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The New Italian "Res.non-Dom" Regime: Loconte & Partners Wealth Management

Learn about the new tax regime for resident non-domiciled individuals in Italy introduced by the 2017 Budget Law. Discover who can benefit from the special tax regime, the application process, termination conditions, and the tax fees involved.

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The New Italian "Res.non-Dom" Regime: Loconte & Partners Wealth Management

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  1. LOCONTE & PARTNERSWEALTH MANAGEMENT***The New Italian «Res non-Dom» regime Loconte & Partners – Studio Legale e Tributario

  2. THE NEW LEGISLATION • The Law no. 232/2016 (2017 Budget Law), by introducing Article 24-bis of the Italian Income Tax Code (ITC), provided - for the first time ever in Italy - a new tax regime for individuals so-called «Resident non domiciled»; • The new legislation introduced a substitutive tax on all income produced abroad, instead of the ordinary income taxation; • The key issue is the derogation from the ordinary «worldwide income taxation» principle in favour of those who, after having lived abroad for many years, move their residence to Italy. • Since the flat tax represents a “substitutive tax” of the Personal Income Tax (so called "IRPEF"), no rule of ordinary taxation will be applied (i.e. no Italian tax credit is granted for any taxes paid abroad). Loconte & Partners – Studio Legale e Tributario

  3. BENEFICIARIES OF THE SPECIAL TAX REGIME • The new substitutive regime is available to: • Individuals who have not been tax residents in Italy, according to Article 2, par. 2 of Italian ITC, for at least nine of the ten previous years before opting for the new regime and movingtheir residence to Italy; • According to Article 2, par. 2 of Italian ITC individuals who are registered with the Municipal register of resident population for more than half of the tax year (i.e. the calendar year) are deemed to be Italian tax residents. When fulfilled, this condition is sufficient to irrefutably qualify the taxpayer as an Italian tax resident; • Citizenship is not relevant for applying for the new tax regime. Loconte & Partners – Studio Legale e Tributario

  4. BENEFICIARIES OF THE SPECIAL TAX REGIME (continues) • The forfait can be extended to one or more qualifying related persons (registered partner, children, parents etc. according to Article 433 of the Italian Civil Code). • Regardless of the tax period in which the forfait is extended to one or more related persons, the 15-year validity period of the special tax regime starts from the principal taxpayer’s option exercise; • Moreover, the Italian Tax Authority in the Circular Letter No. 17/E of 23rd May 2017 has clarified that the option is inadmissible in any case of ongoing tax assessment. Loconte & Partners – Studio Legale e Tributario

  5. APPLYING PROCEDURE • In order to apply for the substitutive tax regime, the new residents, after moving their residence to Italy (according to Article 2, par. 2 of Italian ITC) should opt for the new regime: • Through their Italian tax return related to the tax year in which they move to Italy; • Eventually issuing a preliminary tax ruling request in order to obtain a confirmation by the Italian Tax Authority that each specific case fulfills the conditions required. Loconte & Partners – Studio Legale e Tributario

  6. THEPRELIMINARY TAX RULING The optional preliminay ruling request shall contain the following information: a. The taxpayer’s personal data, his tax code and, whether available, his Italian residence address; b. The status of non Italian tax resident for at least for nine years for the previous ten years; c. The name of the last residence Countries before opting for the new regime; d. The name of any Country he wants to opt out from the regime (so called “cherry picking”). The Circular no. 17/E specified that once a Country has been opted out it cannot be included in the regime during the following tax periods. The taxpayer must also fill in a duly check list provided by the Italian Tax Authority, with the all information requested. Loconte & Partners – Studio Legale e Tributario

  7. THE TERMINATION OF THE REGIME • The special tax treatment can last for maximum 15 years. In any case: • It can be voluntarily terminated at any time by the taxpayer; • It is supposed to be expired if the tax fee is not paid by the due date; • The option is void if the Tax Authority confirms that the conditions required are not met; • Whether the taxpayer is not admitted to the special regime or in case of voluntary termination, the tax benefit ends also for family members, who opted for the regime. Loconte & Partners – Studio Legale e Tributario

  8. THE TAX FEE • The applying taxpayer will be liable to taxation on the Italian sourced income; • The tax fee is due on the foreign sourced income, as following: • Capital gains derived from disposal of qualified capital shares in foreign companies are expressly excluded from the special regime if realized within the initial 5 years of the validity of the option, and are therefore subject to ordinary taxation on 58% of the income amount, less any related losses. Loconte & Partners – Studio Legale e Tributario

