Tax Lyrical Episode 3: Discover Italy: from travel brochures to tax advice

Sophie:
Welcome to this edition of Tax Lyrical. I'm Sophie Lloyd, counsel at Ashurst, and today's edition will be entitled, Discover Italy: How did we go from travel adverts to tax advice?

Imagine living in a country that offers you stunning landscapes, rich culture, delicious cuisine, and a generous tax regime. Sounds too good to be true, doesn't it? Well, not if you choose Italy as your destination. In today's episode, we will explore the various tax incentives that Italy offers to individuals and businesses who want to relocate or invest in this beautiful country. To help us understand these opportunities, we have invited two experts from the tax department at Ashurst Milan, Michele Milanese, partner, and Federico Nobili, associate.

Welcome to Tax Lyrical, Michele and Federico.

Michele:
Thank you, Sophie. Thank you for having us.

Fede:
Thank you, Sophie. It's a pleasure to be here.

Sophie:
So let's start with a general overview. Why should a high-net-worth individual consider moving to Italy for tax reasons today? What is it that makes Italy stand out from other countries?

Michele:
Well, thanks for the question. I may start saying that it's a real pleasure to be with you and with our listeners today. It is fair to say that, nowadays, Italy is a very attractive option for foreigners, especially compared to other countries that have recently changed or eliminated their tax benefits. For example, the UK has announced the end of their special regime for non-domicile residents in 2025. This means that people who benefit from the UK resident non-dom regime will have to pay more taxes on the foreign income.

Similarly, Portugal has also scrapped the NHR programme, introducing a new restricted regime applicable only to certain categories of qualified professionals. By contrast, Italy continues to distinguish itself internationally for its particularly favourable approach towards non-residents through instruments like the flat tax regime that we'll discuss today. Italy offers significant incentives for those wishing to repatriate or relocate. Combining these benefits with a unique ecosystem that the countries offer and other simplification in getting the immigration visa, it is precisely this combination of factors, Sophie, that represents the uniqueness of the Italian system. Fede, wouldn't you agree?

Fede:
Yeah, thank you, Michele. Indeed. And allow me to say that in addition to personally benefiting from a favourable regime, the beneficiary can extend these advantages to their family members, facilitating a relocation that allows for a new life in a welcoming country like Italy with a mild climate and many international recognised qualities. Then the picture is completed by a favourable regime for reduced taxation on financial income, of course, generated in Italy and a dedicated tax regime for carried interest and also in a highly advantaged context regarding inheritance and gift taxes compared to also the other EU countries.

Michele:
Thus, Sophie, to answer your question, it is no surprise that many foreigners captivated by the Italian lifestyle decided to move permanently to Italy. Some continue their professional activities, others choose to make new investments, while still others prefer to enjoy the fruits of their fortunes quietly. As evidence of this trend, in 2022 there were about 820 new flat tax residents with 318 family members benefiting from the same regime, and in 2023, the number doubled.

Sophie:
Wow. So it's obvious that the word is spreading of the appeal of Italy, both in terms of the advantageous tax regime, but, as you say, the mild climate and Italian lifestyle. But let's get into the details now. So how does this flat tax regime work, and who can apply for it and how?

Fede:
So, yes, basically, the flat tax regime is typically chosen by high-net-worth individuals and offers a substitute tax of 200,000 euros on foreign-source income, provided that the person transferred the tax residence to Italy for the first time in their life or after having lived abroad for at least nine out of 10 years. So the recent increase in the flat tax amount from the original 100,000 to the current 200 has been, let me say, a little bit criticised as a damage to the appeal of this incentive. But it should be noted that though this change will only only affect new residents and will not alter the situation for those who established residence before the regulatory change. So, at the end, if we have to evaluate costs and benefits of this regime, the Italian flat tax remain attractive and continues to represent an opportunity, isn't that the case, Michele?

Michele:
That's right, Fede. The flat tax replaces any Italian taxation for an income. This means that if you wish to make an overly simplified example, individuals with an annual foreign income of less than half a million deriving from non-Italian real estate properties, business, trading, self-employment, would find a flat tax more convenient than the payment of ordinary income tax at a standard rate up to 43%. At the same time, if the annual foreign income is composed by dividends or other financial income, the flat tax would be convenient when such financial income exceeds 770,000 euro. This is because the tax rate on financial income is lower than the 43% on general income, being generally equal to 26%.

Sophie:
Thank you. So it's clear then that the income tax benefit is tangible for those who originate income from outside of Italy. Are there any additional benefits that can be combined with this tax regime?

Michele:
Well, another feature of the flat tax regime that is largely appreciated is the possibility to extend the exemption to other family members by paying a top-off tax of 25,000 euro per person. As per the main option, this extension is convenient when the relevant family member originates minimum level of taxable income from foreign countries. This extension can be done at any time during the validity of the main regime, the flat tax regime offers further advantages. Fede, would you like to summarise those advantages to our listeners?

