What is the tax residence?
The definition of tax residence appears on the article 2 of TUIR (Single Text on Taxation and Earnings), to which article 16 D.Lgs 147/2015 (also known as Internationalization Decree) clearly makes a reference to, and that article 5 D.Lgs 34/2019 later modified.
In a nutshell, someone can say that Italy is his or her tax residence if he or she has been a resident in Italy for most of the tax period (more than 183 days within a year). Therefore, tax residents In Italy are those people who for most of the year are enrolled in an Italian town’s Registry Office (Anagrafe), have their domicile in Italy, or who habitually live in Italy.
Only tax residents can benefit from the tax benefits mentioned below.
Who can benefit?
Foreigners (and in some cases also Italian citizens) living abroad can pay less taxes when transferring their tax residence if they are:
Also known as workers living abroad. This concept applies to people that have never lived in Italy and to Italians that have left the country to pursue job opportunities abroad.
People who have transferred their fiscal residence from April 30, 2019 onwards, can benefit from a tax reduction on the income received for the 2019 tax period.
Tax Agency circular 17/E of 23 May 2017 details the characteristics and mechanisms of the tax benefits that fiscal residents can have.
The tax reduction incentive has two aims: 1) increase the return of Italian workers who have fled abroad and 2) attract foreign workers who are not Italian citizens and have never been Italian residents.
Who can apply for the tax benefits?
The beneficiaries are people from other countries (inside and outside of the UE) and Italians residing abroad that decide to enter into dependent employment (work) or start an autonomous activity or business in Italy. In addition, there are other requirements:
- They must have not been residents in Italy for at least two years before their transfer
- They must promise to remain in Italy for at least 2 years
- The work or business activity is carried out mainly in the Italian territory (for at least 183 days every year)
For example, subjects who were hired in Italy in November 2019, and transferred their residency and domicile to Italy in January 2020, can even enjoy this tax benefit for the money earned in Italy during 2019.
There is also another aspect to take into consideration. Italian citizens who are not registered in AIRE (Anagrafe degli Italiani Residenti all’Estero) and who return to Italy from January 1, 2020 onwards, can access the tax benefit provided that they were residents in another country, with which there is a current agreement against double taxation, in the two tax periods prior to the transfer.
What does the benefit entail?
The beneficiaries have an important advantage: a reduced tax rate on earnings of dependent or autonomous workers (known as IRPEF in Italy). This benefit can be a:
- Tax reduction of 90% for those who transfer their residence to southern Italy (Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sardinia and Sicily). Thus, the beneficiary pays only 10% of the IRPEF.
- Tax reduction of 70% for those who transfer their residence to other parts of Italy. Thus, the beneficiary pays 30% of the IRPEF.
- Tax reduction of 50% for professional athletes. Thus, the beneficiary pays 50% of the IRPEF (the 90% reduction does not apply in the case of transfer to the southern regions).
How long do the tax benefits last?
People can benefit from the tax reduction for up to 5 years. However, for individuals with at least one dependent child (the child must be born or adopted during the first five years of the use of the tax benefit) or individuals who become owners (or even co-owners with their spouse, cohabiting partner or children) of a residential property in Italy after the transfer or in the previous 12 months, the time frame is increased to a total of 10 years. Within this timeframe, the tax reduction is 50% in most cases. However, there is another specific reduction for workers with at least 3 minor or dependent children. In this case, the tax reduction is 90% for the last five years.
Can someone apply to this tax reduction under the flat-rate scheme (Regime forfettario)?
People or businesses that have a registered VAT number can access a flat-rate tax scheme (Regime forfettario), which is a discounted tax regime for individuals engaged in business activities, arts or professions. However, this scheme is considered a substitute tax. Therefore, someone under a flat rate tax scheme cannot obtain the tax benefit mentioned above because this reduction is applied directly to IRPEF. Consequently, individuals must carry out a cost-benefit assessment between the two tax reduction schemes.
When does the benefit end?
It ends when the person does not stay in Italy for at least 2 years. Those benefits already earned will be recuperated, along with relative sanctions and interests. These penalties are recovered together, and range from 90% to 180% of the tax due and not paid, for each year of the benefit enjoyed.
