Italy’s recent Legislative Decree No. 209/2023 introduces significant updates to international taxation but no changes are made to the EUR 100,000 special tax rate that has lured numerous high-net-worth individuals.
Key updates include a revised tax residence criterion, simplifying the controlled foreign companies’ regime, reshoring incentives with a 50% tax exemption, implementing the global minimum tax, and a revamped inpatriate workers tax regime from 2024.
The High-Net-Worth Individual Tax Regime in Italy remains unchanged though, which refers to an annual EUR 100,000 tax on all non-Italian income for individuals relocating to Italy.
Similarly, the Special Tax Regime for Retirees remains unaffected, offering a 7% Flat Tax on foreign pension income for those moving to Italy, provided they meet specific conditions, such as settling in small municipalities in Southern Regions like Sicily and Puglia.
The Special Tax Regime for Inbound Professors and Researchers will also continue without alterations, allowing a significant 90% reduction in taxable employment income for eligible individuals.
Italian Tax Residence Revamped
The Decree reshapes the criteria for determining tax residence, emphasizing personal and family ties over economic interests for individuals.
Companies now define residence based on their legal seat, effective management seat, or ordinary management primarily located in Italy. Notably, effective management seat is clarified as strategic decision-making, and ordinary management relates to ongoing company management.
Before the updates companies were considered tax-resident if they met one of the following requirements – having a registered office in Italy, having an administrative office in Italy, or having principal activity in Italy. The updated tax decree aligns with international practices on effective tax residency.
Controlled Foreign Companies Simplification
The Decree aligns and simplifies taxation for controlled foreign companies (CFC) with the global minimum taxation regime.
Before the tax updates that came into effect in 2024, if a foreign entity was subject to an effective tax 50% lower than what would have applied if the entity was tax resident in Italy and if more than a third of that foreign entity’s revenue came from interest, dividends, capital gains, or any other passive income types then controlling interest in it would be subject to the Italian CFC regime.
Under the new rules, there is an optional approach for audited foreign entities (only) and a simplified effective tax rate text that is aligned with the BEPS Pillar Two provisions whereby foreign-controlled entities with an effective tax rate below 15% are subject to the Italian CFC regime.
Reshoring Incentives in Italy
The new legislation introduces a facilitated regime for economic activities ‘transferred’ to Italy, known as re-shoring. The Decree offers a 50% tax exemption on income from relocated business activities. However, this benefit ceases if activities are transferred out within five tax periods, with tax authorities reclaiming unpaid taxes during the facilitated regime.
Global Minimum Tax Implementation
The updated tax Decree incorporates the global minimum tax in Italy, according to Directive (EU) 2022/2523. This three-tiered system includes a national minimum tax, an additional minimum tax for controlling parent companies with low-tax interests, and a supplementary minimum tax for companies if their controlling parent is in a non-compliant country.
The Updated Inpatriate Workers Tax Regime
Replacing the old beneficial tax regime, the Decree introduces a new inpatriate tax regime that will be applicable from the 2024 tax period. It provides for an exemption of 50% of Italian-sourced employment, and self-employment income up to EUR 600.000 per year, and the benefits of the regime apply for 5 tax periods.
The country’s legislative changes demand careful consideration from individuals and businesses alike, requiring a thorough understanding of the updated Italian tax landscape. Staying informed and seeking professional advice will be paramount in navigating these impactful modifications.
