Bella Italia – such a beautiful country: picturesque landscapes, incredibly rich culture and a dreamlike cuisine of world-class shape our image of this land spur in the Mediterranean and fuel our longing. No wonder that many Germans cross the Alps every year to spend their holidays there. No wonder, however, that every year more and more people from near and far decide to move their residence to Italy. Admittedly, what makes Italy a little missing from our point of view as a tax consultant is cheap taxes. Nevertheless, Italy can even be a tax haven under certain conditions. Therefore, we would like to report here who benefits from the flat tax introduced a few years ago in Italy.

1st Flat Tax in Italy – Introduction

Italy is known to many as a holiday paradise rather than a tax haven. This is probably because Italy simply offers endless opportunities for a sweet life. Pleasant climate, from sandy beaches and rocky coasts in the south over the hills of Tuscany to the peaks of the Dolomites, everyone will find a place where you want to stay forever. In addition, the fantastic cuisine, which draws an overwhelming variety of aromas from nature, enchants and enchants us with every bite, with every sip. Who thinks about the high taxes you generally have to pay in Italy?

Well, of course we do. Therefore, we also know that some people have special tax privileges in Italy. More specifically, there is even a flat tax in Italy. And we present them to you in this article.

Why the Flat Tax was introduced in Italy

But before we go into the details of the flat tax in Italy, let’s briefly discuss the motivation of the Italian legislator who introduced it in 2017. Finally, the flat tax in Italy was by no means intended as a measure to enrich foreigners. On the contrary, Italy wanted to attract wealthy foreigners into the country with the introduction of the flat tax. They should invest part of their assets in Italy by paying a flat-rate tax amount. This in turn, according to the calculation of the legislator, would benefit the Italian economy. Thus, a part would also indirectly get into the notoriously cramped public coffers. In fact, the flat tax is only one offer of several that the Draghi administration conceived at the time and that the subsequent governments continued (see also the brochure of the Italian tax authority).

3. The flat tax in Italy in detail

3.1. EUR 100,000 flat tax in Italy

Now let’s get to the tax privileges that Italy offers with its flat tax. More specifically, it is about income tax in particular. It comes with EUR 100,000 on all foreign income. It does not matter whether you earn EUR 1.000.000 or EUR 100.000.000 per year abroad. The more, the better. Because with EUR 100,000, the entire income tax is paid on all foreign income.

Certainly, for most people who dream of a Mediterranean life in Italy, this tax amount exceeds the annual income many times over. Therefore, this offer is certainly only for high earners who are looking for a way to combine a fulfilling lifestyle with tax privileges. Unlike in the UK, it is irrelevant whether the income flows into a domestic or a foreign bank account.

3.2. No automatic transfer of registered office to Italy

For many entrepreneurs, the rule that the residence moved to Italy does not mean an automatic relocation of the place of business is equally interesting. Because this can prevent commercial income from abroad to Italy, so that they would then be taxable in Italy. So if you want to enjoy the flat tax in Italy, you do not have to worry about such a tax trap.

3.3. No proof of offshore accounts or foreign sources of income

Another plus: Italy does not impose any requirements to disclose the origin of foreign income. Although this may seem like an invitation to money laundering at first glance, it is in any case primarily the countries of origin that are responsible for this verification. Thus, the users of the flat tax scheme in Italy are saved only further effort in preparing the income tax return.

3.4 Option for taxation in Italy

Furthermore, in connection with the flat tax in Italy, there is the option that you can decide for yourself whether foreign income is taxable at home. This allows the use of rules in double taxation agreements.

3.5. Extension of flat tax to family members

The flat tax can even be extended to family members. Because family members who accompany the main taxpayer when moving to Italy only have to pay EUR 25,000 in income tax on their foreign income on request. Unlike in other tax regimes, even the extended family circle can benefit here. In addition to partners and children, siblings, parents and in-laws as well as the spouses of their own children benefit.

3.6. no inheritance and gift tax on foreign capital transfers

In addition, there is no inheritance or gift tax on foreign assets in Italy. However, the transfer of domestic property by way of gift or inheritance is subject to taxation in Italy on a regular basis.

4th Conditions for Flat Tax in Italy

Basically, flat tax taxation in Italy is not a classic non-dom tax regime, because it is also addressed as an incentive for Italians abroad. Therefore, if you meet the following criteria, you can benefit from this tax privilege regardless of nationality and other reference points to Italy.

