Italy: tax breaks for foreign workers

In 2019 Italy expanded the tax breaks for the “brain return”, opening their application beyond the limits previously provided and offering new opportunities to foreign workers to extend the benefit period and reduce taxable income up to 10%.

1. Italian tax breaks for foreign workers: conditions

Art. 5 of the Italian “Growth Decree” (Law Decree n. 34 of 2019) modifies the provisions on the tax breaks about the “brain return”, related to Professors and Researches working abroad (Italian and foreigners), according to art. 44 of Legislative Decree n. 78/2010, and to people working abroad (Italian and foreigners), under art. 16 of Legislative Decree n. 147/2015, expanding the audience of taxpayers who can take advantage of that kind of tax break.

In general, to access the tax breaks, foreign workers must comply with the following requirements:
not be resident in Italy for the 2 tax periods preceding their transfer to Italy;
• the commitment to remain resident in Italy for at least 2 tax periods;
• carry out future work mainly in Italy.

It is no longer required that the work previously done abroad should be characterized by a managerial position, high qualification or specialization.

The requirement of permanence in Italy for at least 2 years is generalized for all cases.

Besides, it is no longer required that to benefit from the tax breaks the foreign worker, once transferred to Italy, must carry out his work in favour of a resident company or its subsidiary.

The working activities, covered by the tax breaks, carried out by the taxpayer once returned to Italy include, in addition to that of dependent work, also those “assimilated” to dependent work, self-employment, as well as business activities, starting from the period after 31 December 2019.

2. Tax breaks for foreign workers: duration of the benefits and reduction of taxes

The duration of the tax breaks for foreign workers is 5 years, a period in which the taxable income is cut by 70% so that taxes are due only on 30% of the income perceived.

The tax breaks are extended for an additional 5 years when:
• the foreign worker becomes the owner of at least one residential property unit in Italy (which can be purchased directly by the worker or by the spouse, cohabiting partner or children, also jointly owned);
• for the worker who has at least one minor or dependent child (even in pre-adoptive custody).
In these cases, in the further 5 tax periods, the income produced is taxed only for 50% of its amount.

Foreign workers who have at least three minor or dependent children (even in pre-adoptive custody), in the further 5 tax periods of tax breaks tax their income only for 10% of the amount so that they are 90% tax-free.
Finally, foreign workers tax only 10% of income if they transfer their tax residence to the southern regions of Italy (such as Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sardinia, and Sicily).

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, limitsderogations 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 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 regimewrite 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.