Italy’s Flat Tax Regime: The Ultimate Guide

Italy has recently introduced some changes to its tax code, providing several significant benefits to foreigners interested in relocating to savor a taste of Italian living.

Traditionally, the country has a reputation for high taxes, with a progressive income tax system that targets the wealthy at higher rates, plus regional and municipal taxes.

These new flat taxation regimes go a long way towards reforming that reputation to make Italy more financially inviting.

This article looks at the Italian tax system and the implications of tax residency in Italy.

We discuss the three new changes to the Italian tax code and what they mean. We start with a look at the 7% flat tax for retirees.

Next, we look at the €100,000 flat tax regime we recommend for HNWIs who earn most of their money abroad.

Finally, we compare that €100,000 regime with Italy’s relocation tax system, which is ideal for those looking to earn their money in Italy while still reducing their tax burden.

Italy – Country Overview

Italy is a southern European country of over 61 million people.

The long boot-shaped country separates the Mediterranean from the Adriatic sea.

The Alps mountains lie to the North of the country, where it shares land borders with France, Switzerland, Austria, Liechtenstein, and Slovenia.

The tiny landlocked Republic of San Marino also lies within the Italian peninsula, some 141 miles (227 km) from Rome.

The capital city, Rome, dates back to the founding of the Roman Empire. Today it remains one of Europe’s great cities and a major tourist attraction.

In 1958, the Treaty of Rome gave birth to what would eventually become the EU. Italy was one of the founding members of Europe and is also a founding member of NATO.

The country has a diverse economy, though the North tends to be more industrialized while the South is generally more agricultural. Italy’s commercial output includes many of the world’s most iconic luxury brands.

As a result, Italy is often synonymous with the finer things in life; good food, high culture, elegant architecture, luxury fashion and a strong motor racing pedigree via brands like Alpha Romeo and Ferrari.

So we need not waste words this time around trying to paint a picture of Italy for you because even if you have never visited this beautiful country, you still have a vision of it in your mind.

And it’s probably an accurate one.

New visitors to Italy are seldom disappointed. They get exactly what they expect to see – and more.

Until recently, it’s fair to say that Italy was an inviting country in every way except fiscally.

Hence the traditional view of Italy as a country that combines the high taxes of Northern countries like Germany with the baffling bureaucracies of Southern countries like Spain.

But the new flat tax regime has started to change all that.

So let’s first take a look at Italy’s tax system and then see how these new rules have dramatically changed Italy’s tax landscape.

Italy’s Tax System

Tax in Italy is based on a progressive tax system.

Those earning a higher income will pay a higher rate of income tax rate than lower income earners.

Italian tax rates vary, with progressive tax rates ranging from 23% to 43% of income, depending on how much you earn. As a result, the general consensus among locals, regardless of income bracket, is that taxes in Italy are way too high.

Plus, because taxation in Italy encompasses national and regional taxes, you need to also factor in a variable regional tax rate plus municipal income taxes, which are based on the national income bracket.

Italy’s corporate tax rate, meanwhile, is 24% (though recently reduced from 27.5%), while capital gains are taxed at a rate of 26%.

Put it all together and it’s hardly la dolce vita.

But…

Luckily the Italian tax authorities have started to recognize this and recently introduced some changes that have resulted in significant improvements.

Italy’s Flat Tax Regime

Recent changes to Italy’s tax regime introduced new flat tax rules designed to make Italy a more attractive destination for residence.

The first of these is the 7% flat tax regime for retirees, which we will cover in more detail in a moment.

The second is a €100,000 cap on foreign income for high net worth individuals (HNWIs) for a period of 15 years, which will be the primary focus of our article.

These new flat tax rules serve as an incentive for foreigners to transfer their residence to Italy while also coaxing Italians living abroad to repatriate.

They also go quite a way towards rehabilitating Italy’s reputation as an old-fashioned European country with high taxes.

Among these potential new residents are HNWIs who can potentially avail themselves of significant reductions in their tax burden. Italy, in turn, benefits from increased HNWI residence and investment.

Who is eligible for Italy’s flat tax?

Both of these flat taxes are available to individuals who change their residence to Italy.

To qualify, you must be deemed “newly resident.” This means that you have been a tax resident in a foreign country for a specified period of time before moving to Italy.

