Italy is home to individuals of considerable wealth. In particular, medium and large businesses in Italy tend to be owned and managed by Italian families who need advice on the structuring of the generational transfer of the business. Furthermore, Italy attracts foreigners that relocate to Italy under the Italian forfait (lump sum) tax regime for individuals moving to Italy (see Section II.iv). Italy also attracts significant investments, including those in Italian real estate, by non-resident private clients, who need advice on the structuring of the acquisition, ownership and disposal of such investments.
i Income tax
Residents are subject to income tax on their worldwide income, including capital gains. Non-residents are subject to income only on their Italian-sourced income.
For income tax purposes, an individual is regarded as a resident of Italy if, for most of the tax period (i.e., the calendar year), he or she is registered with the Official Register of Italian residents, has his or her habitual abode in Italy, or has the main seat of his or her business and interests in Italy (similar to the Organisation for Economic Co-operation and Development (OECD) concept of a 'centre of vital interests').
The total taxable income of individuals is subject to income tax at progressive rates up to 43 per cent, plus local surcharges that depend on the municipality of residence.
That said, income from financial assets, as well as capital gains upon the sale of such assets, is generally taxed in the hands of individuals at a flat rate of 26 per cent (12.5 per cent on the interest and capital gains on Italian governmental bonds and bonds issued by foreign states providing for exchange of information). This favourable regime does not, however, apply to dividends and capital gains from participations in unlisted companies and partnerships established in blacklisted jurisdictions, which are entirely liable to tax.
Capital losses on financial assets can offset capital gains of the same category and be carried forward for five years. Furthermore, an optional regime is available whereby capital gains and losses on certain financial assets are taxed on an accrual – rather than cash – basis and certain income from financial assets may be offset by these accrued capital losses.
Capital gains realised by individuals upon the sale of real estate, either owned for more than five years or inherited, are generally exempt from income tax. Furthermore, Italy does not tax capital gains realised by individuals upon the sale of assets other than financial assets and real estate (such as paintings or statues) unless such gains are realised in the context of a business or of a professional activity (or speculative transaction).
Resident individuals are subject to reporting obligations on foreign-held assets. Since 2013, these obligations also apply to foreign-held assets held by companies, partnerships, trusts, foundations and other entities to the extent that the resident individual qualifies as the beneficial owner for Italian anti-money laundering purposes. The broadening of the definition of beneficial owner, which follows the implementation of the EU Directive 2015/849 of 20 May 2015, has triggered the broadening of the scope of these reporting obligations. Failure to comply with these reporting obligations may result in very severe penalties.
Controlled foreign corporation (CFC) rules may apply to companies, partnerships or other entities established in jurisdictions (other than EU Member States and European Economic Area (EEA) Member States providing for exchange of information) where the nominal tax rate is lower than 50 per cent of the Italian nominal tax rate. They may also apply to companies, partnerships or other entities established outside the above jurisdictions if the CFC is controlled by an Italian resident; subject to a foreign effective tax rate lower than 50 per cent of the effective tax rate that would have applied if the CFC were resident in Italy; and derives revenues that are, for more than 50 per cent, either passive or from intra-group services.
Italy does not have a part-year residence rule. Indeed, in any calendar year, an individual either is or is not a resident for the whole year. Consequently, if an individual moves to Italy in the second half of the calendar year, he or she will be regarded as non-resident in the year of transfer because the conditions for tax residence will not be met for most of the tax period. This feature of the Italian tax system may allow for the optimisation of the tax regime upon transfer of residence. On the other hand, if an individual moves to Italy in the first half of the calendar year, he or she will be regarded as resident for the whole year of transfer.
Finally, no exit tax is levied on individuals (the exception being for assets held in the capacity of entrepreneur).
ii Inheritance and gift tax
Inheritance and gift tax is levied on worldwide assets if the deceased or donor had his or her habitual abode in Italy on the date of demise or gift, otherwise it only applies to Italian situs assets.
In particular, transfers upon death and gifts are subject to inheritance and gift tax at the following rates and with the following exempt amounts:
- 4 per cent if the transfer is made to spouses and direct descendants or ancestors; here, the transfer is subject to tax on the value exceeding €1 million (this exempt amount applies to each beneficiary);
- 6 per cent if the transfer is made to brothers and sisters; here, the transfer is subject to tax on the value exceeding €100,000 (this exempt amount applies to each beneficiary);
- 6 per cent if the transfer is made to relatives up to the fourth degree, to persons related by direct affinity as well as to persons related by collateral affinity up to the third degree; and
- 8 per cent in all other cases.
Same-sex civil unions have been recently introduced under Italian civil law (same-sex marriages or civil unions executed abroad have been assimilated to Italian same-sex civil union). Such introduction has the effect of making them subject to the same tax regime (e.g., rates and exempt amount) applicable to marriages.
