April 2026 update
The population threshold for eligible municipalities is increased from 20,000 to 30,000 residents. Article 26 of Law No. 34 of March 11, 2026—the SME Law—amends Article 24-ter of the Italian Tax Code by expanding the scope of eligible territories to Comuni (municipal authorities). This amendment opens the 7% Regime scheme to medium-sized urban centers that were previously excluded. This will include larger urban centres, particularly those with better transport connections and urban infrastructure in coastal areas, which have more developed infrastructure compared to small villages. The size extension applies to both municipalities in Italy’s “Mezzogiorno” (Southern Regions) and to earthquake impacted areas in Lazio, Marche and Umbria.
The change is expressed to come apply from 7 April 2026. It is not yet clear exactly when the change will come into effect and in particular whether it will apply to
- anyone registering as resident for the first time in Italy on or after 7 April 2026
- anyone who is tax resident in Italy for FY 2026
- anyone who is tax resident in Italy starting from FY 2027
Before official guidance is issued by the Tax Agency caution should be exercised by those selecting a Comune with more than 20,000 (but less than 30,000) inhabitants transferring tax residence to Italy for FY 2026.
Legislation
In Article 24-ter, paragraph 1, of the Consolidated Income Tax Law, referred to in the Decree of the President of the Republic of December 22, December 1986, No. 917, the words: “20,000 inhabitants” are replaced by the following: “30,000 inhabitants”.
The revised wording of Article 24-bis, now reads:
"individuals who receive pension income as referred to in Article 49(2)(a) from foreign entities and who transfer their residence to Italy pursuant to Article 2(2) to one of the municipalities located in the regions of Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, and Puglia, or to one of the municipalities listed in Annexes 1, 2, and 2-bis to Decree-Law No. 189 of October 17, 2016, No. 189, converted, with amendments, by Law No. 229 of December 15, 2016, or in one of the municipalities affected by the earthquakes of April 6, 2009, provided that the population does not exceed 30,000 inhabitants, may opt to subject income of any category, generated abroad, identified in accordance with the criteria set forth in Article 165, paragraph 2, to a substitute tax, calculated on a flat-rate basis, at a rate of 7 percent for each tax period during which the option is valid."
2 responses
Does 7% apply to interest earned and/or balances of US 401k account or just withdrawals?
Under the 7% Regime, an eligible taxpayer is generally liable to Italian tax at 7% on all non-Italian source income. This may include the interest and 401k withdrawals you mention, as well as e.g. distributions received from other foreign retirement arrangements, dividends and other foreign-source income.
The fact that a particular item of income may be exempt from U.S. taxes (e.g. qualifying municipal bonds) , or excluded from taxable income, subject to a preferential rate of tax, or offset by deductions, allowances, exemptions or tax credits under U.S. tax rules does not necessarily/usually mean that the same treatment will apply for purposes of the Italian 7% regime. The Italian tax treatment must be determined under Italian tax law, and the amount subject to the 7% substitute tax is usually not automatically reduced by reliefs that may be available under the U.S. tax system.
To access the regime, a taxpayer must be in receipt of at least one source of qualifying foreign pension income. Depending on the facts and circumstances, distributions from a U.S. 401(k) may be capable of constituting qualifying pension income.
The Italian tax treatment of U.S. 401(k) plans is not expressly addressed in Italian legislation and is often regarded as an area of uncertainty. The generally accepted view is that an Italian-resident beneficiary is taxed only when amounts are distributed from the plan. Under that interpretation, interest, dividends, capital gains and other investment returns arising within a typical, standard 401(k) plan are not taxed annually in Italy (whether under the 7% regime or the ordinary regime). Instead, taxation arises when distributions are made from the plan. The analysis may differ for other types of foreign retirement arrangements.
This is a complex area and taxpayers should obtain advice on their specific circumstances.