With this article, we analyze the benefits of an important Tax Break for US Citizens who move to Italy: the so-called Tax Break "Neo Residenti", New Residents.
This Tax Break consists of a flat tax for High Net Worth Individuals relocating to Italy, which may apply for a maximum of 15 years.
Let us analyze together its advantages and main features.
1. THE FLAT TAX FOR HIGH NET WORTH INDIVIDUALS WITHIN THE OVERALL TAX BREAKS AVAILABLE TO THOSE RELOCATING TO ITALY
Before starting the specific analysis of the Flat Tax for High Net Worth Individuals, it is important to provide a systematic introduction in order to properly frame this tax break within the broader set of tax incentives available under Italian legislation, which are designed to attract US Citizens who wish to move to Italy.
We have already addressed this topic in a previous post:
The most important Italian Tax Breaks are the following:
• Tax Break for High Net Worth Individuals.
Regardless of the different eligibility conditions and the different scope of each tax breaks, three important considerations can help the reader navigate among them:
1) All the above tax breaks require the US Citizen to move the Tax Residence to Italy. The common objective of these tax breaks is to attract as many individuals as possible to Italy in a stable manner.
See more posts on Tax Residency here:
2) These tax breaks are available to individuals of any nationality. Therefore, Italian Citizens, US Citizens, and Citizens of other Countries are eligible. Citizenship is irrelevant: what matters is the transfer of tax residence to Italy.
3) These tax breaks are never cumulative: choosing one Tax Break excludes the possibility of accessing the others.
The most relevant difference among them is the following:
The first two Tax Break — the Tax Break Impatriati and the Tax Break for Researchers and Professors — are aimed at attracting individuals who want to come to Italy to work. Accordingly, the tax incentive applies to employment and self-employment incomes produced in Italy, while US-source income remains subject to ordinary taxation.
Conversely, the 7% Flat Tax for Foreign Pensioners and the Tax Break for High Net Worth Individuals apply specifically to foreign-source income, while Italian-source income remains subject to ordinary taxation.
2. THE FLAT TAX FOR HIGH NET WORTH INDIVIDUALS
The High Net Worth Individuals Tax Break allows individuals to pay a fixed tax in lieu of the ordinary taxes that would otherwise apply to all foreign-source income.
This flat tax is calculated as follows:
• €100,000 per year for US Citizens who transferred their residence to an Italian Municipality (Registrazione all'Anagrafe Comunale) on or before 10 August 2024.
• €200,000 per year for individuals who transferred their residence after 10 August 2024.
The 2026 Budget Law is currently considering increasing this amount to €300,000 starting from tax year 2026. It should be noted that such an increase would not affect individuals who relocated prior to 2026.
EXAMPLE 1
Let us assume that a US Citizen, John, transferred his residence to Italy on 6 June 2023. In this case, provided that the requirements were met, he could opt for the Flat Tax for High Net Worth Individuals amounting to €100,000 per year.
This amount remains €100,000 even after the legislative changes introduced in 2024 and, potentially, in 2026.
Had John transferred his residence to Italy on 12 August 2024, the annual flat tax would have amounted to €200,000.
Legislative changes to the flat tax amount do not affect individuals who have already relocated to Italy: their entitlement to the tax break remains unchanged.
It's important to note that taxes paid in the US are not creditable against the Italian flat tax that has to be paid for the High Net Worth Individuals Tax Break.
3. ELIGIBILITY REQUIREMENTS FOR THE NEW RESIDENTS REGIME
In order to access the Flat Tax for High Net Worth Individuals, three requirements must be met:
A) Transfer of tax residence to Italy;
B) The individual must not have been tax resident in Italy for at least 9 out of the 10 tax periods preceding the year in which tax residence is transferred;
C) Payment of the flat tax by 30 June following the tax year for which the option is exercised.
Let us examine these requirements through practical examples.
EXAMPLE 2
Let us assume that a US Citizen who has never previously lived in Italy moves from the United States to Italy on 6 June 2023 and registers with the Municipal Registry (REgistro dell'Anagrafe Comunale) of the Italian City where he chooses to live.
Let us further assume that he spends the remainder of 2023 in Italy. In this case, he will be considered tax resident in Italy for 2023.
We may then ask the following question:
• Can the US Citizen opt for the High Net Worth Individuals Tax Break for tax year 2023?
Yes, he may opt for the Flat Tax for High Net Worth Individuals for 2023, since 2023 is the first year in which he is tax resident in Italy.
The option must be exercised in the Italian tax return filed in 2024, relating to tax year 2023.
• If, instead, the U.S. citizen had relocated to Italy on 16 December 2023, without having spent any prior days in Italy, could he opt for the High Net Worth Individuals Tax Break?
No, he could not, as he would not be tax resident in Italy for 2023.
Returning to the case of the US Citizen who entered Italy on 6 June 2023 and had never previously lived in Italy, we may ask another question:
• Can the US Citizen opt for the Flat Tax for High Net Worth Individuals for tax year 2024, while remaining subject to ordinary taxation for tax year 2023?
Yes. If the US Citizen remains tax resident in Italy for 2024, the option may also be exercised starting from the second year of Italian tax residence.
Indeed, the second requirement provides that the person must have been tax resident in Italy for no more than one year in the ten tax years preceding the year of election.
Let us therefore analyze the situation year by year:
• 2024: year of election.
• 2023: 1st year preceding the election – Italian tax residence.
• 2022: 2nd year preceding – US tax residence.
• 2021: 3rd year preceding – US tax residence.
• 2020: 4th year preceding – US tax residence.
• 2019: 5th year preceding – US tax residence.
• 2018: 6th year preceding – US tax residence.
• 2017: 7th year preceding – US tax residence.
