What does the special tax relief consist of?
A 7% flat tax on all income for all pensioners (regardless of nationality) who:
- have been tax resident outside Italy for at least five (5) years prior to the year in which they become Italian tax resident;
- transfer their tax-residence to the South of Italy, to a municipality (comune) with a population of fewer than 20,000 inhabitants.
Definition of Pensioner
The definition of pensioner in the legislation and guidelines is rather vague. It appears to include anyone in receipt of a pension (government or private), regardless of age, and regardless of whether the pension income is the principal/prevalent source of income. It is certainly wide enough to encompass all forms of pension, private or public. Given the ease in which private pensions products can be purchased in many countries, and given that all foreign income income (pension or otherwise) will be subject to the flat rate 7% charge), the regime looks very attractive.
The 7% regime applies for nine (9 – it was initially five when the law was introduced) years starting with the year in which the transfer of tax residence is effective.
The regions are: Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, Puglia.
A list of applicable local authorities can be extrapolated from the web-site of the Italian statistical service ISTAT, but you should check directly with the local authority before moving.
Electing the regime must be done in the tax return for the tax year in which the transfer of residence is completed.
The Consequences of Making the Election
- Exemption from income taxes at normal scale rates applicable to pension income and overseas business, employment and rental income;
- Exemption from 26% substitute tax on investment income and
- Exemption from declaring foreign assets (no need to compile section RW of the return)
- Exemption from wealth taxes (IVIE and IVAFE) on foreign assets
The 7% substitute tax means no deductions for tax credits (dependents, alimony, qualify energy-saving expenditure etc.)
The regime does not extend to Italian source income on which tax will payable in the normal way subject to marginal rates or applicable other flat-tax rate, eg.
- rental income on Italian property;
- income from employment or self-employment where the activity is carried on from Italian territory;
- deemed land registry income from property in a luxury category or land and buildings generally which are not occupied as the owners principal residence property (prima casa);
- pensions paid by the Italian government/Italian based occupational/private pension schemes;
- income from Italian government bonds and from Italian listed companies;
- other investment income paid by an Italian intermediary.
Foreign Tax on non-Italian income.
Under the special regime, you are not able to claim credit for any foreign tax. It seems to be the view of the Italian tax authorities (although specific clarification would be helpful) that the 7% applies to the gross income received and the not the net amount after deduction or payment of any foreign tax.
To overcome the risk of double taxation, the Italian legislator has granted the possibility of opting out of the regime on a country-by-country basis, selecting all income sourced in a particular country, and electing this to be taxed at normal rates. This you would want to do, if you were liable to tax in that country, and the foreign tax credit covers your Italian tax liability (or gives you an Italian tax liability that is less than 7% of the gross income.)
After the special regime expires
At the end of the flat tax period, absent any extension by the Italian government via new legislation, the taxpayer will go onto the normal regime. This means taxation at ordinary rates/substitute tax on investment income and gains on worldwide income, if still resident.
The flat-tax period can be ended at will by the taxpayer revoking the option, or by moving their residence to another town that does not qualify for the relief.
If any of the requirements for the relief ceases to apply during the nine year period, e.g. if the population of the local area grows over 20,000 inhabitants, then the taxpayer will go onto the normal tax regime for the next tax periods.
Foreign Pension Income
Note that if you are resident in or have a pension paid by a government or local authority in another country (and one with which Italy has a double tax treaty) and the pension derives from your job with that government or local authority then you may not be liable to Italian tax at all on that pension income. In this case you may well be liable to tax on the pension income in the country that pays the pension.
Ways we can help
- Provide an advance report on your resident status and estimate the amount of tax you would be liable to, were you to move to Italy
- Put you in touch with reliable property consultants you can help you manage the property search, acquisition and refurbishment process
- Assist with the legal aspects of purchasing/renting real estate reviewing contracts/purchase deed, acting under power of attorney,
- Advise on structuring the acquisition in the most tax efficient manner – especially where you are going to be using the property as part of business activity, advising on best regime taxwise and focussing on tax deductions for refurbishment and improvement costs.
- Advice on and preparation of wills, planning your succession, managing Italian forced heirship rules, family trusts and optimising inheritance and gift tax.
If you have any questions or would like further information on this regime feel free to contact us
Legislation and Guidance
Below is the first paragraph new article 24-ter of the TUIR
- Without prejudice to the provisions of Article 24-bis, natural persons who are recipients of the pension income referred to in Article 49, paragraph 2, letter a), paid by foreign persons, who transfer their residence in Italy in accordance with Article 2, paragraph 2, in one of the municipalities belonging to the territory of the regions of Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise and Puglia, with a population not exceeding 20,000. In accordance with the criteria set out in Article 165(2), income of any category received from a foreign source or produced abroad shall be subject to a flat-rate substitute tax at a rate of 7 per cent for each of the tax periods to which the option applies.
Please contact us if you would like to see the translation of the rest.