What is the flat tax for earnings produced abroad?
Natural persons who transfer their residence to Italy can benefit from a replacement tax on income produced abroad, paying a fixed tax for each tax period in which the option is valid, regardless of the amount of income perceived. The fixed tax will replace ordinary IRPEF taxation and related regional and municipal additions.
For the income produced in Italy by the new residents, the ordinary rates planned in our country apply instead.
The legislation has recently been modified by increasing the amount of the fixed tax in relation to the period in which the subjects have transferred the residence to the Italian territory, and in particular:
- If the subject has transferred the residence to Italy prior to 10 August 2024, they can apply a fixed tax in the amount of € 100,000 for each tax period;
- If the subject has transferred the residence to Italy after 10 August 2024, they must apply a fixed tax in the amount of € 200,000 for each tax period;
This option can also be extended to family members of the natural person residing in Italy (spouse, also adoptive children, parents, sons-in-law and daughters-in-law, father-in-law and mother-in-law, and full or half siblings with precedence for full over half siblings), as long as they too transfer their residence to Italy and join the regime in question. In this case, each of them will have to pay a substitute tax of € 25,000 for each tax period, regardless of whether the transfer took place before or after 10 August 2024.
Flat tax: who are the beneficiaries?
The regulation is applied with a specific option by natural persons who acquire the tax residence in Italy on the condition that they have not been residing fiscally in Italy for a time at least equal to nine tax periods during the ten preceding the beginning of the period of validity of the option.
It should be remembered that in order to be considered a tax resident in Italy, pursuant to article 2 of the TUIR (consolidated text for income taxes), it is sufficient to be compliant for most of the tax period, or 183 days during the calendar year, with at least one of the following requirements:
- to be registered in the resident population registry of the Municipality;
- to have established domicile in Italy;
- to have established residence in Italy.
This specific “flat” taxation is applied to all income from foreign sources received by the newly-resident subject in Italy, except for capital gains earned by transferring qualified shares during the first five tax periods of the option validity, which remain subject to the ordinary taxation regime.
The option for applying this particular taxation regime is made directly on the annual tax declaration.
What is the most convenient regime to choose?
It should be noted that exercising the option for the fixed replacement taxation of € 100,000 or € 200,000 in Italy does not allow you to use the credits for taxes paid abroad. For this reason, depending on the type of income and the country of origin, it may be convenient to exclude some countries from the application of the replacement regime and subject the incomes coming from these sources to the ordinary Italian taxation regime.
In fact, the regulation provides for the right to not make use of the application of the substitute tax with reference to the income produced in one or more foreign states or territories, giving specific indication of this while exercising the option, or with subsequent modification of the same. In this case, the exclusion from the special taxation regime will apply on the income produced abroad from the States for which the ordinary progressive taxation will apply.
How to exercise the option
The option for the use of the substitute tax regime, as already mentioned above, is carried out directly on the tax declaration referring to the tax period in which the foreign subject (and possibly his family) has transferred his residence in Italy or to the one referring to the next tax period.
For the purposes of accessing the tax regime in question, the taxpayer has the option of submitting a specific application for preliminary consultation (specifca istante di interpello preventivo) to have confirmation by the Italian tax authorities of the applicability of the tax regime itself.
In particular, this application must contain:
- the personal data, tax code, if already attributed, and the address of residence in Italy if already resident;
- the status of non-resident in Italy for a time at least equal to 9 tax periods during the 10 preceding the beginning of the period of validity of the option;
- the jurisdiction or jurisdictions in which they had their last tax residence before exercising the validity of the option;
- the foreign States or territories for which they intend to exercise their right to not make use of the application of the substitute tax;
- the existence of the elements necessary for meeting the conditions for access to the replacement tax regime on income produced abroad, filling in a special check-list
- prepared by the Revenue Agency and presenting the relative documentation to support, where relevant.
The application must be submitted by the taxpayer to the Central Assessment Office (Direzione Centrale Accertamento) by hand delivery, by mail using a recommended envelope with acknowledgment of return receipt, or by using the certified e -mail box (PEC).
The application must be presented before the deadline for submitting the declaration regarding the tax period in which residence is transferred to Italy and it is effective beginning with that tax period.
How long does the flat tax last? Duration, forfeiture and termination
Once the option has been exercised, the special replacement taxation is valid for 15 years, without prejudice to the possibility for the taxpayer to renounce it at any time. After 15 years the option will automatically expire.
However, the option is revocable in any tax period.
The effects of the option also cease whenever there are cases of omitted or partial payment of the substitute tax.
The revocation or forfeiture of the regime in a tax period precludes the possibility of exercising the option again during subsequent tax periods.
What can we do for you
Taking into account the peculiarity and specificity of the legislation in question, it is appropriate that all the requirements for its application, as well as the effects that derive from it, are analyzed in depth and in advance, with the help of expert professionals in tax matters.
Our studio offers all the necessary assistance to evaluate the least expensive tax regime and provide complete advice on the necessary requirements and their application.
Written by: Bechini, Benigni & Quilici – Dottori Commercialisti associati