How is the benefit applied?
The ways to enjoy the benefit differ, according to whether the beneficiary carries out dependent or autonomous work.
- Dependent work: The Italian employer must apply the reduced tax when managing the employee’s monthly pay package.
- Autonomous work: The reduced tax is directly applied when the earnings declaration (tax statement) is presented.
Many retired people decide to live and transfer their residence to Italy while maintaining property investments and financial activities abroad and receiving pensions from the country in which they worked. However, the consequences of doing this imply important tax matters that should not be taken lightly. Most importantly, it is important to conduct a case by case study of the type of foreign earnings and their country of origin.
Do I need to pay taxes in Italy on my foreign earnings (i.e. pensions, financial activities, investments)?
Yes. According to the principle of worldwide taxation and its definition in Article no. 3 of the TUIR (Testo Unico delle Imposte sui Redditi) or Single Text regarding Taxation on Earnings:
“Taxation is applied to an individual’s total revenues, which for residents means all earnings possessed, less deductible expenses”
This means that people living (and especially, residing) in Italy must file a declaration and be taxed in Italy for all earnings, wherever these are produced.
Is there a way to not be taxed on foreign pensions?
Foreign pensions paid to Italian residents are generally declared and taxed in Italy. However, there is something called agreement against double taxation that allows all earnings from abroad to be taxed differently. If such an agreement exists between Italy and another country, the pensions paid to non-resident citizens will be taxed differently. In particular, there are two types of pensions paid by other countries and received by residents in Italy:
- Public pensions: paid by a foreign country or by one of its political or administrative subdivisions or by a local entity, for the services and work carried out on behalf of these entities. These pensions are taxed in the foreign country.
- Private pensions: paid by entities, institutions or insurance organizations of foreign countries appointed to handle the pension payments related to the termination of employment in the private sector. These pensions are taxable in Italy.
Case by case information about taxable foreign pensions
UK and USA
- Public pensions: If the person resides in Italy and has Italian nationality (or dual nationality Italy-UK/USA), the pension will be taxed only in Italy. If the person resides in Italy but has exclusively UK or USA nationality, the pension will be taxed only in the UK or the USA.
- Private pensions received by residents in Italy are always taxed exclusively in Italy.
- Public and private pensions for Italian residents are taxed exclusively in Italy.
- Earnings from old-age and survivors insurance (AVS earnings), SUVA earnings, and LPP earnings are taxed exclusively in Switzerland and do not need to be declared in Italy (Art. 76 Law no. 413/1991 and Art. 55-quinquies del DL 50/2017).
The Italian-Canadian Agreement makes no distinction between public and private pensions. Moreover, for some cases the pension can be taxed in both countries. However, sometimes this double taxation can be discounted. In particular, the IRPEF due in Italy can be discounted with a credit for the tax paid in Canada.
As shown above, every case has a specific situation governed by individual agreements against double taxation. However, the general principle is that pensions deriving from a foreign country and received by residents in Italy, can be taxed in Italy.
It is important that experts in the topic analyze the background of every individual and the existence of possible agreements against double taxation in order to avoid problems with the Italian tax authorities.
What kind of tax reduction can I expect when moving to Italy?
From 2019, Italy offers retired people abroad an alternative to normal taxation: a substitute tax of 7% on all income produced abroad (not only on foreign pensions) for five years.
What are the requirements and conditions to opt for this tax alternative?
Foreigners must transfer their residence to a town that meets one of the following requirements:
- A town located in the southern regions of Italy (to know which cities are eligible, read our article here) and that has a low-density population (less than 20,000 people based on the data of the Italian National Institute of Statistics).
- Or, a town located in other regions of Italy with a population not exceeding 3,000 inhabitants included in annexes 1, 2 and 2-bis of the decree-law 17 October 2016, n. 189, converted, with modifications, by law 15 December 2016, n. 229.
The pensioners who exercise this option are not obliged to declare the assets held outside Italy (compilation of RW forms) and are exempt from the IVIE (tax on the value of properties located abroad) and from the IVAFE (tax on the value of financial assets held abroad).
