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Expat Briefing Editorial Team
22 September, 2017
Following our last feature on the Netherlands 30 percent ruling for expat workers, this week we look at Italy, which has recently introduced a special tax regime for non-domiciled individuals, as the country seeks to capitalize on the anticipated Brexit brain drain from Britain.
Italy, located in southern Europe, is a large boot-shaped peninsula extending into the central Mediterranean Sea, and includes the islands of Sicily and Sardinia. With a total area of just over 300,000 square kilometers, it is slightly larger than the US state of Arizona.
Almost completely surrounded by sea, Italy has a 7,600km coastline. The north of the country has land borders with Austria, France, Slovenia, and Switzerland.
Climate And Terrain
The climate is predominately Mediterranean, although it ranges from Alpine in the north, to hot and dry in the south. The terrain is mostly rugged and mountainous, with some plains and coastal lowlands. The highest peak is Mont Blanc de Courmayeur (Monte Bianco) at 4,748 meters.
Italy is in an area of active seismic and volcanic activity, and has suffered from damaging earthquakes in recent years. Active volcanos include Mount Etna, located in Sicily, Mount Vesuvius, situated next to the Bay of Naples, and Stromboli, located on the island of the same name.
The population of Italy in 2016 was an estimated 62m and the official language is Italian, although there are small German-, French-, and Slovenian-speaking communities in the north, as well as pockets of Albanian- and Greek-speakers in the south.
Roman Catholicism is the dominant religion in Italy, although the Muslim population is estimated to be between 800,000 and 1m.
Rome is Italy's most-populous city as well as its capital, with 3.7m inhabitants. The next largest city in population terms is Milan, with 3.1m. Naples has a population of 2.2m and is Italy's third-most populated city. Other significant urban centers include Turin in the north west (1.7m), Palermo, the capital of Sicily (850,000), and Bergamo, on the edge of the Italian Alps in the north (840,000).
Italy is a civil law country and is governed as a parliamentary republic. Administratively, there are 15 regions and five autonomous regions.
Citizenship is not automatically granted by virtue of having been born in Italy. Generally, citizenship is granted by descent only, meaning that at least one parent must be an Italian citizen. However, dual citizenship is recognized.
An individual must live in Italy for at least 10 years before they can be naturalized, although for citizens of the European Union the residency requirement is only four years.
Economically, Italy is considered advanced, and the economy is currently the world's eighth-largest. However, there is a stark economic divide between the industrial and affluent north, and the agricultural and less-developed south.
The manufacture of high-quality consumer goods by small and medium-sized enterprises, many of them family-owned, is a driving force of the Italian economy, although services now accounts for almost three-quarters of economic output.
Italy's main exports include engineering products, textiles and clothing, production machinery, motor vehicles, transport equipment, chemicals, foodstuffs, beverages, and tobacco.
Italy's economy emerged from recession in 2014, although growth has been muted since then; the economy grew by an estimated 0.8 percent in each of the years 2015 and 2016.
GDP per capita using the purchasing power parity measure was and estimated USD36,300 in 2016, placing Italy 52nd overall, and well below most Western European economies.
Taxation – An Overview
If you work in Italy for less than 183 days, you will generally be considered non-resident and taxed on Italian source income only. If you stay longer than 183 days you will generally be considered resident and you will become liable for tax on your worldwide earnings. There are some circumstances where you may be considered resident even if you are in Italy for less than 183 days in a year.
If you are a resident there is a deduction of income tax made by your employer from your wages or salary each time you are paid. They will also deduct social security contributions. If you have more than one source of income, or are self-employed, you may have to pay advance tax twice a year; advanced tax is based on the previous year's earnings.
The tax rates are progressive, and the marginal (highest) tax rate is 43 percent. Personal allowances are given in the form of tax credits. You may have to fill in a tax return after the end of the year to calculate the final amount of tax payable.
If you are self-employed, you will pay income tax based on the profits of your business after deduction of costs. A withholding tax will be deducted by your contractees prior to making payment, this is treated as an advance payment of tax.
The "Non-Dom" Scheme
In a bid to attract wealthy individuals to relocate to the country, and high net worth Italian expats to return there, the Italian authorities introduced earlier this year a EUR100,000 (USD118,000) per year substitute tax on foreign income and gains for previous non-doms who declare Italy as their primary tax residence.
According to the Italian Revenue Agency: "This favorable tax regime is available for 'newly resident' individuals in Italy, who (regardless of their nationality or domicile) have been non-tax resident in Italy for at least nine years out of the 10 years preceding their transfer to Italy. The incentive regime may be also extended to the family members of these individuals."
"High-net-worth individuals transferring their tax residence to Italy are enabled to apply a substitute tax to their foreign income and gains, amounting to EUR100,000 for each fiscal year, in lieu of the Italian Income Tax. Therefore, this taxation represents an alternative to the application of the ordinary taxation and the option is valid for a period of 15 years."
"The election for the regime may be extended to family members through the payment on their foreign income and gains of a substitute tax amounting to EUR25,000 per member."
Italian-sourced income and gains for individuals opting into the scheme will remain taxable in the normal, progressive way, although there are also benefits for applicants in terms of gift and succession taxes and tax reporting.
Observers have suggested that the Italian authorities may have their eyes on capturing wealthy UK expats post-Brexit.
Indeed, as it has transpired, Withers LLP announced recently that it represented the first taxpayer, a high net worth individual who was formerly registered as a non-dom in the UK, to move to Italy to take advantage of the new status and to establish a new hub for his family.
It remains to be seen how many others follow in their footsteps.
For further information about various aspects of expat life in Italy, please visit the Italy section of Expat Briefing.
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