Italy has enacted a non-domiciled residency scheme. The UK's version has been a political hot potato, so it will be interesting to see how an Italian system will work.

The UK recently tightened rules on how its non-domiciled regime works, seen as reducing the attractions of having such a system. In a move that hasn’t perhaps grabbed much attention at a time when the news headlines are full of talk about Brexit, Donald Trump and the Italian referendum, Italy has a new tax law that, argues the international law firm Withers, rivals the UK's own non-dom system.

The article’s authors are Giulia Cipollini (head of tax in Italy) and Giorgio Vaselli, associate. This publication is pleased to share such views and invites readers to respond. 

This is the first non-dom system in Italy; this has been in force since 7 December. Among its central features are that all foreign income and gains are sheltered from Italian tax, including gift and succession tax. There is no requirement to declare these assets to the Italian authorities and aspiring non-doms must apply to authorities for preliminary ruling. Such persons must also be tax resident and have been in Italy for more than 183 days each year. And finally, once confirmed as non-doms, they must pay €100,000 per year, and €25,000 for each family member.

The rules cover several fields of the Italian legal system such as: immigration laws, repatriation of Italians working abroad (the draft law strengthens and broadens the scope of provisions currently in force) and, most noteworthy, income tax rules for eligible individuals to become Italian tax residents (the Italian "res non-dom" regime).

The Italian "res non-dom" regime
The rules introduce a brand new territorial system aimed at non-Italian residents for individual income tax purposes. The timing of this measure (which coincides with the changes to the UK's "res non-dom" regime that could eventually see it becoming less attractive to HNWIs) suggests that Italy might be seeking to woo HNWIs looking for a new home following Brexit or deterred by the tightening of rules in the UK.

In summary, the new rules on "res non-doms" provide a major exception to the general principle of taxation of income on a worldwide basis applicable to Italian tax residents (as also applies in the vast majority of states and jurisdictions), as follows:

-- any Italian-sourced income will still be identified, determined and taxed pursuant to the ordinary rules. Therefore, taxpayers will be required to submit their annual income tax return and pay income tax on the ordinary terms, save for Italian income (a) that is subject to final withholding/substitutive taxes (e.g. financial incomes); or (b) for which an income tax return would not be required;

-- any income sourced from foreign jurisdictions, as determined in a preliminary tax authority ruling (see below), falls outside the scope of Italian income tax (i.e. will not contribute to determine the individual's overall taxable basis), provided that an annual flat substitutive tax of €100,000 ($106.254) is paid in a lump sum. (Italian laws, generally written for non-residents deriving incomes in Italy, will have to be interpreted by exclusion);
    
-- the taxpayer will not be able to claim foreign tax credits (generally available under the ordinary regime) on any foreign income sheltered from the substitutive tax; and

-- the Italian tax authorities will decide whether treaty benefits to reduce foreign taxes levied at source in respect of foreign income applies to 2res non-doms".

From a subjective standpoint, as currently designed the above rules would be available to all individuals (regardless of their nationality) who:

-- become Italian tax resident pursuant to the domestic rules (i.e. they have been in Italy for more than 183 days in a calendar year, and meets at least one of the following conditions (i) domicile, as defined in the Italian civil code, (ii) residence, as defined in the Italian civil code, (iii) enrolment with the registry of Italian population). In practical terms, either of the last two conditions (which are more formal, compared to the assessment of domicile under Italian laws) would grant easier access to the "res non-dom" tax regime ; and

-- have been non-Italian resident for income tax purposes for 9 out of 10 years preceding their relocation to Italy. Therefore, the new system would also be available for Italian returnees.

"Res non-dom" status may be extended to family members (as broadly defined under article 433 of the Italian civil code, which includes adopted children), provided that: (i) the aforementioned annual €100,000 substitutive tax is increased by €25,000 for each family member; and (ii) each member involved meets the aforementioned conditions.
 

On the procedural side, the "res non-dom":
-- must request a preliminary ruling on their status from the tax authorities.  This should be filed within the period for filing the annual income tax return for their first tax year as an Italian tax resident;
-- requires disclosure of the individual's last tax residence to the Italian authorities (also including any family members applying for "res non-dom" status);
-- may not exceed 15 calendar years as a "res non-dom", but the status may be revoked before this time limit; and
-- ends for good (i.e. no further options are allowed) if the "res non-dom" fails to fully or partially pay the €100,000 substitutive tax and the €25,000 per family member.

The wording of the draft provision seems to allow for tax violations/assessments relating to income sourced in Italy, without revoking the status (i.e. the "res non-dom" status remains applicable when the taxpayer is assessed on his/her Italian sourced income – which, as said, is subject to the ordinary rules). Furthermore, tax violations/assessments relating to foreign income earned in the year preceding the "res non-dom" taking on this status would not have a negative impact on status.

Furthermore, "res non-dom" status would exempt the taxpayer from a duty to disclose foreign assets in their tax return under the ordinary disclosure rules (a.k.a. "RW" rules). CRS/FATCA duties would still apply, meaning that intermediaries falling within the scope of FATCA/CRS may still report the existence and value of foreign assets to the Italian tax authorities.
Interestingly, "res non-dom" status would also shelter:

-- gift and succession taxes (excluding the taxpayer's family members), which are only due on assets located in Italy at the time of death of the individual (or in case of any donations). This is good news for potential candidates, as there are persistent rumours that Italy might overhaul its current gift and succession tax regime in the near future (currently, gift and succession taxes are levied at very low rates of 4 per cent - 8 per cent, with exemptions for certain business assets);

-- Italian property taxes on real estate and financial assets held abroad (a.k.a. "IVIE" and "IVAFE"), including taxpayer's family members.

Incentives to immigration
Subject to several subjective and procedural conditions, immigration for periods exceeding three months is simplified for individuals who are willing to:

-- invest at least €2 million in treasury bonds and alike, held for at least two years;

-- invest at least €1 million in a company that is incorporated and established in Italy, held for at least two years, and

-- donate at least €1 million to selected philanthropic fields/projects.

Eligible candidates will receive a special "investors VISA" with a two year term that can be extended for other three years.

It is expected that all such provisions would substantially increase the appeal of the Italian tax and administrative system from foreigners' perspectives.