Italy is rolling out the red carpet for international workers who acquire Italian tax residency, in a series of generous tax reforms. Employers of individuals incoming to Italy should familiarise themselves with the new rules, in case they impact upon the value of their incentive packages.
The Impatriate regime: 50% exemption from income tax
A partial exemption was already in place for Italian-source income for employees transferring their tax residence to Italy in certain circumstances (the so-called “Impatriate regime”).
Now the new Budget Law 2017 broadens the Impatriate regime to provide for a 50% exemption from income tax for Italian-source income from employment for the first year of Italian tax residence and the subsequent four tax years.
This valuable exemption is subject to a number of conditions including that the employee:
- must not have been resident in Italy under Italian domestic tax law in the previous five tax years, must acquire Italian tax residence under Italian tax law and then reside in Italy for at least two tax years;
- will work for an Italy-resident company, whether via another group company or directly, working in Italy for more than 183 days in each tax year; and
- will work at managerial level (or have certain minimum qualifications).
The tax regime is also available (subject to the 2-year minimum period of Italian tax residence) to EU citizens and citizens of third countries that have an effective tax treaty or exchange of information agreement with Italy provided that the employee:
- has a university degree and continuously worked in a country other than Italy in the previous 24 months; or
- continuously studied in a country other than Italy in the previous 24 months and obtained a specified level of qualification.
Optional flat rate tax on foreign source income and gains
The Budget Law 2017 introduced a further option for individuals acquiring Italian tax residency: optional flat substitute tax on foreign-source income and gains. This cannot be used cumulatively with the Impatriate Regime.
- Flat rate tax: All foreign-source income and gains are subject to a substitute tax (in lieu of usual income tax rules) equal to €100,000 per year (and are not subject to any additional income taxation, even if remitted to Italy).
- Capital gains on substantial shareholdings: Capital gains on substantial shareholdings realised in the first five tax years of Italian tax residence are subject to income tax under general rules with the benefit of a foreign tax credit even if they would otherwise qualify as foreign-source;
- Foreign assets exemption: Foreign assets are not subject to reporting obligations (except for substantial shareholdings for the first five tax years) and are exempt from wealth, inheritance and gift taxes.
- Duration: The individual can opt into the substitute tax regime for a maximum period of 15 years. He/she can opt out at any time, but will no longer be able to opt back into the regime.
- Family members: The substitute tax regime can be extended to one or more family members, who must pay an annual substitute tax of €25,000 each. If, for example, two spouses transfer their tax residence to Italy and both of them opt into the substitute tax regime, the overall annual substitute tax would be €125,000.
Conditions for the tax regime include:
i.The individual must have been non-resident in Italy for Italian tax purposes in at least 9 of the 10 years prior to the first year of effect of the option.
ii.The individual must select this option via their annual tax return.
What should employers do now?