4.1. Minimum stay abroad

First of all, it is important that you can only use the flat tax if you have been tax resident in Italy for a maximum of one year in the past ten years. This also applies to all family members who want to move to Italy and make use of this tax advantage. Consequently, one must prove the tax residence abroad for this period.

4.2. Residence in Italy

Furthermore, you should know that this tax privilege is only available on request. Fortunately, Italy is offering a trial period of 120 days in this respect, during which the Italian financial authorities will draw up a preliminary ruling on such a request. For this probationary period no residence in Italy is required.

Finally, if you accept this option for flat-rate taxation in Italy, you must also establish a residence in Italy. It does not matter whether you live in your own or a rented property. Accommodation with relatives or acquaintances is also permitted.

However, it is important that you actually live in Italy. For more than half a year per investment period. This also applies to all family members who want to be taxed under this flat tax scheme. In any case, a sham residence is inadmissible. Therefore, one should also expect a review by the authorities.

4.3. No flat tax on profits of foreign company sales in the first five years

There is also an exception to the flat-rate taxation of foreign income. Only after five years in Italy can the profit of a company sale abroad be paid with the flat tax in Italy. Indeed, profits made before the expiry of that period are subject to general taxation rules. Therefore, one should consider such a company sale in the first five years very well.

4.4. Temporary restriction of the flat tax scheme in Italy

Another important cornerstone of flat taxation in Italy is that this tax regime is limited to 15 years. After this period of validity, foreign income is also subject to regular taxation in Italy.

4.5. Arrangements for the payment of flat-rate tax

Finally, you should also pay the flat tax in Italy on time. If a payment of the income tax is delayed, one automatically falls out of the flat-rate taxation and is henceforth subject to the general taxation in Italy. It should also be noted that the payment in an amount is mandatory.

4.6. Possibility to terminate the application of preferential tax schemes

Therefore, the following note is also relevant: You can also voluntarily withdraw from the flat tax regime. But anyone who has quit it once, for example to move abroad, cannot apply for it a second time. This also applies to persons covered by the family regime. Together with the main applicant, they also lose the tax privilege.

5th flat tax in Italy – what you should also consider

This brings us to the also important topic of residence status. Because those who want to settle in Italy also need a permit. For Italians who lived abroad in the past, the relocation is of course possible without further restrictions. All other people moving to Italy from abroad, on the other hand, need a visa.

Visas are available in different versions. For everyone, you have to prove that you have a sufficiently high income to ensure your own livelihood. For wealthy foreigners, Italy also has special offers. Thus, with an investment of over EUR 1,000,000 in an Italian company, one can purchase such an investor visa. This investment is even halved if you invest in an Italian startup. If, on the other hand, you invest twice the amount in state securities in Italy, you can also obtain such a visa. The fourth alternative is accompanied by donations of at least EUR 1,000,000. The prerequisite here is that they benefit the Italian economy as philanthropic donations in the field of culture, education or science, to name just a few examples.

All these regulations do not impose any conditions on the citizenship of taxpayers who want to come to Italy under the special flat tax regime. They may thus retain their previous nationality(s). On the contrary, anyone who has paid the flat tax in Italy for at least ten years can apply for Italian citizenship. This applies to EU/EEA nationals as well as to people from third countries.

6th Flat tax in Italy – Conclusion

Let’s summarize. The flat tax in Italy is undoubtedly a tempting alternative to other tax regimes abroad. Especially for wealthy Italians who have lived abroad for a long time and want to return to their homeland, it is particularly attractive. Of course, this only applies if you actually pay less tax with the flat tax than with regular taxation in Italy.

Speaking of regular tax in Italy: if you want to optimize your own taxes, you should of course avoid adding taxable income from Italian sources.

But this brings us to a second aspect, namely the dark side of flat-rate taxation in Italy. Because the flat tax does not prevent that in parallel with the tax in Italy a taxation of foreign income takes place abroad. In Germany, for example, in addition to the unrestricted tax liability, a limited or extended limited tax liability may apply. This may even involve tax risks, as this can be accompanied by the elimination of various tax approaches, including the elimination of the basic allowance (§ 32a EStG).

So if you want to move to Italy to save taxes, you also need a special tax setup that excludes that taxes are incurred abroad. Otherwise, the flat tax of EUR 100,000 is just another tax expense.

Such a possibility exists, for example, near the border with Switzerland. If you do business from Switzerland, you can benefit from their low corporate taxes. Those who live in Campione d’Italia, for example, also benefit from the flat tax in Italy. Tax optimizations at home and abroad go hand in hand.