New Optional Taxation Regime Included in the Italian Budget Law to Encourage New Foreign Investments.

A new bill has been passed in Italy establishing a favorable taxation regime on foreign-sourced income. The TUIR – or consolidated law on income tax - also eases the conditions of the tax regime on Italian-sourced employment income setting a partial exemption of 50% on taxation for this type of income, as opposed to the existing 30% partial exception.

Posted Thursday, January 26th 2017
New Optional Taxation Regime Included in the Italian Budget Law to Encourage New Foreign Investments.

Benefits for new tax residents


The TUIR proposes the payment of a fixed amount of $100,000 per fiscal year for income and gains generated outside Italy, in substitution of the payment of the regular income tax and excluding any other type of fiscal imposition on income. Family members of the beneficiary can also profit from the option for an additional $25,000 per family member per fiscal year.


Nevertheless, the capital gains from substantial shareholdings come with a five years period – from the start of the option – during which they will be subject to regular income tax excluding them from the substitution regime. This, in order to avoid any type of fraud that could be committed by abusing the system to avoid harder impositions contained in a foreign law. Although, as of yet there is no consensus among experts on whether double taxation treaties could be applied to the substitution regime or not.


The TUIR also mandates that the income and gains affected by the substitution regime won’t qualify for any type of foreign tax credit, except for gains affected by the five year period which can qualify for it. Also, individuals that benefit from the option have the possibility to exclude some incomes and gains from the substitute regime – whether they are held in one or more foreign states – which will therefore be taxable under general taxation rules and qualifying for foreign tax credit.


Some other interesting benefits of the law are: a) the non-affectation of goods located outside Italy from inheritance and gift taxes, b) softer migration laws for the applicants, as well as c) the exclusion of foreign-held assets from wealth taxes which don’t, it should be noted, they have to be reported to the authorities under existing disclosure rules.  However, the rules of the CRS and FATCA must be respected. These require informing the authorities of the existence of foreign assets. The substitute regime will apply for a period of fifteen years after which income will be subject to general taxation laws. Nevertheless, individuals can renounce to the option at any given time but won’t be eligible for the regime in the future, should they do so.


Who can access the optional regime?


Any individual – foreign or Italian – can apply for the option of the substitute regime on foreign-sourced income if they acquire Italian tax residence and respect three mandatory conditions. First, individuals whose tax resident has been Italy for at least nine of the ten year period prior to their request cannot profit from the substitute regime. Second, applicants to the option must inform Italian tax authorities about their last state of tax residence so that the corresponding foreign tax authority can be informed about the change. Finally, in order to benefit from the option, individuals need a positive ruling by the Italian authorities confirming their eligibility for the option. That said, Italian tax authorities must reply within a 120 days period time or the request will automatically be approved.


Looking for new investment


The bill is hardly unique, we can find many similar laws in countries such as the UK, Portugal and Malta. The Italian government is definitely trying to attract high-profit contributors, especially since Brexit has created the perfect environment to do so.