Fede:
Yes, my pleasure. So, first and foremost, this regime provides an exemption from the payment of EVM, which is the tax on real estate investments held abroad, and IVAFE, the tax on the value of foreign financial assets. In practise, this means that those opting for this regime will not be required to pay taxes on real estate held outside Italy, nor on financial products, bank accounts or selling accounts managed by foreign intermediaries. But that's not all. One of the most advantageous aspects is the absence of fiscal monitoring obligations. In other words, the beneficiary will not need to provide details about investments and assets held abroad.

Another important advantage not to be underestimated is the exemption from inheritance and gift taxes on assets located abroad, provided that the deceased or the donor had opted for the flat tax and the inheritance or donation occurs during the validity of the regime. Moreover, this exemption extends to assets transferring to a trust provided at the [inaudible 00:08:17] has opted for the subsidy tax. And yes, there is also another highlight. Like we said, these benefits can also be extended to the beneficiary's family members. So this possibility makes this tax regime even more appealing and advantageous for those looking to optimise the management of their wealth, also, on an international level.

Sophie:
I can see that, Fede. So, while the tax regime is undoubtedly advantageous, how complicated is it in practise to obtain a visa?

Michele:
Whilst European applicants may not face specific limitation to remain in Italy, for non-European applicants, the process has been simplified through the adoption of a digital procedure. The investor visa is without a doubt one of the best opportunities out there. The key condition to access this regime is, as the name suggests, making a qualifying investment. Within three months from arrival, the applicant must have invested in sectors deemed strategic for our country. The amount required varies according to the type of investment, from 250,000 euro for a start-up to 2 million euro for investments in Italian Govies.

This investor visa can be obtained reasonably quickly and is valid for two years with the possibility of renewal for another three years if the investment is maintained. If the investor then decides to extend their stay in Italy further, they will have two options. They can either apply for a new investor visa or hope for an EU permit for long-term residence. Beyond these aspects, there are other additional benefits; the freedom to travel throughout the Schengen Area and, after at least 10 years of residency, the possibility to apply for Italian citizenship.

Sophie:
Thank you, Michele. I can see how the flat tax regime is a very interesting system and, on the face of it, achievable because it's relatively simple. Could you summarise what investors have to do to access it?

Fede:
From a procedural standpoint, the process is fairly simple. The taxpayer can opt into the regime by transferring the residence and filing the tax return for the relevant fiscal year. In the tax return, the applicant needs to make sure that section NR, containing the relevant option, is properly filled in. In addition, the tax amount needs to be paid lump summing. Moreover, the taxpayer has also the possibility to file for a ruling obtaining a preliminary response from the Italian Revenue Agency, which addresses any doubt on the application of the relevant regime for the specific case.

Sophie:
So, among individuals who could benefit from tax relief regimes, what we often see in the media are the names of celebrities, actors, influencers, singers, and athletes. Why should these figures consider Italy a fiscally strategic country?

Michele:
The regime may be convenient or not, depending on whether the primary source of income originates from a foreign state or Italy. The option may be convenient when income originates from abroad, while it's absolutely inefficient if the primary source of income originates from Italy. Say, for example, that a celebrity were to receive royalties from music copyright licencing from a non-Italian company, such foreign income should fall under the relief provided by the flat tax. In this example, no additional taxation would occur in Italy on top of the 200,000 euro per year for the flat tax. On the contrary, if the relocation to Italy brings the celebrity to originate their income from Italian clients, then the flat tax regime would become a useless additional charge paid on top of Italian taxes. If this is the case, then the applicant should absolutely opt out.

Sophie:
That seems like a really important point. Thank you, Michele. So what if the primary source of income is actually Italian then, are there any incentives in place where that is the case?

Fede:
Yes. So we have many examples; managers, directors, or other individuals, whether high-net-worth individuals or not, that come to work for Italian branches or foreign groups or Italian companies. Those people could access a different regime based on a reduction of Italian taxes on employment or self-employment income source in Italy. The regime generally referred to as Impatriates has a focus on Italian source income as opposed to the foreign income. The Impatriates regime allows for a 50% tax reduction in income earned by employees and self-employed individuals within certain limits. So this regime requires that at least three years have passed since the applicant's last residence in Italy and the beneficiary must commit to maintain residence in Italy for at least four years.

Michele:
Fede, perhaps at this point it is helpful to mention that the incentive we are discussing is an updated version of a previous more generous tax measure. The old regime offered a very generous tax reduction with fewer restrictions. Previously, in order to qualify, an applicant only needed to maintain tax residence in Italy for at least two years and not to have been a resident in Italy for the previous two years.

