Reform of the Impatriates Regime
The Italian Council of Ministers has approved approved the final draft text of the law modifying the Impatriates Regime.
See this article for the latest information
Italian Council of Ministers Press release n. 54 of 16 October 2023
Reform of the Italian Impatriates Regime, Tax Residence Test and incentive for transfers of businesses to Italy.
Italy’s Council of Ministers met on Monday 16 October 2023, at Palazzo Chigi, under the chairmanship of President Giorgia Meloni to discuss the draft 2024 budget law and program,
The Council approved a draft bill containing the State budget forecast for the financial year 2024 and the multi-annual budget for the three-year period 2024-2026 and the update of the Draft Budgetary Plan (DPB).
Amongst the measures announced in a press release issued by the Council of Ministers are a substantial reform of the beneficial tax regime regime for Impatriated Workers and the introduction of a similar type of relief for companies that move their activities to Italy.
Note that this is a draft bill and subject to amendment before it is passed. It is not yet current law.
Impatriated workers
Employed or self-employed workers who transfer their tax residence to Italy will be eligible for a new beneficial tax regime replacing the one currently in force. The new regime is intended to apply to workers who are tax resident in Italy with effect from FY 2024 (the calendar year ending 31 December 2024.) The old rules will apply to those who transferred their residence effective FY 2023 and prior years. These individuals will stay in the current regime for the remainder of its 5 year (or ten year if extended) term.
The relief will consist in a 50% reduction in computing taxable earnings, as opposed to the current 70% or 90%. In summary it appears the conditions for the relief applciable to psot FY 2023 arrivers will be:
- The regime will apply for a maximum of five years. The possibility of extending for a further five has been withdrawn;
- Taxpayers must be in possession of high qualification or specialisation requirements;
- Beneficiaries must not have been resident in Italy for the previous three tax periods;
- The tax reduction under the new regime will be 50 percent (as opposed to the current 70%/90% reduction;
- It appears there will be an annual upper income limit of 600,000 euros. Income over that amount will not be elegible for the relief;
- For employees there must be a new relationship of employment with a different employer from the foreign employer before the transfer to Italy. The new rules also appear to exclude employees of an Italian company belonging to same group of companies as their former foreign employer. But this condition is not, at present clear;
- The work activity must be carried out for the greater part of the tax year from Italian territory, in line with the current regime.
Impatriated workers will be subject to clawback of the tax relief, with interest, but apparently without penalties, if they do not maintain their tax residence in Italy for the full five year period.
The government responding to critism on the grounds of the potential (illegal) retroactive effect of the legislation, especially as regards workers who have moved to Italy in the second half of FY 2023, has amended the draft text of the legisation, such that the old rules will continue to apply to people who have registered a transfer of residence with an Italian Comune on or before the end of December 2023. Registering as resident prior to 31 December 2023 will, if the legislation is approved as drafted, allow access to the current version of the regime, even though the worker is not tax resident in Italy for FY 2023, under the Italian test of residence, which is based on a 183 day test.
The current rules for researchers, university professors and sports workers remain unchanged.
Pending the Parliamentary approval process, all the above is to be treated as a draft proposal for reform of the Impatriates Regime. It is not yet law.
Transfer of corporate residence
The new rules intend to provide an incentive for the carrying out of economic activities in Italy State by way of a tax incentive. This will consist of a reduction in the computation of taxable profits for the purposes of income taxes of 50 percent. This will apply to entities carrying on business activities and to professional associations currently working abroad and who transfer their activities to Italy. to Italy and previously carried out in a foreign country outside the European Union or the European Economic Area.
The relief applies in the tax period in which the transfer takes place and for the five following Clawback of the tax benefits also applies the activity which has been transferred to Italy is subsequently transferred to a state not belonging to the European Union and the European Economic Area during the period in which the benefit applies or within ten tax periods from the end of the relief regime.
The activities must have been carried out outside Italy for 24 months prior to the transfer.
Tax residency
For individuals the civil law concept of residence will be replaced with a criterion of a substantial nature, in which residence is the place where the taxpayer’s personal and family relationships are closest and/or a test of physical presence in the territory of the State. The civil law rules on residence remain unchanged.
The new test of tax residence will depend on whether the criteria are satisfied for the greater part of the tax year also taking into account non-consecutive periods. Fractions of days will be taken into account under the physical presence test.
