With the Budget Law for fiscal year 2017, Italy enacted a new flat tax for Italian first-time residents. The flat tax amounts to euro 100,000 regardless of the amount of taxable income. Foreign source income is completely exempt from tax, while domestic source income is taxed under the normal rules (graduated tax rates on income brackets generally applying to all resident taxpayers).
First-time residents will also be exempt from the duty to report their non-Italian financial assets, and will not be subject to Italy’s estate and gift tax. Special rules for residence permits and visas will also apply to facilitate the establishment of Italian tax residency in connection with the application of the new tax. The new flat tax is aimed at attracting high net worth individuals to Italy. This who have solely non Italian source income will pay euro 100,000 and will be cleared from any other tax filing and payment obligations.
Individuals who have not been resident in Italy for Italian tax purposes for at least nine of the previous ten years, at the time they establish their tax residency in Italy, will qualify for the flat tax. An individual is Italian treated as an Italian tax resident if she registers as an Italian resident individual at the local municipal office in the place where an individual has her home, or by maintains in Italy her place of habitual abode or the main center of interests, for more than half of a tax year.
Scope of the flat tax
The flat tax is elective and applies in lieu of the ordinary income tax on foreign source income. Italian source income will always be subject to the regular income tax (charged at graduated rates by brackets of income). The flat tax applies for a maximum period of 15 years. Foreign source capital gains (that is, capital gains realized from the sale of stock or other ownership interests in foreign entities), are subject to the the ordinary income tax (at the marginal rate of 43% charged on 49.72% of the amount of the gain under Italy’s participation exemption rules), if realized within five years from the beginning of Italy’s tax residency. Taxpayers must elect to pay the flat tax in lieu of the ordinary income tax. Taxpayers can terminate their Italian tax residency at any time, even before the expiration of the fifteen year period of application of the flat tax.
Individuals who qualify and elect for the new flat tax will be exempt from the obligation to report their non Italian investment and real estate assets, which is usually carried out by filling out a special section of Italian personal income tax return. They will also be exempt from Italy’s estate and gift tax on non-Italian assets.
Possible constitutional challenges
The new flat tax may be challenged under the provision of the Italian Constitution, which requires income that taxes are charged in proportion to an individual’s “contributive capacity”, that is, in a way that they are commensurate to an individual’s income or wealth.
Individual taxpayers having solely non-Italian source income from financial or real estate investments located and managed outside of Italy, or from closely held foreign companies, would benefit from a very generous tax regime that would limit their tax liability to the flat amount for euro 100,000 regardless of the actual amount of income they actually earn. The exemption from the duty to disclose foreign financial and real estate assets and investments will also result in much reduced administrative burden in filing an Italian income tax return.
High net worth U.S. citizens or resident alien individuals who have relinquished or plan to relinquish their U.S. citizenship or terminate their U.S. tax residency should consider Italy as a new “tax haven”, allowing for a a low flat tax on their non Italian source income with no reporting or disclosure of their non Italian assets wherever located in the world.
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