How do I know if a southern town meets with the demographic requirements?
In order to choose a municipality with a population lower than 20,000, foreign pensioners should look at the data resulting from the Annual municipal survey of the movement and population calculation, published on the site of the National Institute of Statistics (ISTAT), in reference to 1st January of the year prior to the first year of the option’s validity.
What do I need to include in my tax return to obtain the tax reduction when living in the south of Italy?
Foreign pensioners must present the tax return of the tax period during which they effectively transferred their tax residence to the south of Italy. In this tax return they must report:
- That they have not been residents in Italy for at least five years prior the tax application
- That the place (jurisdiction) where they had their last tax residence is reported in the list of the current administrative cooperation agreements
- The foreign country or countries for which they intend to exercise the right not to avail themselves of application of the substitute tax
- The country of residence of the foreigner that pays the income
- The amount of foreign source income that is taxable under the substitute tax scheme
When does the tax reduction end?
The 7% tax reduction ends after five years. However, there are two scenarios in which the tax benefit may end before this period: voluntary revocation and forfeiture of the regime
- A taxpayer may voluntarily revoke it during one of the tax periods subsequent to the one in which it was first exercised, communicating this revocation in the tax return relating to the last tax period of the option’s validity.
- On the other hand, forfeiture of the benefit occurs:
- If the requirements set by the standard are not met
- For omitted or partial payment of the substitute tax within the date set for payment of the income tax balance
- In the event of transfer of tax residence to an Italian Municipality other than those indicated
- If the taxpayer decides to transfer their tax residence abroad
The option remains effective even if, from the second tax period of its validity, the taxpayer transfers residence to another Municipality in the South having the same characteristics required by the law to benefit from this option. The option expires, on the other hand, if following controls, the existence of tax residence in Italy is shown to have taken place in the five years preceding the year in which it is exercised. And in any case, revocation of the option and forfeiture of the regime preclude the exercise of a new option.
How is the tax paid?
For each tax period when the regime is in effect, within the date set for the payment of the income tax balance, the subjects who have exercised the option should provide for the payment, in a single payment, of the substitute tax due, calculated according to a flat rate of 7% on income produced abroad. Failure to pay the tax, or insufficient payment, will result in forfeiting the benefit and making any future request impossible.
People that have recently established Italy as their tax residence.
The “2017 Budgetary Law”, approved on 7 December 2016, introduced a series of dispositions aimed at attracting foreigners to Italy. In particular, it introduced a tax benefit for new residents: a flat-rate tax on earnings generated abroad.
What does the tax benefit consist of?
The 2017 Budgetary Law has, moreover, introduced the new article 24-bis of the TUIR (Single Text for Taxes on Earnings), defining the special regime for foreigners living in Italy. This is an optional tax regime that substitutes the IRPEF (Tax on Earnings of Physical Persons). It is accessible, under certain conditions, to natural persons who have transferred their tax residence to Italy, regarding earnings produced abroad.
Who can obtain this tax benefit?
Natural persons (and at their request, their family members) who, beginning on 1 January 2017:
- Transfer their own residence to Italy
- Have not been tax residents in Italy for at least 9 tax periods over the past 10 years preceding the beginning of the period of validity of this option.
What are the advantages?
New residents can benefit from the following advantages:
- Substitute tax equal to €100,000 per year for earnings from non-Italian sources, in place of the normal payments of IRPEF and additional regional/communal taxes. This regime can, upon request, also be extended to family members, and the substitute tax for these is equal to €25,000.
- Exoneration from the obligation of declaring investments abroad or foreign activity of a financial nature that produce earnings in Italy.
- Exemption from the obligation of paying the tax on foreign properties (IVIE) and of the tax on foreign financial investments (IVAFE).
- Exemption from taxes on donation and succession on property held abroad.
What are the requirements?
To have access to this regime one must present a specific request for a ruling and obtain the favorable opinion of the Agenzia delle Entrate (taxation office).
When does the tax benefit end?
New residents can access this regime for maximum 15 years after the first period of validity.