Italian resident non-domiciled tax regime
Main clarification provided by the Italian Revenue Agency in the Circular letter no. 17/E published on 23rd May 2017
The Italian Circular Letter no. 17/E published by the Italian Revenue Agency on May 23, 2017 provides, inter alia, some important clarification in relation to the Italian so-called “Res nonDom” tax regime, set forth in art. 24-bis of the Italian Tax Code.
The purpose of this newsletter is to summarize the most relevant clarification provided by the Italian Revenue Agency, after a brief description of the main features of the the “Res non-Dom” tax regime, whilst remaining available for an in-depth and detailed analysis of each specific case.
A. The “Res non-Dom” tax regime.
Starting from fiscal year 2017 individuals can opt for a new favorable regime if they have not been Italian tax resident for at least nine out of the ten tax periods preceding the one in which the option for the new regime is exercised. Under this regime, a flat tax of 100,000 Euro – substitutive of personal income tax due on foreign-sourced income (1)(2) – is payable on a yearly basis.
(1) The only exception concerns capital gains realized on “qualified” participations if realized during the first five years of adoption of the regime. Shareholdings or quotas are deemed qualified when they represent more than 20% (2% in the case of listed companies) of the voting rights in the ordinary general meeting of the company or more than 25% (5% in the case of listed companies) of the share capital.
(2) The flat tax regime does not apply to the Italian-source income of the individual, which is taxed under the ordinary rules.
Furthermore, individuals who opt for the regime (i) benefit from an exemption from inheritance and gift taxes regarding assets held abroad, (ii) do not have to disclose foreign investments in their annual tax return and (iii) do not have to pay tax on immovable property held abroad (so-called “IVIE”) and tax on investments held abroad (so-called “IVAFE”).
The regime can be extended to family members who also move their tax residence to Italy. In such case, the flat tax is due in an amount of 25,000 Euro per family member opting for the regime.
The taxpayer can file an advance ruling request with the Italian Tax Authorities in order to determine the right to benefit from the flat tax regime.
The favorable fiscal regime automatically expires after fifteen years and can be revoked by choice of the taxpayer in any tax period after the first tax period of adoption.
B. Clarifications provided in the Circular letter.
1. Exemption from the CFC rules.
Individuals who opt for the “Res non-Dom” tax regime are not subject to the Italian CFC rules, provided that the controlled foreign entities are not located in countries which have been voluntarily excluded from the scope of the substitute tax regime (so-called “cherry picking”).
Therefore, income deriving from participations that would ordinarily give rise to the application of the CFC rule will not be taxed on a transparent basis, falling within the scope of the substitute tax.
2. Tax “haven” income benefit from the “Res non-Dom” tax regime.
The “Res non-Dom” tax regime applies irrespective of the foreign country of origin of the income and regardless of its taxation in the source country.
Therefore, dividends and capital gains coming from a foreign country considered as a “tax haven” for income tax purposes are to be included among the foreign income to which the substitute tax applies (i.e. they are excluded from the ordinary tax regime).
3. Tax residency of foreign entities managed by “Res non-Dom” taxpayers.
The tax residency of foreign entities managed only by individuals who have opted for the “Res non-Dom” tax regime should not be challenged by the Italian Tax Authorities. The special status of “Res non-Dom” taxpayer is irrelevant for the purposes of attractingItalian tax residency of a foreign entity, according to Art. 73 of the Italian Tax Code, where the challenge is grounded only on the existing relationship between those taxpayers and the foreign (managed) entity.
4. Income derived through “conduit” entities.
Italian “Res non-Dom” taxpayers holding nonItalian entities qualified as pass-through (fictitious) vehicles should treat the underlying income as if they were directly held.
In particular, any income derived from the assets held by companies qualified as “conduit” vehicles – according to art. 37, paragraph 3, Presidential Decree 600/73 – should be treated by the “Res non-Dom” taxpayers as follows:
(i) if the income was Italian sourced, it would be taxed according to the Italian tax rules;
(ii) if the income was non-Italian sourced, it would be subject to the substitute tax (i.e. they are excluded from the ordinary tax regime).
5. Restricted Stock Unit incentive plan and employment income.
In the context of a “Restricted Stock Unit incentive plan”, the employment income deriving from the granting of stocks that occurred when a “Res non-Dom” became an employee of an Italian entity – part of the same group which includes the foreign entity that formerly employed the individual – may be subject to the substitute tax for the quota ascribable (on a pro rata basis) to the period during which the work is performed abroad.
6. Eligibility for the Double Tax Treaty.
In the Italian Revenue Agency’s view a “Res non-Dom” qualifies as Italian tax resident for the purposes of the Double Tax Treaty, unless the single treaty provides otherwise.
7. Inheritance and gift taxes.
Being confirmed that during the time period of validity of the “Res non-Dom” tax regime inheritance and gift taxes solely apply to assets located in Italy, in relation to the assets located abroad it has been expressly specified that such exemption also applies to any act of liberality, including a contribution of assets in a trust.