The Italian Budget Law for 2019 introduced a flat tax regime
Set at 7%, the Italian flat tax scheme aims to attract foreign and Italian nationals living abroad.
Individuals with an income from a foreign pension, or other source from abroad, can benefit from the scheme. In order to take advantage of the flat tax rate, individuals must transfer their tax residence to certain municipalities. The municipalities have fewer than 20, 000 inhabitants. They are located in the Italian regions of Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily.
In addition, certain municipalities with fewer than 3,000 inhabitants are part of the scheme. These municipalities are in Italian regions impacted by the earthquakes in 2016.
Individuals who opt for the flat tax regime will be exempt from tax on the value of both financial assets (Imposta sul valore delle attività finanziarie detenute all’estero (Ivafe)) and real estate property (Imposta sul valore degli immobili situati all’estero (Ivie)) which they own abroad.
They will also be exempt from completing annual, “Quadro RW” filings. The Italian tax authority uses Quadro RW filings to monitor individuals resident in Italy with foreign investments and financial assets abroad.
Who can benefit from flat tax rate scheme?
– Individuals from countries that have tax cooperation arrangements with Italy. Namely, Tax Information Exchange Agreements (TIES), Double Taxation Agreements (DTA) and Foreign Account Tax Compliance Agreements (FATCA).
– Individuals who have not been an Italian tax resident for 5 years prior to the period for which their option is valid.
Do you have to apply to be part of this tax regime?
If you meet the criteria outlined above, you can adopt the new flat tax regime when you file your tax return related to the fiscal period in which you moved your tax residency to Italy.
You will need to indicate the jurisdiction/s in which you had your previous tax residence. The Italian tax authority will then forward this information, through the appropriate administrative cooperation instruments, to the tax authorities of the indicated jurisdiction/s.
It is possible to carve out income produced in one or more foreign countries or territories. You may, for example, decide that for income in a certain country or territory, the ordinary Italian tax rules should be applied. In principle, this allows you to benefit from foreign tax credits based on applicable tax treaty protections and relief on taxes you have paid abroad. You must specifically indicate this intention when you exercise your option to take up the flat tax regime.
How long is the option valid?
The flat tax regime is effective for nine years from exercising your option to adopt it. You may withdraw from the regime at any time during the five year period. This will not prejudice the effect of previous fiscal years. However, withdrawal from the regime precludes you from exercising a new option to join the flat-rate tax regime.
The Italian tax authority may revoke your rights to the flat-rate regime by challenging your legal entitlement to it.
You must pay your 7% tax as a lump sum each year. The Italian tax authority sets the payment deadline for payments. Failure to pay in full ends your right to the flat tax regime.
For more information, or to discuss what would best suit your personal situation, feel free to contact us.
Alternatively, seek advice from a qualified accountant registered with the ODCEC, the Italian professional accounting association of certified public accountants, auditors and advisors.
You may also be interested in The Principle of Tax Residence under Italian Law