Art. 24-bis of the Italian Direct Tax Code provides a special Flat Tax regime for income produced abroad by new residents, the so-called resident non-domiciled, to attract wealthy foreign individuals to Italy and encourage new investments in this Country.
1. Flat Tax for non-domiciled residents: characteristics of the tax regime
Art. 24-bis of the Italian Direct Tax Code provides the Flat Tax regime for non-domiciled residents in a version that seems to be inspired by the models already in force in the United Kingdom, Portugal and Malta. This tax regime allows individuals who transfer their tax residence to Italy not to pay the progressive Italian direct tax on incomes produced abroad but paying only a substitute tax on these incomes. Only capital gains deriving from the sale of qualified participation are excluded from this tax regime for the first five years after its adoption.
For the purposes of the applicability of the Flat Tax regime, the taxpayer must not be resident for tax purposes in Italy for a period of at least nine years during the ten years preceding the entry into force of the option.
To exercise the option taxpayers must submit a specific request to the Tax Authority before the deadline for submitting the tax return regarding the year in which the residence is transferred in Italy, also indicating the Countries in which they had their last tax residence. These data allow the Tax Authority to communicate the relevant information to the respective foreign States to prevent tax evasion.
A taxpayer can also choose to apply the Flat Tax option in favour of the family members as well as he can opt not to use the resident non-domiciled tax regime for some income from particular Countries. The ordinary taxation regime of foreign income would continue to operate for the latter incomes.
Those who opt for the new regime also benefit from some advantages for the issue of entry visas to our Country and exemption from the obligations related to tax monitoring of activities held abroad.
The effects of the option cease in the case of:
- choice of the taxpayer;
- expiration of the term of 15 years from the first option;
- omitted or insufficient payment of the substitute tax.
2. The Flat Tax
As a result of the option, taxpayers pay a substitute tax of € 100,000 each year, regardless of the foreign income produced, while their family members pay a substitute tax of € 25,000.
The payment of the substitute tax does not entitle the holder to credit for any taxes paid abroad. The credit applies only for foreign income produced in the Countries for which, while making the option for the Flat Tax, the taxpayer requested to apply the ordinary taxation regime.
The beneficiaries of the non-domiciled resident tax regime are exempt from the payment of stamp duties, IVIE and IVAFE property taxes as well as inheritance and donation taxes relating to activities held abroad.
3. The advantages of the new Flat Tax regime for wealthy foreigners
The non-domiciled resident tax regime addresses the category of non-residents who hold large estates abroad, belonging to the group of HNWI (“high net worth individuals”). These people, while transferring their tax residence to Italy, have the possibility not to be subjected to the principle of taxation of income on a world basis, generally applied to taxpayers resident in Italy for tax purposes, and to pay only a fixed tax lower than the ordinary one.
Taxpayers should consider applying for the non-domiciled resident tax regime based on the characteristics of the foreign tax jurisdictions in which their incomes are produced. The taxpayer should be careful to avoid Double Taxation phenomena deriving from the exercise of taxing power by Italy and other Countries involved, which sometimes would not always be avoided through the application of the Conventions Against Double Taxation.
4. 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.
5. International tax advice for the specific case
For taxpayers that would like to apply to the special tax regime, it is fundamental 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 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 the verification in your specific case of the conditions for the applicability of the special tax regime, write to us at email@example.com or fill out the Contact Form.
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