Italy’s 7% Flat Tax Incentive for pensioners

A recent Italian law has extended the 7% Italian Flat Tax for pensioners who transfer their tax residence to Italy (provided by art. 24-ter of the Italian Income Tax Code), increasing the benefit period from five years (previously provided) to nine years.

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1. The new Italian Flat Tax for pensioners and the requirement of transferring the tax residence to Italy

Art. 24-ter of the Italian Income Tax Code (as introduced by the 2019 Budget Law), provides the new 7% Italian Flat Tax regime to encourage retirees abroad to transfer their tax residence to Italy.

Pensioners, Italian or foreign citizens, who receive foreign pension income can take advantage of the 7% Italian Flat Tax.

To benefit from the Flat Tax, the pensioner must not have been a resident for tax purposes in Italy for at least five tax years before the year in which he makes the option for the tax incentive involved.  

The pensioner must move from foreign countries with which Italy has agreements for administrative cooperation in tax matters.

On the other hand, in Italy, the pensioner must become a resident in one of the Municipalities having a population not exceeding 20.000 units, belonging to the Regions of Southern Italy, such as Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, Puglia.

Also, the benefit is granted to pensioners who move to one of the Municipalities, with a population of no more than 20.000 inhabitants, affected by the seismic events of 2016 (belonging to a specific list provided by law) or 6th April 2009.

In addition to pension income received by pensioners, the Italian Flat Tax for pensioners also covers income of any category received from foreign sources or produced abroad.

According to the Italian Flat Tax regime, the pensioner’s income is not subjected to the ordinary personal income tax. Instead, a 7% substitute tax applies concerning each year in which the option for the tax incentive is exercised.

2. The Flat Tax option for retirees: the duration increases from 6 to 10 years

Retirees who meet the above requirements can access the 7% Italian Flat Tax regime by merely choosing the option in the tax return for the year in which they transferred their residence to Italy.

The retirees must also indicate in the tax return the jurisdiction or jurisdictions in which they had their last tax residence before they came to Italy.

When exercising the option, or even subsequently, the pensioners can choose to be subject to the Flat Tax just some of the income produced in one or more foreign states or territories.

The pensioners pay the Italian Flat Tax with a single payment under a 7% “substitute tax” within the same term provided for the ordinary income taxes.

Rules for assessment, collection, litigation, and penalties of the Flat Tax are the same that apply to the ordinary income tax.

The only difference is that since the Flat Tax is a “substitute tax,” this tax cannot be deducted from other taxes or contributions.

The Flat Tax regime can be renounced by the retiree while remaining valid for previous tax periods.

The law also provides for some cases in which the Tax Authority can deny the Flat Tax regime, namely:

• if the Tax Authority ascertains the absence of the requirements for its application;

• if the taxpayer does not pay (even partially) the Flat Tax within the deadline.

Finally, if the pensioner renounces the Flat Tax regime or the latter is denied by the Tax Authority, he would not be able to exercise a new option.

Recently, the Italian government increased the period to benefit from the pensioners’ flat tax (Legislative Decree no. 34/2019).

The maximum tax benefit period changes from the previous five years to the actual 10 years starting from the fiscal period in which the option becomes effective, according to the abovementioned indications.

The retirement Flat Tax regime now proves to be even more convenient than before for retirees living abroad, who in the past had not moved to Italy for the high tax burden of our country, which has now become “fiscally attractive.”

3. Pay attention to the details of the concrete case

Although the tax regime mentioned above may appear easy to understand, things are not always so clear in practice.

Each situation could have particularities that interact with the legislation involved to produce different effects.

The information provided has a purely general nature, given that the discipline of special tax regimes in practice proves to be full of exceptions and derogations that cannot be underestimated.

As already mentioned, there are numerous exceptions, limits, derogations, and cases of non-applicability of the tax incentives, which, in summary, have not been discussed above and which, in the specific case, could push the Tax Authority to deny the tax advantage.

Therefore, the assessment of the applicability of the tax regime cannot disregard the examination of each concrete case.

In fact, as in all international tax analyses, it is essential to frame all the crucial details of the case examined to understand the applicability of special tax regimes.

This assessment is fundamental, on the one hand, to allow the application of the special tax regime to hypotheses that look like they don’t fall into and, on the other hand, do not apply the special tax regime to cases that only apparently fall into them.

This approach is essential to not jeopardizing the special tax regime and avoid the Tax Authority would recover the evaded taxes and applying sanctions.

Any assessment by the Tax Authority of the non-applicability of the special tax regime involves not only the recovery of the taxes not paid because of the tax regime for each previous year of use of the special tax regime but also the application of tax sanctions in the way to erode a large part of the income produced by the taxpayer, with severe economic damage for the latter.

4. International tax advice for the specific case

For taxpayers that would like to apply to the special tax regime, it is fundamental to have a verification conducted by a Professional specialized in international tax law.

This Professional can deeply assess if the special tax regime is applicable in the specific case to avoid the Tax Authority legitimately denying the special tax after several years, recovering the tax evaded as well as penalties and interests.

Again, in daily practice, it happens that the special tax regime results in applying to hypotheses that only apparently (in the eyes of the contributor) did not seem to be included or, on the contrary, can not apply to cases that only apparently (in the eyes of the contribution) seemed to fit into it.

For this reason, it is not advisable to apply special tax regimes without a successful in-depth analysis.

The ITAXA Law Firm has gained a long experience in the analysis of special tax regimes and understanding of the approach of the Tax Authority concerning related cases, also based on unpublished Tax Authority responses.

If you wish to request international tax advice from the ITAXA Law Firm regarding verifying the conditions for the applicability of the special tax regime in your specific case, write to us at info@itaxa.it or fill out the Contact Form.

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Antonio Merola, LL.M.

Tax Lawyer specialized in International Taxation at the International Tax Center of the University of Leiden (The Netherlands) by attending the LL.M. (Master of Laws) in International Tax Law (after a University Master in International Tax Planning and a University Master in Tax Law in Italy), for several years he has been dealing with Tax Consulting and Tax Litigation in favour of Individuals and Companies.