exempt from the new regime foreign-source income arising from a specific jurisdiction may qualify for a reduced tax rate under the relevant double tax treaty, and may claim a foreign tax credit in Italy for foreign taxes paid on such foreign-source income.
An eligible taxpayer can benefit from this regime for up to 15 years. It is possible to extend the benefits of this regime to immediate family members by paying an annual amount of EUR 25,000 per additional applicant, and election to take part in this regime can be withdrawn at any time. The new legislation also provides for an expedited visa process for those non-EU citizens wishing to adhere to the regime.2
However, relocating to Italy may also have non-tax implications on an individual’s estate plan. More specifically, the EU Succession Regulation (no. 650/2012) is currently applicable in Italy, and generally provides that the law governing a multi-jurisdictional succession is determined by the law of habitual residence of the decedent (potentially, Italy). A decedent may choose to apply the law of his/her nationality to regulate the succession, provided that certain formalities are met.
Ultimately, relocating to Italy may require a restructuring of the applicant’s financial and non-financial holdings. It may be important to restructure assets to ensure that only certain types and sources of income are generated once the applicant has moved to Italy (i.e. income from a specific jurisdiction, or only foreign-source income). Moreover, it is important to inform financial institutions of a relocation as there may be regulatory restrictions with respect to certain investments based on the residence of the investor.
1 ‘Qualified shareholdings’ are those that consist of more than 20% of the voting rights, more than 25% of the capital of a private company, more than 2% of the capital, or more than 5% of the voting rights of a listed company
2 Additionally, non-EU citizens who intend to relocate to Italy can apply for a two-year investor visa (requiring an investment of EUR 2 million in Italian public bonds, or EUR 1 million in Italian operating companies — subject to certain holding requirements — or a charitable donation of EUR 1 million), which may be extended for an additional three-year period, thereby permitting the foreign investor to meet the five-year residence requirement necessary to apply for a permit of stay of indefinite duration in the EU