Application of the inbound expatriate tax regime to employees returning to Italy from a posting abroad

February 21, 2023

Requirements for applying the inbound expatriate tax regime

According to the rules regulating the inbound expatriate tax regime in Italy, employees are subject to tax on 30% of their Italy sourced employment income, assimilated income and income from self-employment, where the employee:

The employee benefits from the above tax relief from the tax year he transfers his tax residence to Italy. The relief is available for 4 tax years following the year the employee becomes Italian tax resident. It is possible to extend the relief beyond 5 years where specific conditions are met under Italian law.

Applicability of the inbound expatriate tax regime to employees returning from a posting abroad

Position of the Italian Tax Authority

Italian law does not expressly regulate the application of the inbound expatriate tax regime to employees returning to Italy after being posted abroad.

The Italian Tax Authority applies a restrictive interpretation of who the inbound expatriate regime applies to. It also imposes conditions beyond the scope of the law before allowing the inbound expatriate tax regime to apply to employees returning from a posting abroad. Subject to some exceptions, the regime has limited application to employees returning to Italy from a posting abroad.

These exceptions occur when:

The Italian Tax Authority has also introduced a stricter requirement for the application of the inbound expatriate tax regime. An Employee now needs to sign a new employment contract with the posting Italian company.

A new employment contract is not in itself sufficient if the terms of the employment are substantially the same, regardless of the new role covered by the employee.

The Italian Tax Authority has identified specific work continuity terms that make the employee returning to Italy from a posting abroad ineligible for the inbound expatriate tax regime.

These terms are:

These terms exist in most, if not all, postings abroad, precisely because of the nature of the posting itself, in fact, it is normal for the employee to continue the pre-existing employment relationship after the posting ends.

Position of the Case Law

The Provincial Tax Commission of Milan recently ruled for the first time that the inbound expatriate tax regime applied to an employee who had returned to Italy from a posting abroad. The Provincial Tax Commission of Milan found that all the requirements under the law were met and disregarded the additional conditions required by the Italian Tax Authority.

The Provincial Tax Commission of Milan held that the interpretation of the law provided over the years by the Italian Tax Authority was ‘erroneous’. The Italian Tax Authority’s interpretation was found to be inconsistent with the law, which is aimed at favouring the return to Italy of employees who have worked abroad. Moreover, the law in no way refers to the need to enter into a new employment contract.

However, the Provincial Tax Commission of Milan does not completely disregard the Italian tax authority’s conditions. It was held that there was no reason to deny the tax relief to a posted employee who returns to Italy where the returning employee has a change in work activity, like the case above.

Therefore, the Provincial Tax Commission of Milan has accepted there is a requirement of discontinuity of employment, introduced by the Italian Tax Authority, even if the same is not present in the text of the law.

Apart from the requirement of discontinuity of the working activity, the Provincial Tax Commission of Milan seems to deem it sufficient that the employee meets the requirements expressly set forth in the law in order to benefit from the inbound expatriate tax regime.

The same position has been assumed recently by the Provincial Tax Court of Rome.

Concluding remarks

The position of the Provincial Tax Commission of Milan, although innovative in scope and less restrictive from the position taken over time by the Italian Tax Authority, does not completely distance itself from the Italian Tax Authority’s orientation. In fact, the Provincial Tax Commission of Milan still makes reference to the discontinuity between the working position held by the employee before and after the posting.

The requirement of discontinuity of employment is rarely found in cases of an employee returning to Italy from a posting abroad, precisely because of the nature and typical features of the posting.

It should also be noted that the Italian Tax Authority seems to adopt such a restrictive approach only in the case of the return to Italy of employees posted abroad. The Italian Tax Authority has taken a more relaxed stance for employees who move to Italy for flexible/remote working on behalf of a foreign employer. For flexible / remote workers, the Italian Tax Authority does not require the existence of either the requirement of discontinuity of employment or the requirement to sign a new employment contract.

Therefore, the Italian Tax Authority operates a disparity of treatment between two similar situations.

The greatest contradiction lies in the fact that the requirement of discontinuity of employment is requested in a situation, the one of posting, where the return of the employee in continuity with respect to the previous employment relationship is a physiological element, by virtue of the very nature and characteristics of posting.

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