The rules for the calculation of the taxable base may be extremely favourable. For instance, the value of unlisted participations in companies or partnerships is generally equal to the corresponding quota of the book net equity of the company or partnership resulting from the latest balance sheet drawn up pursuant to the applicable law. The value of the Italian real estate is, in principle, equal to its fair market value, but the tax office cannot dispute the value declared if it is at least equal to the value resulting from the cadastral registers, which is generally much lower than the fair market value.
Exemptions from inheritance and gift tax may apply to assets of cultural value, while Italian governmental bonds are free from inheritance tax.
An exemption from inheritance and gift tax applies to the transfer of businesses and participations in companies and partnerships to spouses or descendants.
For participations in Italian-resident companies, the exemption is subject to the additional condition that the recipient acquires or reaches a controlling shareholding. The control must be retained for five years following the transfer, otherwise the exemption will be clawed back. The tax authorities have clarified that the exemption would apply to the transfer of a controlling shareholding in joint ownership to a spouse or descendants and may apply to the settlement of a controlling shareholding into a trust for their exclusive benefit. For instance, if an individual holding a 60 per cent participation in an Italian-resident company were to transfer a 30 per cent participation to each of his or her two children, the exemption would not apply. On the other hand, the settlement of the 60 per cent participation into a trust for the exclusive benefit of the two children would qualify for the exemption, provided that the trust was properly structured.
The application of the exemption to non-resident companies is a source of debate. According to one interpretation, the exemption is not available to non-resident companies, which would conflict with EU law, where applicable. According to a second interpretation, the exemption applies to non-resident companies irrespective of the control condition. According to a third interpretation, the exemption applies to non-resident companies under the same control condition applicable to resident companies. In a private ruling dated 2 August 2011, the tax authorities held the third interpretation to be the case.
Finally, individuals who are subject to Italian inheritance and gift tax on their worldwide assets can benefit from the Italian inheritance, estate and gift tax treaties, which may preclude the levy of more burdensome taxes in other jurisdictions. Treaties for the avoidance of double taxation on inheritance and estate tax are in force with Denmark, France, Greece, Israel, Sweden, the United Kingdom and the United States. The treaty with France also covers gift tax. For instance, a UK-domiciled or deemed domiciled individual may transfer his or her habitual abode to Italy and become immediately exposed to Italian inheritance tax on his or her worldwide estate, but, as a consequence, he or she becomes treaty protected from UK inheritance tax on non-UK situs assets.
iii Wealth taxes
Italian legislation does not provide for a comprehensive wealth tax. In very general terms, wealth taxes apply at proportional rates to the following:
- Financial assets held in Italy: foreign assets deposited with an Italian financial intermediary should be regarded as assets held in Italy for the purpose of wealth taxes provision. The annual rate is 0.2 per cent. The taxable base is calculated on the basis of the value of the assets laid down in the periodic reports issued by the Italian financial intermediary with which the assets are deposited. Current accounts are subject to tax at a fixed negligible amount.
- Financial assets held abroad by resident individuals: the annual rate is 0.2 per cent. The taxable base depends on the type of financial asset. In general terms, the taxable base is the trading value for listed assets. In other cases, the taxable base is generally the nominal value. Current accounts are subject to tax at a fixed negligible amount.
- Real estate located abroad held by resident individuals: the annual rate is 0.76 per cent. The taxable base is generally equal to the purchase price of the real estate, but if the real estate is located in an EU or EEA Member State providing for exchange of information, the taxable base is equal to the value resulting from foreign cadastral registers or other deemed value relevant to foreign income, wealth or transfer taxes and, in the absence of such value, is generally equal to the purchase price.
Another tax applies on the value of Italian real estate, calculated on the basis of the value resulting from the cadastral registers. Favourable tax regimes may apply to, for example, the main abode.
iv New forfait tax regime for individuals moving to Italy
The Budget Law 2017, which entered into force on 1 January 2017, introduced a special forfait tax regime (the substitute tax regime) for individuals who transfer their tax residence to Italy. This regime is meant to attract high net worth individuals to Italy.
Conditions for the substitute tax regime
The option for the substitute tax regime is available to individuals (whether Italian or foreign nationals) who acquire Italian tax residence. The substitute tax regime is subject to the following conditions:
- the individual must have been non-resident in Italy for Italian tax purposes in at least nine of the 10 years prior to the first year of effect of the option; and
- the individual must opt for the aforementioned substitute tax option in the annual tax return.
Substitute tax regime
The substitute tax regime is as follows:
- all foreign-source income and gains are subject to a substitute tax (in lieu of the levy of income tax according to general rules) equal to €100,000 per year (such income and gains are not subject to any additional taxation if remitted to Italy);
- foreign assets are not subject to wealth taxes, inheritance and gift tax, and reporting obligations;
- as an exception, foreign-source capital gains on substantial shareholdings realised in the first five years of Italian tax residence are subject to income tax according to general rules. As a consequence, during such five-year period, substantial shareholdings are subject to reporting obligations. This exception is a specific anti-avoidance rule and, therefore, depending on the specific facts and circumstances, it can be disapplied through a mandatory advance ruling (e.g., if the taxpayer undertakes to stay in Italy for at least five years after the sale); and
- the individual can opt for one or more foreign states to be excluded from the scope of the substitute tax regime.