For the 7% retiree flat tax option, you will need to be out of the country for five tax years before moving to Italy. For the HWNI flat taxation option, you will need to have been a non-resident for at least nine out of the ten years prior to moving to Italy.

You can apply for this tax rate even if your country does not have a tax treaty with Italy.

Your nationality or domicile doesn’t matter. So it doesn’t really matter what country you move from either, as long as you have not been a tax resident prior to the move.

So Italians living abroad can also avail of this to repatriate while living off a foreign pension, provided they have been living abroad for the requisite amount of time.

Meanwhile, HNWIs receiving worldwide income can opt only to be taxed on €100,000 of that income.

These flat tax regimes can also be extended to your family members, including your spouse and children.

So if you’re of Italian ancestry and spent years daydreaming about moving back to the “old country,” these new tax laws make it more enticing than ever.

You can move to Italy, enjoy a flat rate of tax on all your foreign-earned income, and potentially follow the process of citizenship by descent to obtain an Italian passport with visa-free travel throughout the EU.

What Are The Benefits Of Italy’s Flat Tax Regime?

The main benefits of Italy’s flat taxation are your extensive tax savings and the ability to extend those to your dependents.

In the case of the 7% flat tax, there is no cap on the income earned. So if you’re a pensioner looking to enjoy a taste of la dolce vita in your autumn years, the tax savings could be significant.

For the 7% regime, you must be a non-tax resident for five years before moving to Italy. You can then avail of the flat rate for ten years. Dependents who also receive a foreign pension can also avail of this option.

For high net worth individuals, the Italian flat taxation regime provides an exemption on foreign-earned income, replacing it with a substitute tax on all worldwide income of just €100,000 per fiscal year, for up to 15 years.

This regime can also be readily extended to your family members at an additional cost of €25,000 per member. Plus, you can enjoy a degree of flexibility in how you choose to avail of the regime.

Another benefit is that, when transferring your tax residence to Italy, you need only pay inheritance tax and donation tax on assets or properties which originate within Italy.

You can then enjoy life in Italy, with access to other EU member countries, without worrying about any complications arising from your tax status.

Tax Residency in Italy

Tax residency in Italy follows the standard 183-day rule. So if you reside in Italy for more than 183 days during a fiscal year, you are considered tax resident of Italy.

In Italy, the factors which determine your tax residency are:

• Being registered at the Anagrafe (citizen registry)
• Having a residence in Italy (an abode where you reside within the country)
• Having a domicile in the country; through familial, social or financial ties which demonstrates that Italy is the country where you have the most significant personal connection.

If you match just one of the above criteria at any point during a given tax year, you will be deemed to be tax resident in Italy.

If, however, you have not been tax resident for a specified number of years, you can avail of Italy’s flat taxation regime. You will need to be previously non-resident for a period of five years to avail of the 7% flat rate, or ten years for the €100,000 taxation regime.

When planning a move to Italy timing can be critical; you may be eligible for exemption on income and remittances due to the difference in the tax year between your current tax residence and Italy.

This is why getting professional advice is so important and why our extensive experience in this area can be so valuable. Our core business is helping HNWIs reduce their tax burden by moving overseas. Talk to the Nomad Capitalist team about an Action Plan today to find out how much you could save.

How to be non-tax resident in Italy

To be non-tax resident in Italy, you must be out of the country for more than 183 days.

You will also need to sever any ties that could be used to determine your tax residency. These include credit cards, companies, club memberships, subscriptions, etc.

This process can be complicated if an Italian resident moves from Italy to one of Italy’s blacklisted jurisdictions, so again it is strongly recommended that you get professional advice before you move.

What is the 7% flat tax in Italy?

Italy’s 7% tax regime for retirees allows holders of a foreign pension the chance to transfer their tax residence to one of the municipalities in the South of Italy.

This allows them to opt out of the standard progressive tax rate and pay a tax rate of just 7% on all foreign-sourced income.

Applicants can then enjoy exemptions on income tax and wealth tax on foreign-sourced income but are not exempt from inheritance or gift tax.

No social security payments are required, but any income derived from inside Italy will still be taxed at the applicable progressive tax rate.

To avail of this option, you first need to ensure you are tax non-resident for a period of five years before transferring your tax residence to Italy.

You also need to be able to demonstrate that you are in receipt of a foreign pension and have it paid into an Italian bank.

