Over the last couple of years, the Italian government has been very prolific in the implementation of tax reliefs for expats and pensioners, deciding to move to the Bel Paese either for work or to retire to.
Some of the measures saw people paying tax rates as low as 7% or even contributing a specific sum as a ‘substitute’ annual tax.
These regimes, however, caught the eye of the European parliament, which went on to condemn Italy and other countries that have similar fiscal provisions in place.
The EU stated that: “[It] deplores the fact that some member states have created dubious tax regimes allowing individuals who become resident for tax purposes to obtain income tax benefits, thereby undermining other member states’ tax base and fostering harmful policies which discriminate against their own citizens; [the parliament] notes that these regimes may include benefits not available to national citizens, such as the non-taxation of foreign possessions and income, lump-sum tax on foreign income, tax-free allowances on a part of incomes earned domestically or lower tax rates on pensions remitted to the country of origin.”
Discrimination or a game of politics?
But many disagree.
Nicola Saccardo, partner at Italian tax law firm Maisto & Associati, told International Adviser: “At the time being there is no regulation or legislation that could be used to censor the compatibility of these regimes.
“The European parliament’s position is political, not a legislative one. That is because it does not have the possibility to introduce a bill to contrast member states that currently have favourable tax regimes.”
As a matter of fact, if the European parliament would want to put an end to these practices, it would need to table a motion that would have to be approved unanimously by all 28 member states.
This means that those countries currently trying to attract individuals through tax benefits would need to vote against their own fiscal measures.
‘No economic interest’
Federico Raffaelli, partner at law firm CMS’ Rome office, told IA that while there is a “political will” to go against Italy, there is very little revenue the country gets from tax reliefs.
“I don’t think there’s a real economic interest to react against Italy, it is more a political decision, but the risk is that some people might move to countries outside of the EU.”
The European parliament said that, while it understands these schemes are there to attract high (HNWIs) and ultra-high net worth individuals (UHNWIs), they do not create “real economic activity” and only facilitate people to dodge paying tax.
“HNWIs and UHNWIs are using complex tax structures, including the setting up of companies, and continue to have the possibility to shift their earnings and funds or their purchases through different tax jurisdictions to obtain substantially reduced or zero liability by using the services of wealth managers and other intermediaries.
“[The European Parliament] deplores the fact that some EU member states have implemented tax schemes to attract HNWIs without creating real economic activity.”
A decision form the EU court to make?
Saccardo added that “Italy is not violating any European law since there is no disposition precluding Italy, or other member states, from introducing these types of tax reforms”.
However, Vincenzo Senatore, lawyer at Italian tax law firm Giambrone Law, disagrees.
He believes the EU is getting ready to take Italy and other states to the European Court of Justice to challenge their “discriminatory” tax measures.
“If the European Commission refers a member state to the court of justice, it is up to the court to verify that every member state is in compliance with the European treaty,” Senatore told IA.
Italy’s track record could prove it wrong
Senatore said there have been many Italian fiscal reforms that were challenged by the EU in court, for which Italy was forced to amend its legislation.
“For instance, there have been several complaints following the introduction of reduced rates for Italian citizens living abroad who bought their first home in Italy; or even regarding Italian pensioners living abroad who were exempt from paying IMU (the Italian property tax).”
In those cases, the EU referred the Italian government to the court of justice, and Salvatore believes this case won’t be any different.
Italy’s tax regimes
Currently, Italy has three different tax regimes that have been proven very popular among foreigners:
- The 7% flat-rate tax: It is limited to expat pensioners who want to spend their retirement in Italy. To enjoy the fiscal benefits, they would need to not have been resident in the country for the last five tax years; have their pension paid by a foreign entity; their country must be in administrative cooperation with Italy; and they must retire in a village with no more than 20,000 inhabitants in the southern end of the country;
- The substitute tax regime: This allows people who have not been Italian tax residents for at least nine of the last 10 tax years to pay an annual €100,000 (£86,777; $ 112,115) substitute tax on their foreign-sourced income;
- The ‘impatriate’ tax regime: Aimed at skilled workers, it allows a 50% exemption for Italian-sourced employment and self-employment income.
“I believe the €100,000 flat tax is going to be the main fiscal measure that the European Union is going to contest,” Senatore added.
“That it because it also entails a €25,000 incentive for the individual’s relatives which can be perceived as quite discriminatory.”
What should financial advisers do?
Senatore thinks that for financial advisers working with expats looking to move to Italy, it should be business as usual.
“Currently advisers are probably trying to get maximum tax relief for their clients, so they will generally encourage them to get those tax reliefs as soon as possible.
“Since no law has retroactive remit when it comes to fiscal matters, they should not experience any consequences.
“That is also because every government will try to monetise as much as possible. Future sanctions (if any) from the EU will take time, so for the time being the tax regimes will stay in place, because [the Italian government] would want to keep the promises it made to its citizens.”
