Italian Flat Tax for new resident retirees: now it is more convenient

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.

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 residing 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 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 in place for administrative cooperation in tax matters.

On the other hand, in Italy the pensioner must become 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 3,000 inhabitants, affected by the seismic events of the year 2016 (belonging to a specific list provided by law).

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.

The Flat Tax option for retirees: the duration increases from 5 to 9 years

Retirees who meet the above requirements can access the 7% Italian Flat Tax regime by merely choose 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 he had his last tax residence before they came to Italy.

At the time of exercising the option, or even subsequently, the pensioners can choose to 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 the form of 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 for the ordinary income tax.

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

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

The law also provides for some case 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 to 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 has increased the period to benefit from the pensioners’ Flat Tax (Legislative Decree no. 34/2019).

The maximum the tax benefit period changes from the previous five years to the actual nine years after the fiscal period in which the option becomes effective according to indications provided above.

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”.

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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.