With regard to corporate residence of legal persons, references to the “main object of the company test”, which has given rise to disputes and risk of double taxation, and to the criterion of the “seat of administration” will be eliminated. Corporate residence will therefore depend on three alternative tests.
- the place of the “registered office”;
- the “place of effective management”;
- The “place of principal ordinary management”.
The latter two tests of residence represent a move to more of a “substance over form” approach to determining a company’s tax residence. The tests are designed to look at the place where strategic decisions are taken and the management activities of the company are actually carried out.
Next Steps
The draft bill needs to go through the Parliamentary approval process which may result in modification, or indeed complete exclusion, of the government’s proposals, over forthcoming weeks. Once the Parliamentary approval process is complete, it is expected that the Tax Agency will issue operating guidelines.
We will update this post as further details emerge.
4 responses
As a professional lawyer, I find the proposed reform of the beneficial tax regime for Impatriated Workers and the introduction of incentives for transferring businesses to Italy quite interesting. The changes in tax residence criteria and the reduction in taxable profits for entities transferring their activities to Italy will have a significant impact on international tax planning strategies.
One aspect that I would like to delve deeper into is the criteria for determining tax residence under the proposed changes. The shift from a civil law concept to a criterion based on personal and family relationships, physical presence, as well as tests related to corporate residence, will require a comprehensive understanding and analysis by tax professionals. How will these new criteria be applied in practice, and what implications will they have for individuals and businesses seeking to establish tax residence in Italy?
Overall, these proposed reforms present both opportunities and challenges for individuals and companies considering relocation to Italy. It will be essential for legal advisors to closely monitor any developments during the Parliamentary approval process and subsequent issuance of operating guidelines by the Tax Agency.
The modification of Article 2 of the Italian Tax Code effective FY 2024 involved, amongst other things the definition of domicilio – the principal center of “business and interests”. The “and” here had been the source of contention, often ending up in the Italian courts, as to whether business/economic relationships took precedence over family ties. The change was in our view, designed to remove scope for debate – the focus now is exclusively on center of family interests. The change might also have been targeted at the specific situation where one member of the family, e.g the working spouse, moves abroad for work, spending less than 183 days in Italy, transferring their registered residence away from Italy, leaving the rest of the family resident in Italy to enjoy Italy’s public services.
Under the remodeled Article 2 such working spouses can be considered Italian tax resident, even if they do not meet any of the other Article 2 tests of tax residence, by reason of maintaining their domicile, defined as center of family affairs, in Italy. In these circumstances they may (also) meet the habitual abode test (residenza) by virtue of the presence of accommodation. The Italian Supreme Court has offered the definition of “habitual abode” as the place to which one intends to return, after spending a period, however long, away from it.
The analysis in any case where the taxpayer is, for the relevant period, deemed tax resident in a double tax treaty partner country, impacted by an analysis of an applicable treaty tie breaker clause. These clauses in Italy’s treaties generally turn first on permanent home, centre of vital interests (economic and family) and habitual abode, before moving on to nationality and mutual agreement.
Relying on a double tax treaty to “override” the Italian domestic test of residence can often be troublesome, given the uncertain tax position that is almost always created as the two taxing authorities apply different interpretations, based on domestic law, to the facts and circumstances. These can be complex especially in the tax period or periods spanning a move to Italy.
For us, the 2024 changes to the criteria for determining Italian tax residence lead to a heightened focus on the timing of any move to, or away from Italy. This is especially so where one spouse/partner is moving separately from the other spouse/partner. It is probably going too far to say that 2024 changes create an absolute rule to the effect that if your spouse/partner is tax resident in Italy, then so are you. That might however be the result. In all cases the position needs to be examined in the light of all the facts and circumstances. That brings into focus, for people moving to Italy, the need for advance planning with a view to pinning down ahead of the move exactly which Italian tax year will be the first year of residence, and when they will cease to be tax resident in whatever jurisdiction they are moving from, applying the exercise to all family members.
Are there any news regarding the future legislation?
Latest news is here. In short the post 2024 regime will be less beneficial that the previous one – lower rates of exemption, cap at Euro 600k of annual earnings, longer prior period outside Italy for returnees and longer minimum period of stay – but it is not as bad as orginally proposed. And people moving infra group will be admitted under the new rules, albeit with more stringent condtions. Also the extension of the old regime for those who registered as resident with their Comune has been confirmed. We are just wating for the decree to be published. It’s been a rush job by the Italian Government and a number of open questions of detail remain, but this will need to wait until we see the final version of the Decree and guidance from the Tax Agency.