  9. INHERITANCE AND GIFT TAX • The 2017 Italian Budget Law (Art. 1, par. 158), provided that foreign assets are excluded from inheritance and gift tax if the transfer takes place during the period of validity of the option. Assets located in Italy are subject to the ordinary inheritance and gift tax. • The same exemption applies to the transfer of assets (located abroad) in connection with the establishment of a trust or of other asset protection legal instruments (Circular no. 17/E). Loconte & Partners – Studio Legale e Tributario

  10. THE TAX BENEFITS • The taxpayers could opt out any Countries from the special regime. Income produced in those Countries will be subject to ordinary taxation (so called «cherry picking»); • The «cherry picking» could be convenient if income derive from «black list» Countries; • The option is renewable for maximum 15 years continuously; • The wealth taxes (IVIE and IVAFE) are not due only on the assets held in the Countries covered by the option; • If the taxpayer opts for the special tax regime he does not have tax monitoring obligations in relation to the assets covered by the option. Loconte & Partners – Studio Legale e Tributario

  11. WHO CAN BENEFIT FROM THE NEW REGIME • In principle, individuals who may well be interested in the new Italian regime could be the following: • Successful sportsmen who used to live in Italy in the past; • Inventors or individuals who earn royalties; • Managers at the end of their career; • High net-worth individuals. Loconte & Partners – Studio Legale e Tributario

  12. A PRACTICAL CASE Example of a practical case: • Mr X is an Italian citizen and a US tax resident. He is a managing partner of a US Private Equity Company and he will retire next year; • Mr X is planning to return to live in Italy after retiring; • Mr X will receive substantial pension income trom the US (EUR 300.000 in the example); • Furthermore, he inherited in 2015 two apartments in Monte Carlo, worth approx. Eur 9,000,000 and generating Eur 115,000 per year in rents; • He holds financial assets with a bank in Monte Carlo for a value of Eur 4,500,000 of shares and bonds. Loconte & Partners – Studio Legale e Tributario

  13. A PRACTICAL CASE On standard terms, Mr X would be regarded as an Italian tax resident and the overall treatment in Italy would be the following: • US pension income: taxed at the marginal income tax rate (the highest is 43%), plus regional and municipal taxes. The tax bill would therefore be approx. EUR 129,000 per year (*); • Rental income derived from Monaco: also taxed at the marginal income tax rate plus regional and municipal taxes. In the example the tax charge would be approx. Eur 53,000 per year; (*) US tax treatment of pension income needs to be evaluated in accordance with applicable laws and the Double Taxation agreement in force. Presently, the Italy-USA DTA only covers US federal taxes. Loconte & Partners – Studio Legale e Tributario

  14. A PRATICAL CASE • Investment income: dividends, interests and capital gains are subject to the substitutive tax of 26% or to the marginal tax. Assuming a 4% annual return, the tax charge would be approx. Eur 47,000; • Wealth taxes (IVIE and IVAFE): ordinary Italian wealth tax on foreign real estate (IVIE) is 0,76% of the purchase price, and the wealth tax on foreign financial assets (IVAFE) is 0,2% of the market value. In our case the tax bill would be Eur 68,400 for IVIE and Eur 9,000 for IVAFE. Loconte & Partners – Studio Legale e Tributario

  15. A PRACTICAL CASE If Mr X applies for the new tax regime, the Eur 100,000 forfait tax would replace: - The Eur 129,000 tax due on pension income • The Eur 53,000 tax due on rental income • The Eur 47,000 tax due on investment income • The Eur 77,400 wealth tax i.e. Italian taxes for a total amount in excess of Eur. 300,000. Loconte & Partners – Studio Legale e Tributario

  16. A PRACTICAL CASE It has to be noticed that in the Circular Letter no. 17/E/2017, the Italian Tax Agency specified for the first time that taxpayers opting for the special tax regime shall be considered full-fledged tax residents also with respect to the applicability of Double Taxation Treaties, if any Convention against Double Taxation should not take different provisions. Further clarifications shall be provided by the Italian Tax Authority. Loconte & Partners – Studio Legale e Tributario

  17. «RES NON DOM» REGIMES COMPARISON PORTUGAL–Regime para residentes Nao Habituais: the foreign sourced income is not subject to taxation if certain conditions are met, except income derived from «tax heaven countries». UNITED KINGDOM – Res non dom: foreign sourced income is taxed on a «remittance basis». All income not remitted to UK is subject to a flat tax. MALTA – High net-worth individual regime: foreign source income is taxed at 15% only if remitted to Malta. Loconte & Partners – Studio Legale e Tributario

