Italy Enhances Tax Breaks for Certain Individuals Moving to Italy

On April 30, 2019, the Italian government passed Law Decree No. 34^[1], which simplifies and improves the existing tax breaks contemplated for certain individuals moving to, and becoming tax residents of Italy.

The new rules apply to workers, whether employees or self-employed, and regardless of their citizenship, who transfer their tax residence to Italy and (i) have not been resident in Italy in the 2 preceding tax years, (ii) maintain an Italian tax residence for at least 2 tax years, and (iii) will work mostly in Italy (i.e. for more than 183 days in each tax period). Entrepreneurs meeting these conditions, and starting a new business in Italy as of 2020, are also eligible.

Such individuals can enjoy a 70% (currently, 50%) exemption from the Italian personal income tax (currently levied at graduated rates of up to 43%, plus local surcharges of up to 4.23%) of any employment, self-employment or business income earned during the five-year period including the year of the transfer and the following four.

The exemption increases to 90% if the individual moves to certain southern regions^[2]. Moreover, the tax break is extended for an additional 5-year period if (x) the individual has at least one minor or dependent child, or (y) he/she (or his/her partner or children) purchases a house in Italy in the year of the transfer or the preceding year, provided that in such additional 5-year period the exemption is reduced to 50% (however, if the eligible individual has at least 3 minor or dependent children, it is increased to 90%).

Tax residence is determined pursuant to the Italian statutory rules (an individual is deemed to be an Italian tax resident if, for the greatest part of the tax period - i.e. at least 183 days in any given year – he/she either is enrolled in the registry of the Italian resident population, or sets the center of his economic, social and personal interests in Italy, or has an Italian habitual abode available to him) or any applicable tax treaties.

The new rules will apply to individuals transferring their tax residence in Italy as of 2020. Hence, individuals who are currently benefiting from the regime and/or transfer their tax residency in Italy in 2019 would not benefit from such enhanced tax breaks.

These changes are in line with other tax measures enacted in Italy in the past few years to attract qualified workers, retirees and high-net worth individuals of all nationalities, who decide to transfer their tax residency to Italy, such as the flat €100,000 tax regime for high-net worth individuals transferring to Italy^[3].

^[1] Law Decree No. 34 must be converted (possibly with amendments) into law no later than June 29, 2019, otherwise it will lapse with retroactive effect.

^[2] Namely, Abruzzo, Molise, Campania, Apulia, Basilicata, Calabria, Sardinia and Sicily.

^[3] As illustrated in our alert memos of January 16, 2017 and March 13, 2017, this beneficial regime enables individuals who become Italian tax resident and have not resided in Italy for at least 9 of the 10 years preceding the year in which the election is made, to opt to be taxed in Italy on their foreign-source income (other than certain equity capital gains) and assets by paying a flat annual charge of €100,000.