Fede:
Yeah, yes, you're right, Michele. Additionally, while the old regime taxed only 30% of the beneficiary's income, with some exceptions, the new regime provides for a 50% reduction on an annual taxable income. But if the individual relocates to Italy with a minor child, or as a child during the benefit period, the tax reduction increases to 60%. So it's important to note that the benefit is now available only for the first five years after establishing residence in Italy, and it's no longer extendable, unlike me before. The updated regime is available only to those who meet specific high qualification or specialisation requirements such as practising a regulated profession or holding an advanced degree with professional qualifications. Clearly, the new criteria have narrowed the potential beneficiaries compared, of course, to the previous regime.

Sophie:
Yes, although it remains an advantageous regime, even with the narrowed potential beneficiaries. What steps must the applicant take to apply?

Michele:
Opting for the Impatriates regime is rather simple. Employees can do it directly by filing a declaration with their employer. Consultants may submit a written request to their clients. In any case, adherence must be indicated in the subsequent annual income tax return. Here's where getting some advice to master this incentive is important as the process, although straightforward, may require some attention to prevent annoying tax claims or inefficiencies. Remember that in order to ensure its long-term sustainability and to prevent abuse by a foreign taxpayer, the Impatriates regime has recently been updated in the sense that Fede was mentioning. I guess one can understand the objective of the Italian legislature keeping the tax system attractive for foreigners and, at the same time, preventing forms of tax abuse. The result, though, is not the easiest discipline to navigate for interested employees and managers.

Sophie:
I can understand that. I can also imagine individuals wanting to be able to switch between the Impatriates regime and the flat tax regime. Can an individual who's chosen one of these two tax relief regimes later switch to the other regime?

Fede:
So the answer is yes. So recently the Italian tax authorities confirmed that an Italian citizen residing abroad for more than 10 years who returned in Italy in 2019 and benefited from the flat tax regime, can legitimately revoke this regime and replace with the Impatriates regime, and we will also be eligible for its extension for a further five years. This is possible because although these are alternative regimes and thus not combinable within the same tax year, there is no restriction preventing the taxpayer from using different regime in different tax years. Provided, of course, that the requirements for which relief are met.

In other words, the fact that the beneficiary initially opts for the flat tax does not preclude him from accessing the Impatriates regime in subsequent years. However, it'll be necessary to revoke the previous regime, which will cease to have effect for the future. And it's important for the taxpayer to be aware that the new regime will not start from scratch. It'll be considered as having starting from the moment he opted for the flat tax. And in any case, extension was available for those already under the old Impatriates regime, whereas those who will apply for the new regime will not be eligible for an extension.

Sophie:
And what about companies? Why should company taxpayers consider Italy as an attractive destination?

Michele:
Fair point, Sophie. There is also a specific measure designed to facilitate the relocation of businesses or functions to Italy. This is a favourable regime creating an incentive for economic activities relocating from non-EU countries, complementing the range of tools we have discussed so far. However, the effectiveness of this advantage is subject to the prior authorization of the European Commission. For a company that decides to take advantage of this regime, the benefits are clear. Not only a significant tax advantage can be achieved with a 50% reduction of corporate taxes on the income generated, but also an opportunity can be sought to enter a new network and market while enhancing the value of products and services under the prestigious Made in Italy labour. If this regime is finally approved, it will represent yet another tool to attract foreign investments.

Sophie:
Thank you, Michele. That's a very clear summary. So, to conclude, what would you advise our listeners today?

Michele:
Our advice is to have a clear understanding of the Italian tax flow and the legal tools available to taxpayers. This is especially important for high-net-worth individuals who can only appreciate these opportunities with the ongoing support of lawyers familiar with the local context. These incentives are permanent and despite the recent amendments discussed today, which made the option more expensive, they continue to be among the most appealing in Europe, showing the political willingness to attract high-value individuals in the country. The recent tweaks to the flat tax regime and the anti-abuse provision for the Impatriates regime are not aimed at undermining their effectiveness, but rather eliminated some typical abuses and loopholes, making the regime more sustainable from a public finance standpoint throughout the years.

Sophie:
That is all we have time for today. Thank you very much Michele and Federico for an excellent summary of the attractive tax regimes available to both high-net-worth individuals and to companies in Italy. It has been brilliant to have you both on the podcast today, and I think we've all got a much better picture now in addition to our idyllic ideas of the lifestyle in Italy as to why Italy is being talked about as the relocation destination of choice at the moment.

Now, by way of reminder, listeners may wish to revisit the previous episode of Tax Lyrical where we discuss some of the key UK tax policies of the new Labour government, which may be push factors for some individuals out of the UK, in addition to the pull factors to Italy explained today by Michele and Federico. Any listeners should feel free to get in touch with any of us with any additional questions that they may have. Thank you very much.