The 2019 Italian Budget heralded good news in the form of a tax break for people with foreign income who have not been resident in Italy during the last 5 years and become resident in a town with a population of less than 20,000 in the regions of Sicily, Sardinia, Campania, Basilicata, Abruzzo, Molise or Puglia.
All income from foreign assets for people in such circumstances will be subject to a flat rate tax of 7% for 5 years and they will also be exempt from the normal reporting requirements on foreign assets, which also result in a tax liability.
The reason for this unusual generosity from the Italian tax authorities is competition from Portugal which, as many of you will be aware, introduced a tax regime for pensioners who move to Portugal which suspends tax on foreign pension income for the first 10 years of residency and during that period a 20% flat rate of tax is applied to other income.
Actually the original proposal was to mirror the Portuguese system in Italy on the basis that since Portugal introduced their regime in 2012 they have attracted somewhere between 80,000 and 100,000 new residents (including many Italians) whose spending power has added 1.2% to the country’s GDP amounting to $3.5 Billion per annum.
However, with the well reported issues around the budget deficit the conditions have been rather watered down from a ‘full Portuguese’ with the tax break only lasting 5 years, and although I think the regeneration aspect of the legislation is admirable it does unfortunately limit the numbers of eligible pensioners as there are many who already own a property in a non-participating region of Italy but have not yet applied for residency.
For Italy, it is not only attracting foreigners which is key but also the thousands of Italians who are working abroad many of whom have opted to retire to Portugal rather than Italy on their return to Europe over recent years.
If you are eligible for the regime you are now presented with a number of financial planning opportunities. Aside from income tax on private pension income being 7%, if you have investments or property overseas then the usual 26% capital gains tax which would apply also becomes 7%. The same goes for rental income which would normally be subject to income tax rates. No Italian income is included the regime.
For those who are becoming resident now or in the future in one of the eligible regions there is also the opportunity to plan in advance and maximise your benefits during the 5 year period setting yourself up for the transition back to the normal tax regime following the 5 year exemption period in the best possible circumstances.
Particularly for Italians who are working abroad and are likely to return to Italy and live in one of the eligible areas in the future, there is an opportunity to build assets outside of Italy and use the period to move assets back into Italy in a much more tax efficient manner than would otherwise be possible.
We are well positioned to help everyone who can benefit from this regime, we specialise in cross border financial planning, dealing with people in many different countries and have access to a wide range of UK and EU-based and regulated solutions which can be used to maximise the benefits offered in advance, during and after the 5 year period.
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