The type of pension (e.g., state or private) is not clearly defined, so the law is widely interpreted to mean either foreign pension or income from abroad generally.

Once in place, this arrangement lasts up to ten years and is open to all, regardless of age or citizenship.

Italian Flat Taxation Regime For HNWIs

This is the flat taxation regime we recommend for our clients.

It replaces the standard progressive income tax rate with an annual flat rate of €100,000 on all foreign-sourced income for a period of up to 15 years. It can also be extended to family members for an additional €25,000 per dependent.

If you elect to pay the annual rate of €100,000, you will not pay income tax on the value of any of your foreign investments, such as stocks or real estate properties, only on Italian-sourced income.

The regime also places no limit on lump-sum remittances, so you can bring money into the country and move it around freely without triggering additional income or capital gains taxes.

You are still eligible to pay gift tax and inheritance tax under the regime, but only on Italian-based assets. You will not pay any on foreign income.

Controlled Foreign Company (CFC) rules do not apply under the regime, but permanent establishment (PE) rules do.

By appointing an overseas director, however, you can ensure a 50/50 split, effectively placing your company management overseas.

So even if you choose to call yourself the CEO of that company, the company will be considered a foreign company, and the €100,000 regime will still apply.

Income covered under the €100,000 regime

Italy’s flat €100,000 regime could result in significant tax savings for HWNIs who earn a substantial amount of their income from abroad.

Forms of foreign income covered under the regime include:

• Income from employment/self-employment
• Rental income
• Shares, dividends and other forms of financial income
• Other foreign sources of active or passive income

The main takeaway here is that the €100,000 regime covers foreign income only, and any income deriving from inside Italy will be taxed at the standard applicable progressive rate.

Does the €100,000 Regime Cover Crypto?

Yes. Generally, anything from a foreign source is exempt under the €100,000 regime. With crypto, as with other assets, earnings will not be deemed local source income unless those earnings derive from inside Italy.

So, for example, if you trade cryptocurrency using an Italian-based crypto trading platform, that is deemed local income and you will be taxed. If you use a foreign platform, this is foreign income and you will not be taxed.

This rule applies to any assets where the broker or account holding those assets is based overseas.

Applying for the €100,000 flat taxation regime

Before applying for the €100,000 flat taxation regime in Italy, you must first ensure you meet the two main conditions of the regime, which are:

REQUIREMENTS

• You need to move your tax residence to Italy
• And prior to this move, you must not have been tax resident for nine out of the ten preceding tax years

The application process then runs as follows:

Application Process

• You file an inquiry with the Italian tax authorities providing your personal details, financial information and residency status.
• Your request will then be reviewed by the Italian tax authorities.
• If accepted, you can apply for a visa in your home country’s Italian embassy or come to Italy and apply for a residence permit.

Adding Family Members

Adding family members to this regime costs an additional annual fee of €25,000 per family member. There is no age requirement for this; it is only required if the family member(s) you wish to add actively earns income.

So if you have a spouse, for example, and wish to add them to the scheme, your joint maximum tax liability would be €125,00 annually.

Residency Requirements

Once you have been resident locally in your chosen municipality, you will then get a tax certificate. Obtaining this certificate is essential for filing your tax returns and verifying your tax residence.

Once you have this certificate, there is no real need to be permanently resident in Italy. You are free to move and travel as you wish and spend time abroad. You do not have to spend most of your time in Italy but can still enjoy the benefits of the €100,000 regime for a total of 15 years, provided you retain your Italian tax residence.

The best way to guarantee this is to maintain a property or residence in Italy with bills in your name, etc. This also helps to back up your claims to Italian residence in respect of other countries.

Can US Citizens Avail Of The €100,000 Regime?

Yes, but they will not be able to enjoy anything close to the full benefits that the €100,000 regime provides.

This is because, by law, the United States reserves the right to tax all US citizens, regardless of where in the world they reside.

So if you are a US citizen living in Italy you will still need to file taxes in the US. Which is why it’s a good idea to file your tax returns in Italy first and then, because the US and Italy have a tax treaty, you can opt to claim the €100,000 in your US tax returns.

So, although they can’t enjoy the full benefits to save substantial sums of money on taxes, US citizens can still avail of the regime and avoid paying taxes unnecessarily in Italy.

