Relocation to Italy: Italian Lump Sum Tax Regime
On 6 March 2024 the UK Chancellor announced fundamental changes to the UK tax regime for individuals with a foreign domicile of origin, who reside in the UK but without the intention to remain in the UK permanently or indefinitely, so-called “non-doms”, and to the UK inheritance tax regime generally. These changes are covered in our briefing note here. The extent of these changes and the uncertainty surrounding the detail of their implementation is leading some UK resident foreign domiciliaries to accelerate their plans to leave the UK. In this context, many of those looking to relocate are considering Italy, amongst other places, as a possible destination. Italy is also an attractive option for UK domiciliaries considering a relocation upon their retirement. Many consider Italy desirable from a lifestyle perspective. From a tax perspective, the draw of Italy is its Lump Sum Tax Regime introduced in 2016.
In this note, we provide a summary of the main features of the Italian Lump Sum Tax Regime and some key aspects to consider from an Italian immigration, UK tax and general estate planning perspective.
Please note that the comments herein are general and non-exhaustive and are not related to a specific case, so they cannot be relied upon as advice.
1. The Italian Lump Sum Tax Regime
The conditions for the eligibility to the Lump Sum Tax Regime
The option for the Lump Sum Tax Regime is available to an Italian resident individual, subject to the condition that the individual had been non-resident of Italy for Italian income tax purposes in at least 9 of the 10 years prior to the first year of application of the regime.
The Lump Sum Tax Regime
The main features of the Lump Sum Tax Regime are the following:
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Income and gains from non-Italian sources are subject to a substitute tax equal to 200,000 Euro per year1, in lieu of being subject to income tax according to general rules. Taxes on these income and gains levied outside of Italy are not creditable against the 200,000 Euro tax;
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Assets held outside of Italy are not subject to wealth taxes;
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Assets with a non-Italian situs are not subject to inheritance and gift tax;
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As an exception, gains from the disposal of substantial participations (see below2) realized in the first 5 years of Italian tax residence are excluded from the scope of the Lump Sum Tax Regime and are subject to income tax according to general rules even if arising from non-Italian sources. Based on our experience, it is possible to obtain, through an advance ruling, the disapplication of such carve out rule so that even these gains will be covered by the Lump Sum Tax Regime. From our experience, the Revenue Agency is willing to grant such disapplication if the individual commits to remain resident in Italy for income tax purposes in the five years following the year of realization of the gain (see below for comments on the ruling procedure).
The duration of the Lump Sum Tax Regime
The option for the Lump Sum Tax Regime is effective for up to 15 tax years.
The possible extension to relatives
The Lump Sum Tax Regime can be extended to one or more qualifying family members (such as spouse and children) against the payment of an annual substitute tax of 25,000 Euro (rather than 200,000 Euro) per family member wishing to benefit from the regime.
Optional ruling procedure
A ruling on the interpretation and application of the rules of the Lump Sum Tax Regime may be requested to an ad hoc office of the Italian Revenue Agency. The ruling may be obtained even prior to the acquisition of Italian tax residence and does not imply an obligation to acquire Italian tax residence.
Among the others, a ruling may be helpful to obtain confirmation of:
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Eligibility for the Lump Sum Tax Regime;
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Whether a certain income or gain is sourced outside of Italy;
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The treatment of holding companies and trusts for Italian tax purposes (see further below);
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The disapplication of the specific anti-avoidance rule for foreign-source gains on substantial participations realized in the first 5 years of Italian tax residence (see further above).
Holding companies and trusts
If an individual moving to Italy under the Lump Sum Tax Regime holds his assets through holding companies, or is a settlor, trustee, or beneficiary of trusts, the specific features of these holding companies or trusts must be analysed. In certain cases, it may be advisable to seek confirmation, of the tax treatment of the holding company or trust, through a ruling.
Income tax treaties
The Italian tax authorities hold the view that individuals subject to the Italian Lump Sum Tax Regime are treaty residents under the income tax treaties signed by Italy (and will issue treaty residence certificates accordingly), unless the treaty provides for specific provisions denying treaty benefits to lump sum taxpayers.
2. Immigration options for non-EU/EEA (and non-Swiss) citizens
In order to legally reside in Italy, non-EU/EEA (and non-Swiss) citizens may be required to apply for a visa (to be converted into a residence permit). In general terms, if they are not moving to Italy for the purpose of working or studying in Italy, they would often use either the investor visa or the elective residence visa.
The main requirements for these two visas are the following:
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the investor visa is granted alternatively upon: (i) an investment of at least 2,000,000 € in bonds issued by the Italian Government; (ii) an investment of at least 500,000 € in equity instruments of an Italian company (250,000 € if the company is an innovative start-up); or (iii) a donation aimed at supporting a public investment project of at least 1,000,000 €;
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the elective residence visa is granted upon the proof by the applicant to derive sufficient passive income (from assets or pension) to support himself/herself and to have the availability of a suitable accommodation in Italy (either rented or owned). The elective residence visa does not grant the holder the right to work in Italy.
