Wealth Management for HNWI Clients: Planning, Protection and Tax Reliefs

Wealth Management is becoming increasingly important in our globalized and technological economy where many entrepreneurs and families need personalized management of their assets due to the relative complexity and the numerous risks they can incur.

1. Wealth Management and the new needs of HNWI Clients

Wealth Management involves assets services, planning and protection of significant wealth exceeding € 500.000 (owned by the so-called HNWI – High Net Worth Individual) to identify the best solution for the relative increase and protection from the numerous risks surrounding it.

Wealth Management has had maximum diffusion in the past few years, especially in Anglo-Saxon countries.

Nowadays, also in Italy, more and more entrepreneurs and families are demanding Wealth Management services due to the profound change in the economic context.

In particular, here are the new factors that want the new Wealth Management approach in asset management:

  • The globalization of the markets has led to the internationalization of economic activities and investment policies abroad, so the patrimonial events no longer concern only Italy but also various foreign jurisdictions whose characteristics it is essential to know in order not to run into unpleasant surprises;
  • As a result of the so-called “Voluntary disclosure”, new capital has fiscally emerged, part of which has been repatriated in Italy, and the remaining is still abroad, so it has become essential to find the best strategy for the best Walth Management of these assets at an international level;
  • In recent years we have seen the development of the international exchange of information for tax purposes. This exchange of information has led to the fall of banking secrecy and the end of tax havens, so we will have to say goodbye to the practices of international tax evasion perpetrated through the concealment of wealth abroad.

2. Wealth Management and Risk Hedging

Wealth Management regards the financial and non-financial assets of the HNWI Clients. It concerns a series of risks of different natures that may arise in concrete cases and must provide an adequate response

Those are the risks:

  • Personal and family members: health, safety, matrimonial matters, succession, financial damage and excessive tax burden;
  • Business: economic crisis, civil liability, generational handover and high tax burden.

For a careful assessment of these risks and, therefore, to provide a customized Wealth Management solution to each asset situation, the relationship with the Client should be characterized by the following requirements:

  • Specialization: it is essential to deal with professionals specialized in Wealth Management services that can create a special relationship with HNWI Clients and are constantly updating their knowledge on the subject to identify the risk factors associated with the specific concrete case;
  • Planning: Wealth Management services imply the implementation of a solid relationship with the HNWI Client, a solidity of confidentiality, empathy and identification, such as to identify his fundamental objectives and plan the steps to achieve them efficiently;
  • Customization: in-depth knowledge of the Client’s needs can only be followed by the provision of a tailor-made service, with a clear choice of the most appropriate tools for protection from the risks that arise in the specific case and the achievement of the objectives chosen by the Client.

3. Tools for Planning and Protection

Wealth Management services can be divided into different categories, depending on the objectives to be achieved:

  • Tax planning and optimization: the professional has the task of examining the tax characteristics of the entire assets of the HNWI Client to verify the margins for a legitimate maximum tax saving and to mitigate the risks of tax disputes; 
  • Strategic business management: in this case, the consultant works alongside the entrepreneur to manage the events of the entrepreneur’s life, being able to use the following tools:

1. Internationalization processes;

2. Share company;

3. Business sale;

4. Holding;

5. Fiduciary registration;

  • Management of the generational handover to preserve the wealth of the family or business along the generations:

1.Family agreement;

2. Corporate area: social agreements, shareholder agreements, family holding company, the establishment of the right of usufruct for descendants;

3. Fiduciary instruments;

4. Trust;

  • Protection of assets from creditors’ actions, damaging events and high tax burden:

1.Asset fund;

2. Insurance policies;

3. Acts of destination;

4. Fiduciary mandates;

5. Foundations;

6. Trust.

4. Tax Reliefs: Italian Tax Optimization regimes for HNWI Clients

4.1. Italian € 100.000 Flat Tax for HNWI

Art. 24-bis of the Italian Direct Tax Code provides a special € 100.000 Flat Tax regime for income produced abroad by new residents, the so-called resident non-domiciled, to attract HNWI (High Net Worth Individuals) to Italy and encourage new investments in this Country.

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 pay 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 for HNWI, 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.

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.

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.

4.2. Italian 7% Flat Tax for New Resident Retirees

Art. 24-ter of the Italian Income Tax Code (as introduced by the 2019 Budget Law), provides the new 7% Italian Flat Tax for new resident retirees to encourage pensioners 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 a resident in one of the Municipalities having a population not exceeding 20.000 inhabitants, 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.

4.3. 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  Italian Revenue Agency 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 preventing the  Revenue Agency would recover the evaded taxes and applying sanctions.

Any assessment by the Revenue Agency 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.

4.4. International tax analysis 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  Revenue Agency 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 Revenue Agency concerning related cases, also based on unpublished Revenue Agency responses.

5. The creation of value in the Wealth Management

By providing Wealth Management services, the professional must create a strong empathy with the HNWI Client to understand the needs to be met in concrete cases.

However, this does not imply that the HNWI Client always understands the professional’s fundamental skills and the energy invested in achieving the case’s objectives. Often, he does not even have the tools to appreciate the value of the contribution made to his financial situation.

It may happen that, for example, an HNWI Client does not fully appreciate the planned capital protection against a specific risk just because this maneuver has not resulted in any measurable capital increase.

For this reason, it is essential, on the one hand, to make the Client aware of the risks affecting his/her assets to allow him/her to evaluate the adverse events to avoid concretely. On the other hand, it is crucial to agree precisely on the objectives to be achieved, to make it easier to measure the performance and added value of the Wealth Management services provided.

For more information and assistance on Wealth Management services, the Italian € 100.000 Flat Tax for HNWI, and the Italian 7% Flat Tax for New Resident Retirees, please write 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.