• 2016: 8th year preceding – US tax residence.
• 2015: 9th year preceding – US tax residence.
• 2014: 10th year preceding – U.S. tax residence.
Thus, in the ten years preceding 2024, only one year (2023) involved Italian tax residence (year 2023).
However, this “second-year rule” does not apply if there were additional years of Italian tax residence. Consider the following scenario:
• 2024: year of election.
• 2023: 1st year preceding the election – Italian tax residence.
• 2022: 2nd year preceding – US tax residence.
• 2021: 3rd year preceding – US tax residence.
• 2020: 4th year preceding – US tax residence.
• 2019: 5th year preceding – US tax residence.
• 2018: 6th year preceding – US tax residence.
• 2017: 7th year preceding – US tax residence.
• 2016: 8th year preceding – Italian tax residence.
• 2015: 9th year preceding – US tax residence.
• 2014: 10th year preceding – U.S. tax residence.
In this case, the option cannot be exercised in 2024, since the person was Italian tax resident in more than one year during the previous ten years. The only possible year of access, thus, would have been 2023.
A final example concerns an individual who relocated to Italy on 15 May 2024:
• 2024: year of election.
• 2023: 1st year preceding the election – Italian tax residence.
• 2022: 2nd year preceding – US tax residence.
• 2021: 3rd year preceding – US tax residence.
• 2020: 4th year preceding – US tax residence.
• 2019: 5th year preceding – US tax residence.
• 2018: 6th year preceding – US tax residence.
• 2017: 7th year preceding – US tax residence.
• 2016: 8th year preceding – Italian tax residence.
• 2015: 9th year preceding – Italian tax residence.
• 2014: 10th year preceding – U.S. tax residence.
In this case, there is no possibility to access the Flat Tax for High Net Worth Individuals, as there were two years of Italian tax residence in the previous ten years.
Regarding the third requirement, namely payment of the flat tax by 30 June of the year following the election year, the following considerations apply:
• If the US Citizen opts for this Tax Break for tax year 2023, the option must be exercised in the 2024 tax return, and the €100,000 flat tax must be paid by 30 June 2024, without possibility of delay.
• Failure to pay by 30 June results in loss of the Tax Break: if the US Citizen would pay on July 1st, the Tax Break would be lost.
4. CHARACTERISTICS OF THE ELECTION IN THE TAX RETURN
The main characteristics of Flat Tax for High Net Worth Individuals are the following:
• The maximum duration of the Tax Break is 15 years, which cannot be extended. The option renews automatically each year unless revoked or forfeited.
• The Flat Tax for High Net Worth Individuals may be revoked at any time. Once revoked, it cannot be reinstated.
• Revocation must be exercised in the tax return relating to the year for which revocation is intended.
• The regime is forfeited if:
o a) the flat tax is not paid by 30 June;
o b) tax residence is transferred abroad.
Within the NR Form filed inside the Italian Tax Return, additional elements may be specified:
• a) Certain Countries may be excluded from the Tax Break (“cherry picking”): in this case, income from those countries is taxed under ordinary rules.
• b) The Flat Tax for High Net Worth Individuals may be extended to family members, with a flat tax of €25,000 per year per family member (potentially €50,000 from 2026). Family members are those listed under Article 433 of the Italian Civil Code, with particular emphasis on spouses and children. Revocation by the main taxpayer automatically applies to family members.
An additional advantage of the Tax Break is the significant simplification of Italian tax compliance, as taxpayers are exempt from filing the RW form and from paying IVIE and IVAFE.
5. US INCOMES SUBJECT TO THE FLAT TAX
The Flat Tax for High Net Worth Individuals applies to all foreign-source income.
However, capital gains from the sale of qualifying shareholdings are explicitly excluded and remain subject to ordinary taxation during the first five years of the tax break
If income from a specific Country is excluded via cherry picking, it is subject to ordinary taxation.
EXAMPLE 3
Let us assume that a US Citizen moves to Italy on 24 September 2024 and earns average annual dividends, interest, and capital gains of €950,000.
Assuming ordinary Italian taxation at 26% flat tax rate, the ordinary taxation would be:
€950,000 × 26% = €247,000
By paying the flat tax of €200,000, the taxpayer would achieve an annual tax saving of €47,000.
However, two important considerations apply:
• The flat tax must be paid even in years with low incomes or capital losses.
• While the 26% Italian tax is generally creditable for US tax purposes, the creditability of the flat tax of €200,000 is highly uncertain, which is particularly relevant for US Citizen living in Italy.
6. POTENTIAL RISKS OF THE FLAT TAX FOR HIGH NET WORTH INDIVIDUALS
Having analyzed the features and advantages, it is also necessary to consider potential weaknesses of the Flat Tax for High Net Worth Individuals.
A) The main risk relates to the determination of Italian tax residence, a topic extensively addressed in prior articles.
Given the importance of this element, the Flat Tax for High Net Worth Individuals allows for a probative tax ruling (interpello probatorio) to obtain certainty from the Italian Tax Authorities.
B) Corporate tax residence (Place of effetcive management) must also be carefully monitored.
C) US employment income must be carefully assessed, as employment income is generally sourced where the work is physically performed. Income paid by a US company to a US Citizen living and working remotely in Italy is generally qualified as Italian-sourced income.
See also:
D) As previously noted, the creditability of the Italian flat tax of $200,000 in the U.S. tax return is highly uncertain and must be carefully evaluated, as it may significantly affect the overall tax benefit.
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CONTACT US FOR MORE INFORMATION
If you need more information on the Italian Fiscal Code or the opening of a Partita IVA, you can send an email to:
enrico.povolo@dottcomm.net
or make a phone call to the following number:
+39 0444 322987
Enrico Povolo