ITALY: An Introduction

Italy is today considered one of the most attractive countries in Europe for private clients to live and work in. Given this, the Italian government has recently introduced different kinds of instrument useful to attract residents and to simplify the bureaucracy and taxation for people living in the national territory.

Personal Income Tax 

According to the 2023 Italian budget law and starting from 2022, personal income tax rates, which are levied at progressive rates, have been reduced in number from five to four and in to lower percentages (23–43%).

In addition, with regard to individuals engaged in business, arts, or professions who can benefit from the so-called forfettario regime, the 2023 Italian budget law has increased the maximum amount of profits (from EUR65,000 to EUR85,000) for the application of a 15% substitute tax rate. It is worth underlining that for the five-year period of business, this regime provides the application of a 5% substitute tax rate. Also, only with reference to fiscal year 2023, individuals engaged in business and professional activities who, for different reasons, do not qualify for the above-mentioned tax regime, can still benefit from a 15% substitute tax rate on an adjusted income exceeding the highest income generated in any of the three preceding fiscal years, up to EUR40,000.

Permanent Establishment 

Considering that remote working has hugely increased in the last few years, the nature of a “permanent establishment” has become a relevant issue, especially for companies based abroad that allow employees to work physically from Italy.

Therefore, the 2023 Italian budget law has introduced a relevant condition regarding a “permanent establishment exemption” for investment management activities with the aim of ensuring that foreign investment funds (and controlled entities) will not trigger the creation of a “permanent establishment” through their activities in Italy of a fund’s (senior) asset managers.

This means that an asset manager, who is defined as the person who, in the name and/or on behalf of a foreign investment vehicle (or of its direct or indirect subsidiaries), habitually concludes contracts and/or negotiations, is not considered a “dependent agent” if specific conditions are met.

Crypto-assets 

Furthermore, in the light of the resonance that crypto-activities are currently having in the world, the 2023 Italian budget law has introduced a special tax regime for cryptocurrencies and other crypto-assets, as well as a capital gains tax on gains from crypto trading.

First of all, a new definition of a crypto-asset has been provided: they are considered a digital representation of value or rights that can be transferred and stored electronically using distributed ledger or similar technology.

From a tax point of view, a 26% capital gains tax will be levied on gains derived from crypto trading where the gains exceed EUR2,000 in a tax period. As an incentive to encourage taxpayers to declare the value of their crypto-assets held on 1 January 2023, taxpayers can pay a substitute tax of 14% in lieu of the 26% capital gains tax on the purchase cost. The valuation of crypto-assets is not considered for purposes of the corporate income tax and the tax on productive activities.

It is also worth mentioning that in June 2023, the Italian Revenue Agency has published a draft Circular Letter on tax treatment of crypto-assets so as to receive contributions and suggestions from the public and possibly incorporate them into the final version of the Circular that will be issued in the future.

Favourable Tax Regimes in Italy and a New Tax Framework

Throughout the years, Italy has implemented several favourable regimes aimed to attract foreign individuals or to attract back individuals that, even though resident abroad, were previously Italian residents or citizens. The regimes have covered different kinds of individual: employees, the self-employed, pensioners or simply HNWIs who decided to move their residency to Italy. These regimes in general allow the individual a high reduction on the income taxable base of their employment/self-employed income or the application of a favourable flat tax on foreign income. In light of the above, the last few years have seen an exponential increase in the number of people who opted for such special tax regimes.

Considering all of this, Italy has worked very hard to keep and improve the special tax regimes in order to attract more people to transfer their tax residency in the national territory.

As a consequence, people trust the Italian legal system and keep choosing Italy as a place to live in. With regard to gift and inheritance tax, Italy continues to be considered a “tax paradise” because the tax rates are still low and the allowances still high. It is worth remembering that the tax rates depend on the relationship of the beneficiary with the deceased/donor.

Also, Italy does not currently have a wealth tax, although there have been discussions in recent years about introducing such a tax. Considering the current right-wing configuration of the Italian government the situation is not going to change anytime soon.

Recently, the government has approved a set of general principles and criteria for a full reform of the Italian tax system. The Parliament will now build on this framework, making it final by issuing a law that will enable the government to implement the reform in detail. From the effective date of the enabling of the new framework, the government will then have approximately 24 months to execute the reform through the issuing of one or more Legislative Decrees.

Among the new provisions, the government aims to review the tax residence rules for individuals and companies, in order to align Italian provisions with international best practice and the double-tax treaties signed by Italy and to reduce the VAT for specific operations. In particular, the idea is to apply a lower tax rate (from 5.5–10%) for art imports (works of art, collectors’ items and antiques) so to become a major competitor in the global art market.

Trusts 

Finally, with regard to trusts, the Italian Revenue Agency issued, in October 2022, Circular Letter No 34/E/2022 laying down comprehensive guidelines on the tax treatment of trusts and similar entities for tax purposes. In particular, the new provisions regulate a change of interpretation regarding the moment when inheritance and gift tax is due, effects of change of interpretation on existing trusts, taxation of income distributions from low-tax trusts, tax reporting of foreign financial assets and the treatment of trusts in relation to taxes on foreign financial assets (so called IVAFE) and real estate (so called IVIE).

Considering all the above, Italy represents an interesting and attractive place in which to live, work and invest.