As an American HNWI living in Italy, this will most likely still be the best option from a tax savings point of view, unless you’re prepared to renounce your citizenship to opt out of US taxes completely.

Italy’s Regional Relocation “Resident Worker” Tax

Italy also has a third type of tax regime for those relocating to Italy for work. It provides significant exemptions on income taxes based on where they relocate to for a period of five years.

If you relocate to the North of Italy, you will be eligible for a 70% exemption on income taxes, while relocating to the South brings the exemption rate up to 90%.

For example; if you earn €1 million in the North of Italy, you will pay tax only on €300k. And if you earn the same amount in the South of Italy, you will only pay tax on €100,000.

So obviously qualifying for this regime can be hugely beneficial if you plan to earn most of your income from inside Italy.

Under this rule, CFC and PE rules apply, as do blacklisted jurisdictions.

Unlike the €100,000 regime, the main focus of this regime is on Italian-source income. So you can retain your business in the US and then invoice it to bring all or just some of that income into Italy.

You can extend this arrangement after five years if you have at least one child under 18 or if you purchased a home twelve months before or after moving to Italy.

How To Apply

To apply for Italy’s Resident Worker tax break regime, you need to work and reside in Italy and meet the following criteria:

• Be resident outside of Italy for two years before applying.
• Reside in Italy for at least two years after applying (or otherwise forfeit their tax exemptions.)
• Predominately earning your income within Italy.

The regime works for both employed and self-employed individuals, including entrepreneurs relocating to Italy to do business.

So if you want to move to Italy and start a company there, you can still apply for this regime, provided your primary income is from Italy.

One important thing to note is that you can apply even if you resided in Italy previously but neglected to remove your name from the Anagrafe (Anagrafe della Popolazione Residente – the Italian population registry) and later became tax resident in another country for two years.

This is a handy provision as it means that if you had resided in Italy for a while and then just picked up and left, even if your name stayed in the system, you can return after two years to claim these benefits.

With double taxation treaties, as long as you can prove your tax residence elsewhere, any outdated records are essentially overruled.

List of Southern Provinces Offering 90% Tax Exemption

Since the North of Italy is home to the country’s major financial and population centers, the South of Italy is generally more in need of investment.

For this reason, the Italian state offers a 20% higher incentive for foreigners to relocate to the South. (Though with 90% in the South versus a 70% exemption in the North, the exemption rates are still relatively high in either case.)

So if you opt to relocate to the South, you are eligible to pay tax on only 10% of your annual income.

The following provinces offer a 90% regional tax exemption:

• Abruzzo
• Basilicata
• Calabria
• Campania
• Molise
• Puglia
• Sardinia
• Sicily

North or South?

While the financial incentives of South versus North are obvious, there may be other factors deciding where in Italy you wish to reside.

Stylish Milan offers a high level of English fluency, as does the capital Rome, while the province of Tuscany remains particularly popular with expats.

The South may offer greater tax incentives, but as many areas are more traditional than international, you may find it harder to integrate. But if you’re persistent, you will find a more authentic taste of la dolce vita if that’s your intention.

In the end, it comes down to whether you wish to be more connected to Italy or to the outside world. Will you feel more at home in the fast-paced metropolitan North or the slower, more Mediterranean South?

This view is based on the general consensus of foreigners and Italians alike, but we must still be mindful not to use too many broad strokes.

Like many countries, particularly in Europe, regional North versus South stereotypes are quite prevalent in Italy. So instead of giving them too much creed, we urge you to explore as much of this beautiful country as you can so you can make your mind up.

The goal, after all, is to find that perfect place in Italy where you can move to and enjoy these tax benefits for the next five years.

Of course, local residents will be more than happy to share their opinions on where they think is best, but their input, while potentially valuable, certainly won’t be impartial.

But at Nomad Capitalist, we want to ensure you get the complete picture with access to the most up-to-date information available so you can weigh up your options and make the best choices.

Plus, you gain the benefit of our years of extensive experience in international relocation backed up by our broad network of trusted partners on the ground.

Looking to move to Italy? Interested in a new home in Europe but not sure where? Our team is standing by to remove those uncertainties and turn them into lucrative realities.

To discover how you can reduce your tax burden while transforming your life for the better, talk to us about an action plan today.

Italy’s Tax Regime FAQs