What is the flat tax for income from abroad?
Individuals who transfer their residency to Italy can benefit from a substitute tax on income produced abroad, by paying a fixed tax of 100,000 euro for each tax period in which the option is valid, regardless of the amount of income received.
On the other hand, for income produced in Italy by new residents, the ordinary rates in Italy are applied.
Who are the beneficiaries?
The regulation is applicable with a specific option for individuals who acquire tax residence in Italy, on condition that they have not been tax residents in Italy for at least nine tax periods during the ten preceding the start of the option’s period of validity.
It should be remembered that in order to be considered tax residents in Italy, pursuant to article 2 of the TUIR (Consolidated text for income taxes), it is sufficient to comply, for most of the tax period, i.e. 183 days during the calendar year, with at least one of the following requirements:
- be registered in the Resident Population Registry (Anagrafe) of the Municipality;
- have established domicile in Italy;
- have established residence in Italy.
This specific “flat” taxation applies to all income from foreign sources received by those who are newly resident in Italy, with the exception of capital gains realized through the sale of qualified shareholdings carried out in the first five tax periods qualifying for the option that remains subject to the ordinary tax regime.
If the option is exercised, a fixed annual tax of 100,000 euro is due on the aforementioned income for each of the tax periods in which this option is valid, replacing the ordinary IRPEF taxation.
This option can also be extended to family members of the individual newly resident in Italy (spouse, children including those who are adopted, parents, sons-in-law and daughters-in-law, father-in-law and mother-in-law, full or half brothers or sisters with preference to full), provided that they transfer their residence to Italy and pay a substitute tax of 25,000 euro for each tax period.
The option to apply this particular tax regime is made directly in the annual tax return.
Which is the most advantageous regime to choose?
It should be noted that exercising the option for the fixed substitute taxation of 100,000 euro does not allow credits for taxes paid abroad to be used in Italy. For this reason, depending on the type of income and the country of origin, it could be advantageous to exclude some countries from the application of the substitute tax regime and subject the income deriving from them to the ordinary Italian tax regime.
In fact, the regulation provides for the right not to avail of the application of the substitute tax, with reference to income produced in one or more foreign States or territories, giving specific indication thereof when exercising the option, or with subsequent modification of the same. In this case, the ordinary progressive taxation will apply to income produced abroad from the States for which exclusion from the special tax regime has been chosen.
How to exercise the option
The option to use the substitute tax regime, as mentioned above, is completed directly in the tax return referring to the tax period in which the foreign person (and possibly family members) transferred their residence to Italy or in that referring to the following tax period.
For the purpose of accessing the tax regime in question, the taxpayer has the right to submit a specific request for a preventive ruling to obtain confirmation from the Italian tax authority of the applicability the tax regime itself.
In particular, this application must contain:
a) personal information, tax code (if already assigned) and, if already resident, address of residence in Italy;
b) non-resident status in Italy for a period of time equal to at least 9 tax periods during the 10 preceding the start of the option’s validity;
c) jurisdiction or jurisdictions of last tax residence before exercising the option’s validity;
d) foreign States or territories for which the person intends to exercise the right not to make use of the substitute tax;
e) existence of elements necessary for verifying the conditions for access to the substitute tax regime on income produced abroad, by completing a specific checklist prepared by the Revenue Agency and presenting the related supporting documentation, where relevant.
The request must be hand delivered by the taxpayer or sent by registered mail with return receipt, or by certified email (PEC) to the Central Assessment Department.
Presentation of the application must take place within the deadline set for presenting the return relating to the tax period in which residence in Italy is transferred and is effective starting from this tax period.
How long does the flat tax last? Duration, forfeiture, and termination
Once the option has been exercised, the special substitute taxation is valid for 15 years, without prejudicing the possibility for the taxpayer to renounce it at any time. After 15 years, the option automatically expires.
However, the option is revocable for any tax period.
Furthermore, the effects of the option always cease in cases of omitted or partial payment of the substitute tax.
Revocation or forfeiture of the regime in one tax period precludes the possibility of exercising the option again in subsequent tax periods.
What we can do for you
Taking into account the peculiarity and specificity of the legislation in question, it is appropriate that all the requirements for its application as well as the resulting effects are analyzed and investigated in advance with the help of tax professionals.
Our firm offers all the assistance necessary to evaluate the most advantageous tax regime and provides comprehensive advice on the requirements and their application.
