A year and a half ago the Italian Government, introduced a new preferential tax scheme in our country for income earned abroad by all those persons, whether Italian citizens or not (known as "res non doms”), who intend to transfer their tax residence to Italy[1].
This tax scheme is highly innovative for Italy but similar schemes are already well established in other European countries (see table end of page). The objective is to attract rich foreigners who will boost the economy with investments, consumption and an injection of new capital.
Most of these high net worth individuals come from the United Kingdom, Switzerland, Russia and the United States as well as from countries such as the Netherlands and Norway, and they work, not just in finance, but also in the art world: many of them are in fact collectors of works of art.
The subjective preconditions for application of the scheme
In order to benefit from the preferential scheme, Italian or foreign individuals must not have been been resident in Italy, as defined by Article 2, para. 2 of the TUIR, for at least nine of the ten tax years before the scheme option was introduced.
In order to facilitate the transfer of entire households and to enable a more widespread and easier use of the scheme, the government has agreed that the scheme may be extended from the principal taxpayer to the family members[2].
The objective preconditions for application of the scheme
Article 24-bis of the TUIR provides that opting for the scheme makes it possible only to subject income, earned abroad and identified pursuant to Art. 165, para. 2, of the TUIR, to the substitute tax. This means that, for example, the interest earned on current accounts at banks and paid to the new resident by foreign persons, or the capital gain made by the new resident on the sale of non-qualified investments in foreign companies traded on regulated markets, is to be considered as income earned abroad and, as such, likely to fall within the scope of Art. 24-bis of the TUIR.
Therefore, all income earned in Italy by new residents is excluded from the substitute tax and will therefore be taxed on the basis of the ordinary provisions in force for persons resident in Italy.
The methods of access to the scheme
A person (foreign national or Italian citizen) who wishes to access the res non dom scheme will be able to do so by one of the following methods:
- By submitting a specific application directly to the Italian Revenue Agency;
- By indicating in the tax return for the tax year in respect of which the persons have transferred their tax residence to Italy, or in the tax return for the next following year. More specifically, the person making the tax return will be required to indicate the factors required for access to the scheme under Art. 24-bis of the TUIR, namely: non resident status in Italy for nine of the ten tax years prior to the start of the validity of the option; the jurisdiction or jurisdictions in which the taxpayer was last resident for tax purposes; any foreign countries or territories for which he/she intends to exercise the right not to avail him/herself of the application of the substitute tax (known as “cherry picking”). When choosing the countries to include or exclude from the scheme, it is also necessary to examine whether the entire Double Taxation Treaty does not apply, as well as the factors required in the checklist contained in the tax return.
Effects of the scheme
Persons who intend to use of the new preferential scheme will be required to pay a substitute tax for IRPEF (Italian personal income tax) and calculated, on a flat rate basis, at the rate of EUR 100,000 for each tax year in which the option applies. In the case of an extension of the preferential scheme to family members, the payment of the flat rate substitute tax on the foreign income earned by each of them will be EUR 25,000.
Once this option has been exercised, the person who makes use of the above substitute tax may make a specific declaration to the intermediaries (for example, an insurance company acting as a substitute tax) who are involved in the collection of the foreign income and who will have the right not to charge any tax.
This scheme is temporary and, in any event, its effects cease 15 years after the first tax year of the validity of the option without the possibility of any renewal, with the consequence that foreign income will contribute to the formation of the total income of the resident person and will be subject to the ordinary IRPEF income tax.
Advantages of the scheme
Following adoption of the res non dom scheme, the principal tax payer and his/her family members will have the following advantages:
- Exemption from the obligation to monitor tax on foreign activities and investments[3]. While in relation to qualified shareholdings which may generate capital gains taxable in the ordinary manner if realised in the first five tax years of validity of the option, the newly resident must indicate the value of their foreign shareholding in the RW section of the Italian tax return;
- Exemption from payment of IVIE (tax on the value of buildings owned abroad) and IVAFE (tax on the value of financial instruments, current accounts and savings accounts);
- The exemption from inheritance tax on open bequests and gifts made during the validity of the optional scheme for assets outside Italy at that time.
| Italy | Portugal | UK | Malta | |
|---|---|---|---|---|
| Scheme in force | New residents scheme | Non Habitual Resident (NHR) | Resident non-Domiciles | Rules for High Net Worth Individuals |
| For whom? | Individuals | Individuals | Individuals | Individuals |
| Preconditions | Not tax resident for at least 9 of the previous 10 tax years | Not being tax resident in the previous 5 years which are cumulative with other requirements | Tax resident in the UK, but non-UK domiciled (available for 15 out of 20 years) | Owner of real estate and not tax resident in the previous 5 years |
| Taxation | Substitute tax of EUR 100,000 on income from abroad, excluding capital gains on qualified shareholdings | For a 10 year period, a NHR individual in Portugal may benefit from preferential taxes rates or full tax exemption on certain categories of Income. | Remittance Basis of Taxation available. Applies to assets taxed under Income and/or Capital Gains tax legislation. If elected for only UK earnings, UK situs assets and non-UK assets from which benefit is enjoyed in the UK are assessable. Deemed-domicile status applies for all UK taxes after 15 years (out of 20) residence. |
Income from abroad: taxed only when received or “remitted" to Malta. Income from abroad received in Malta or received abroad: proportional rate of 15%. |
All the preconditions are therefore in place so that the res non dom scheme can continue to develop fully in Italy as it has done in other European countries, providing a valid opportunity for the many high net worth individuals who decide to take advantage of the above-mentioned advantages offered by the legislation, managing to combine this scheme with other asset and succession planning tools (life insurance policies, trusts, family agreements, etc.). For example, a foreign party who is a unit-linked life policyholder in France and who wishes to join the res non dom scheme in Italy, as well as making the existing policy in Italy "portable", is a case in point.
For further information and clarification please contact our team of experts who will be pleased to help you find asset planning solutions through the unit-linked policies offered by Bâloise Vie Luxembourg S.A.