The draft delegated decree on international taxation, approved by the Council of Ministers on October 16, 2023, significantly tightens the favorable regime for so-called expatriates and raises concerns for those who have returned, or plan to return, to Italy in the second half of 2023.
Current Expatriate Regime
The expatriate regime was introduced by Article 16 of Legislative Decree No. 147/2015 (known as the internationalization decree) with the aim of encouraging the return to Italy of taxpayers fiscally resident abroad with high professional qualifications (so-called cervelli).
Over the years, the legislature has gradually relaxed the professional qualification requirements, effectively extending the favorable regime to anyone transferring their tax residence to Italy, including professional athletes.
The current expatriate regime provides a 70% tax exemption for income tax purposes (90% in the case of transfer to a region in Southern Italy). It applies to all employees, self-employed individuals, and sole proprietors who:
- (i) Transfer their tax residence to Italy,
- (ii) Have not been fiscally resident in Italy in the two tax periods preceding the transfer,
- (iii) Commit to residing in Italy for at least two years,
- (iv) Primarily carry out their activities in Italian territory.
The duration of the favorable regime is five tax periods, with the possibility to request an additional five, with a 50% tax exemption, if the taxpayer has a minor child or purchases a residential property in Italy after the transfer or in the 12 months preceding it.
The New, More Restrictive Regime
As anticipated, the draft delegated decree significantly tightens the current regulations. Firstly, the tax-exempt quota decreases from 70% to 50%, eliminating the higher exemption of 90% for transfers to Southern Italy. Secondly, an annual cap of €600,000 of eligible income is established, beyond which ordinary taxation is applicable. This new regime is also subject to de minimis state aid limitations, ensuring that for self-employed individuals, the benefit in terms of lower taxes paid cannot exceed €200,000 on a triennial basis.
Regarding the subjective requirements, on one hand, requirements for high qualification or specialization are reintroduced (as indicated in Legislative Decrees No. 108/2012 and No. 206/2007; generally, a three-year degree or the practice of a regulated profession is sufficient). On the other hand, work carried out in Italy must be based on a new employment relationship with a different entity than the one the worker was employed by abroad before the transfer, as well as those belonging to the group. The new regime is also not applicable to sole proprietors.
Regarding tax residency, access to the new regime is allowed for those who have not been fiscally resident in Italy in the previous three tax periods, while the current regime refers only to two tax periods.
Lastly, the durationof the benefit is limited to five tax periods, with no possibility of extension, and the minimum stay period in Italy is raised from two to five years. Failure to meet this requirement results in the resumption of taxation of the facilitated income with the addition of penalties and interest.
Commencement of the New Regime
Regarding the entry into force of the regulations, the draft decree approved by the Council of Ministers provides:
- (i) the repeal of the current regime from January 1, 2024,
- (ii) the application of the new and more restrictive rules for those acquiring tax residency in Italy from the 2024 tax period,
- (iii) the application of the current, more favorable regime for those who have acquired tax residency in Italy by December 31, 2023.
The fact that the application of the current regime (applicable starting 1st of January 2024) is tied to the acquisition of tax residency in 2023 seems particularly penalizing. It should be noted that, to acquire tax residency in 2023, according to Article 2 of the TUIR, the taxpayer must have had residence, domicile, or be registered in the population registry in Italy for most of the calendar year.
Consequently, those who moved to Italy in the second half of 2023 would find it difficult to acquire tax residency in 2023, unless they demonstrate having transferred their domicile (understood as the center of vital interests) to Italy in the first half. This might have occurred, for example, in the case of the early transfer of the spouse and children in the first semester, which is not easy considering the foreign school calendar.
In light of the above, it is evident that the text approved by the Council of Ministers would be detrimental to the legitimate expectations of those who have moved or are about to move to Italy in the second half of 2023 and have made long-term decisions relying on the application of the current regulatory regime for 5 or 10 years. This includes individuals who have already resigned in the foreign country, moved to Italy in the second semester, bought a house, and, when contracting a mortgage, relied on a financial availability that would be significantly reduced due to the change in the regime or those who have returned to Italy with a group company and would not be able to access any form of benefit. In short, real “tax expatriates.”
On this point, it should be noted that Minister Leo promptly intervened to clarify that it is not the government’s intention to penalize those who have planned to return to Italy in the second semester, relying on the application of the current regime. He announced that the change in rules will not affect those who have acquired an anagraphic residence in Italy by December 31st of this year. This government indication has been promptly incorporated into the “stamped” decree text by the General Accounting Office and transmitted to the relevant parliamentary committees. It is hoped, therefore, that the final text of the decree will maintain the anchoring of the current tax regime to the acquisition of anagraphic residence by December 31, 2023, as indicated in the “stamped” text, thereby preserving the legitimate expectations of those who have moved to Italy in the second half of 2023.