3. UK tax aspects of planning a relocation to Italy
For those individuals attracted to the Italian Lump Sum Tax Regime, they will need to be mindful of the following upon their relocation:
Loss of UK tax residence
An individual looking to emigrate from the UK to Italy will need advice on becoming non-UK resident under the UK’s statutory residence test. For someone who has been UK resident for more than 3 tax years, this can involve quite a significant reduction in the number of days (midnights) that they can still spend in the UK, depending in turn on the number of UK connections they also retain.
If it is not practical for an individual to cease UK residence, the individual may well be treated as "treaty-resident” in Italy under the so-called tie-breaker rules in the UK/Italy double tax treaty if, broadly speaking, they have closer connections with Italy than the UK following their relocation. If that is the case, the individual’s UK tax position will be broadly similar, though not identical to that of a non-UK resident. Careful consideration will also therefore need to be given to the treaty position.
Understanding the extent of continued exposure to UK income tax and capital gains tax and the impact of the double tax treaty on income taxes with Italy
Non-UK residents remain subject to UK taxation on certain kinds of UK source income and on capital gains relating to UK real estate. It will be important for an individual to understand the extent of any continued tax and filing obligations, subject to the application of the double tax treaty.
Impact of the temporary non-residence rules
The individual may also need to be mindful of the UK’s temporary non-residence rules if they resume UK residence within 6 tax years. Under these anti-avoidance rules, certain taxable events which occur during the period of non-UK residence can be treated as arising and therefore come into charge upon resuming UK residence.
Understanding the extent of continued exposure to UK inheritance tax regime and the impact of the double tax treaty on inheritance taxes with Italy
Under current law, UK domiciled individuals and non-UK domiciled individuals who have become “deemed domiciled” are subject to UK inheritance tax (IHT) on a worldwide basis.
The extent of a relocating individual’s continued exposure to IHT in respect of their non-UK situated assets will depend:
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in the case of a UK domiciliary, on whether their move to Italy is being made on a permanent basis such that the individual might eventually displace their UK domicile with an Italian domicile of choice and
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in the case of a non-UK domiciliary, on whether the individual had become and is still deemed domiciled for IHT purposes.
Only UK situated assets and those connected with UK residential property will remain exposed to IHT indefinitely, regardless of domicile.
As explained in our briefing note mentioned above, there are proposals to change the basis on which an individual is exposed to IHT with effect from 6 April 2025, so that residence rather than domicile/deemed domicile becomes the determining factor. Under the proposed changes, individuals who have been resident for at least 10 years will be subject to IHT on a worldwide basis and thereafter, will remain subject to IHT in respect of their non-UK situated assets for 10 years after ceasing UK residence.
It is currently still uncertain whether individuals who cease UK residence before 6 April 2025 will continue to be subject to the current rules relating to domicile and deemed domicile, or become subject to the proposed 10-year “tail” under the new IHT residence-based test.
The extent of a relocating individual’s continued exposure to IHT and in particular how this interacts with the taxing rights allocated under the double tax treaty relating to inheritance tax between the UK/Italy will need careful consideration.
4. Succession law/estate planning
Finally, consideration will also need to be given to the succession law position of the individual’s estate following their relocation, since in contrast to English law, which has testamentary freedom, Italy has forced heirship rules which entitle certain next of kin to claim specific portions of the deceased’s estate. It is likely that the individual’s testamentary arrangements will need to be updated to ensure that, where possible, their estate passes in line with their wishes and tax efficiently.
It is important for an individual planning a move to Italy under the Italian Lump Sum Tax Regime to obtain specialist advice on these tax, immigration and estate planning issues, from both a UK and Italian law perspective, as part of their relocation planning.
[1] The tax was equal to 100,000 Euro. It was increased to 200,000 Euro by the Law-Decree No. 113 of 9 August 2024. The Decree contained a grandfathering clause under which the increase in the amount of the tax to 200,000 Euro would only apply to individuals who move their habitual abode to Italy after 10 August 2024. Please note that, while the Decree has already entered into force, it still needs to be approved by the Parliament and further changes may be introduced upon approval.
[2] In very general terms, a participation in a company or entity (including partnership) may qualify as substantial if it exceeds 20%. The 20% threshold is reduced to 2% if the participated company or entity is listed. Rights to acquire a participation (e.g. warrants or options) must be taken into account. To ascertain whether a gain qualifies as a gain from the disposal of a substantial participation, all sales in any 12-month period must be considered; furthermore, a specific anti-avoidance rule may cover the fragmentation of a substantial participation by way of gift. Certain hybrid instruments may qualify as substantial participation too.
