In recent years, Italy has sought to attract talent and High Net Worth Individuals (HNWI) to stimulate investment and bring economic benefits to the country. In this effort, the tax regime plays a crucial role, as favorable tax policies can make Italy more competitive compared to other countries. Italian tax laws offer benefits to those who transfer their tax residency to Italy, providing advantages to both those returning after living abroad and individuals relocating to Italy for the first time.
There are various types of tax incentives. Some focus on work performed in Italy by offering tax exemptions on income earned within the country, such as the regime for returning workers recently amended by Legislative Decree no. 209/2023. Others provide benefits for income earned abroad, such as Article 24-ter of the Italian Income Tax Code (TUIR), which establishes a 7% flat tax for foreign pensioners moving to certain towns in southern Italy, or Article 24-bis, which offers a substitute flat tax for foreign-sourced income. The latter has recently seen an increase in the flat tax from €100,000 to €200,000 per year.
The regime under Article 24-bis is intended for individuals who transfer their tax residency to Italy after being non-resident for at least 9 out of the previous 10 years. These individuals can opt for a flat tax on foreign-sourced income, with exceptions such as capital gains from the sale of qualified foreign shares made within the first five years after relocating. The regime can last up to 15 years and can also be extended to family members, for whom the flat tax is reduced to €25,000 per year.
However, income earned in Italy remains subject to regular taxation. Foreign-sourced income that qualifies for the flat tax includes real estate income (from properties abroad), self-employment income (from work performed abroad), capital income (from foreign payers), business income (from foreign permanent establishments), and miscellaneous income (from activities or assets located abroad). Employees working abroad for a person who opts for the Article 24-bis regime are also considered to have foreign-sourced income.
In some cases, the taxpayer can choose to exclude income earned in specific countries from the flat tax, but this applies to all income from those countries. The regime offers additional benefits, such as exemption from fiscal monitoring of foreign assets and investments, exemption from the tax on the value of foreign real estate (IVIE), and the tax on foreign financial investments (IVAFE), as well as exemption from inheritance and gift taxes on foreign assets.
The recent legislative change introduced by Decree-Law 113/2024 raised the flat tax to €200,000 but left the other aspects of the law unchanged. This increase applies to individuals who move their residency to Italy after August 10, 2024, while those who relocated earlier remain under the previous €100,000 regime. However, this change may discourage some potential new residents who had planned to relocate based on the lower flat tax.
It is uncertain whether this flat tax increase will lead to higher fiscal revenue or if it will instead slow down the flow of HNWIs to Italy, potentially benefiting other countries with more favorable tax regimes, like Greece, Malta, or Spain. Before the change, over 2,000 HNWIs were expected to move to Italy, but this number may now decrease, reducing the potential €200 million annual revenue increase. If the number of new entrants falls to 1,000-1,500, the resulting tax revenue would be between €100 million and €150 million, though the broader economic impact from lost investments could be substantial.
Despite the flat tax increase, the regime remains appealing to many HNWIs due to the significant tax savings and additional benefits, such as exemption from fiscal monitoring, wealth taxes, and foreign inheritance taxes, as well as the ability to extend the benefit to family members. Family groups, particularly business families, could find the regime attractive, as they can relocate together and benefit from the reduced flat tax for family members.
However, some issues still need to be addressed to make Italy a more attractive destination. For example, greater clarity on the intersection between the preferential regime and business tax matters would be useful. Additionally, some formal rigidities, such as strict deadlines for flat tax payments, could be eased.
In conclusion, the flat tax increase to €200,000 is a significant adjustment in Italy’s strategy to attract wealthy individuals, but it remains to be seen whether it will lead to success or if other countries will reap the benefits instead.