12 December 2016

Italy introduces a territorial system of taxation

Giulia Cipollini
Partner | IT

Italy has recently introduced a territorial system of taxation to attract high net worth individuals, including successful individuals in the sports, arts, and fashion and design sectors, who could be interested in moving to Italy to take part in these thriving sectors.  The new measure is contained in the Finance Bill for 2017, approved by the Italian Parliament on 7 December 2016.  This timing, which coincides with the changes to the UK's 'res-non-dom' regime, suggests that Italy might be seeking to woo HNWIs looking for a new home following Brexit or deterred by the tightening of rules in the UK.  The approved rules contain recommendations to simplify Italy's immigration law in connection with the new tax system.

Withers lobbied the authorities to introduce a system along these lines, and the new rules include the following:

  • Italian-source income and gains are taxable in the usual way; but
  • foreign income and gains are sheltered from Italian tax, provided the taxpayer pays an annual charge of €100,000.   This may be extended to family members, at a cost of €25,000 per member.   This is reminiscent of the remittance basis charge in the UK.

*The individual must disclose their tax residency location to the Italian authorities.

This territorial system of taxation is available for up to 15 years (which is another swipe at the UK remittance basis system), unless the individual fails to pay the full annual charge.

The new system is available to all persons (regardless of their nationality or domicile) who have been non-tax resident in Italy at any time during the nine years preceding their relocation to Italy.  Thus, the new system is also available to Italian returnees.   The rules identify individuals as tax resident if they are a registered Italian citizen or reside in Italy for more than half the year (183 days).  The regime requires that all applicants for non-domiciled status request a preliminary ruling from the tax authorities, with the request filed at any time within the term for filing their annual income tax return for their first tax year as an Italian tax resident.  The request can also be filed as a non-Italian tax resident.   The tax authorities will have 120 days to approve or deny the request and, if the tax authorities do not reply within this period, the request is deemed to have been approved.   

In addition to shielding foreign income and gains from Italian tax, the annual charge exempts the taxpayer from a duty to disclose foreign assets in their tax return under the ordinary disclosure rules (a.k.a. 'RW' rules).  Of course, CRS/FATCA still applies, meaning that the existence and value of foreign assets may still be reported to the Italian tax authorities.

It is currently unclear whether the draft provision intends that a non-domiciled individual is able to make use of the treaties for the avoidance of double taxation.  This topic is still under discussion amongst tax specialists and, at this stage, due to the peculiarities of the new regime that make it different from the UK model, there may be grounds to argue that an Italian 'non-dom' could be entitled to benefit from tax treaties.  This aspect will have to be carefully assessed from both an Italian and source State perspective.

Interestingly, the new territorial regime also extends to succession taxes, with inheritance tax only due on assets located in Italy at the time of demise of the individual.  This is good news for potential candidates, as there are persistent rumours that Italy might overhaul its current gift and succession tax regime in the near future (currently, gift and succession taxes are levied at very low rates of 4%-8% with exemptions for certain business assets).

As a result, the new rules add to the choice currently available to individuals without fixed domicile (such as, e.g. the 'res-non-dom' system in the UK/Ireland/Malta, the Swiss 'forfeit' rules, the Spanish Beckham Law, etc.).

With offices in multiple jurisdictions, Withers is ideally placed to advise international clients on the best system in light of their personal needs and family circumstances.  As a leading trust law firm, Withers is particularly suited to advise mobile clients on their relocation needs in the presence of complex family holding structures (such as trusts and foundations).

Giulia Cipollini Partner | Milan

Category: Article