  18. «RES NON DOM» REGIMES COMPARISON Inheritance tax and gift tax focus PORTUGAL–Regime para residentes Nao Habituais: inheritance and gift taxes are due only on assets held in Portugal. Spouses, ascendants and descendants are exempted. UNITED KINGDOM – Res non dom: The inheritance tax rate is 40% with an allowance of 325,000 pounds. Donations are generally exempted, but if the donor dies before 7 years after the donation, ordinary tax applies. MALTA – High net-worth individual regime - Inheritance tax and gift tax are not due. Loconte & Partners – Studio Legale e Tributario

  19. OTHER RELATED TAX BENEFITS • Fast investors Visas procedure • The 2017 Italian Budget Law introduced also a special procedure for granting residence VISAS in favour of foreign investors faster than the ordinary terms of issuance (generally it takes 90 days, but it depends on the types of visa requested); • According to the new Article 26-bis of the Italian Code of Immigration (D.Lgs. no. 286/1998) a special 2-year residence permit can be granted if the non resident individual demonstrates the intention to invest (for at least 2 years) in Italy either: • Eur 2 million in State bonds; • Eur 1 million in the share capital of a company located and operating in Italy; • Eur 500,000 in the share capital of an innovative Italian registered «start up»; • Eur 1 million in donations to Italian entities for philanthropic, cultural or scientific purposes. Loconte & Partners – Studio Legale e Tributario

  20. OTHER RELATED TAX BENEFITS • The new taxation for carried interest • In order to make Italy more attractive for relocating private equity partners, the Decree n. 50 of 24th of April 2017 has officially approved the new withholding tax rate for carried interest; • any profits that partners or managers - resident in Italy - of private equity and hedge funds receive as compensation, regardless of whether or not they contributed any initial funds, are now considered as capital income instead of employment income and, as such, they will be taxed at a substitutive tax rate of 26%; • The tax benefit is very significant, considering that, if qualified as employment income, they would be taxed at the marginal tax rate of 43%. Loconte & Partners – Studio Legale e Tributario

  21. OTHER RELATED TAX BENEFITS • The new tax regime for repatriated highly skilled people • The Italian Government recently introduced tax incentives in order to attract the highly skilled people – both Italian and foreign citizens - to return to Italy. • The tax relief consists in reducing the Italian tax liability of 50% of the income effectively produced, if the person applying meets the following conditions: • He should have been resident abroad for the last two years before moving to Italy and he should declare to remain in Italy for at least five years; • He should work for an Italian Company; • He should work mostly in Italy; • He should be a company manager or qualified as “highly skilled person”. Loconte & Partners – Studio Legale e Tributario

  22. OTHER RELATED TAX BENEFITS The new tax regime for repatriated highly skilled people The Italian 2017 Budget Law, modifying the previous regulation, allows also non EU citizens to benefit from the tax relief, providing that the foreign Country has signed an International Tax Convention against Double Taxation with Italy. Loconte & Partners – Studio Legale e Tributario

  23. SPECIAL TAX DRAFT BILL FOR THE CITY OF MILAN • The Italian Parliament is working on a Draft Bill intended to promote relocation of foreign companies in Milan (n. 4456), providing a number of tax and employment benefits, as follows: • Companies relocating to Milan and hiring at least 50 permanent employees are granted a reduced local tax (IRAP) rate of 1,5% instead of ordinary 3,9%; • Most fringe benefits granted to expats moving to Milan are not included in personal income for tax purposes, as they normally would; Loconte & Partners – Studio Legale e Tributario

  24. SPECIAL TAX DRAFT BILL FOR THE CITY OF MILAN • Interest expenses are deductible for corporate income tax purposes up to Eur 3 mln in excess of the ordinary deductible amount; • Evaluation of corporate assets upon immigration may be based on current value instead of historical cost; • Stamp duty and cadastral charges are reduced to a minimum fixed amount on any real estate investment by foreign companies; • Withholding tax on dividends paid by head offices or group holding companies relocated to Italy is reduced to 1,20%, provided shareholders are located in white-list jurisdictions. Loconte & Partners – Studio Legale e Tributario

  25. HOW WE CAN HELP • Loconte & Partners can assist international clients providing all services concerning: • Analysis and proper management of possible double taxation issues; • Evaluation of benefits deriving from the special regime and any stategic «cherry picking»; • Professional assistance in the preliminary ruling procedure; • Support in all other aspects related to the relocation (legal assistance, real estate, immigration etc). Loconte & Partners – Studio Legale e Tributario

  26. Avv. Prof. Stefano Loconte stefano.loconte@studioloconte.it

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