Duration of the substitute tax regime
The option for the substitute tax regime is effective up to a maximum period of 15 years. The option can be revoked by the individual but, if revoked, is no longer available.
Possible extension to relatives
The substitute tax regime can be extended to one or more qualifying family members against the payment of an annual substitute tax of €25,000 (rather than €100,000) per family member benefiting from such a regime. Therefore, if, for example, two spouses transfer their tax residence to Italy and both of them wish to benefit from the substitute tax regime, the overall annual substitute tax would be €125,000.
Optional ruling procedure
A ruling on the application of the substitute tax regime may be requested, even before the transfer of tax residence to Italy, to an ad hoc office of the Italian tax authorities.
i Applicable law
Italian international private law dealing with successions are laid down in EU Regulation No. 650/2012 of 4 July 2012. The Regulation provides for the general rule whereby the law applicable to the succession as a whole will be the law of the state of habitual residence of the deceased at the date of death. In limited circumstances, the law of the state the deceased was manifestly more closely connected with at the date of death will apply. An individual can, however, opt for the succession law of the state whose nationality he or she possesses either upon the exercise of the option or upon death. In the case of multiple nationalities, the individual can choose the law of any of the states whose nationality he or she possesses. The conflict of law rules provided by the chosen law will not apply.
ii Forced heirship rules and succession agreements
Italian succession law provides for forced heirship rules
The reserved quota of the estate, which is reserved to forced heirs and, therefore, cannot be freely disposed of, depends on the composition of the family of the deceased upon death. For instance, if the spouse and three children are the forced heirs, 50 per cent of the estate of the deceased is the reserved quota for the children, to be divided in equal shares. In this case, the reserved quota for the spouse is equal to 25 per cent of the estate of the deceased, while the remaining 25 per cent of the estate can be freely disposed of.
For the purposes of calculating the reserved quota, the value of the estate of the deceased is equal to the value of all the assets owned at the time of death, net of any debts, plus the value of all assets that were gifted by the deceased during his or her life.
Italian law provides for the discretionary right of the forced heirs to claim the 'reduction' of the transfers made during lifetime or by way of will that prejudice their reserved quota. This clawback action – 'reduction action' – if exercised, is aimed at making transfers in excess of the disposable quota partially or totally ineffective. The transfers will remain fully valid and effective should the forced heirs not exercise the reduction action.
Succession agreements are null and void under Italian law, so that an individual cannot waive, or in any other way dispose of, his or her rights, including forced heirship rights, under a future succession.
The ban on succession agreements has only one exception: under a family pact a business, or a qualifying participation in a company carrying on a business, can be transferred to descendants under an agreement between all the living forced heirs, whereby the forced heirs, not receiving their share of the business or of the qualifying participation, may either be granted a cash amount or other assets by the transferees, or renounce, in whole or part, their reserved quota. It is fair to say that the family pact has not been widely used.
IV WEALTH STRUCTURING and REGULATION
Despite the fact that Italy is a civil law jurisdiction, trusts are widely used, particularly for the purpose of governing the generational transfer of businesses. In this context, the use of trusts may also achieve the exemption from inheritance and gift tax for the transfer of a controlling shareholding (see Section II.ii).
Recognition of foreign trusts
Italian civil law does not regulate trusts, but trusts regulated by foreign laws are recognised in Italy pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition, which was ratified by Italy in 1989. Furthermore, in 2016, specific civil law provisions have been introduced to regulate trusts created for the benefit of individuals with qualifying disabilities. In any event, the settlement of assets into a trust is considered a gift from a succession law perspective, therefore it is relevant to the calculation of the value of the estate of the deceased for the purpose of calculating the reserved quota (see Section III.ii).
The issue of the recognition of 'domestic trusts'2 has also arisen. The prevailing case law has taken the view that domestic trusts must be recognised to the extent that they pursue a legitimate interest, but no explicit judgment of the Supreme Court has ever been issued on this specific point.
Tax regime of trusts
Income tax provisions recognise trusts as taxable persons for corporate income tax purposes, subject to the comments below on transparent and disregarded trusts.
A trust qualifies as resident if either its seat of management (similar to the OECD's notion of a 'place of effective management') or its main object (the place where the day-by-day activities mainly take place) are located in Italy for most of the tax period. Deeming rules may apply to trusts established in jurisdictions not providing for exchange of information. Furthermore, the tax authorities take the view that, if a trust holds only real estate and such real estate is located mainly in Italy, its main object is located in Italy, and, accordingly, the trust is resident in Italy.3
Under the assumption that a trust, resident or otherwise, does not carry out a business activity, it may benefit from the 12.5 per cent or 26 per cent final withholding taxes or substitute taxes on income and capital gains from financial assets that would apply to individuals (see Section II.i) and from the exemption from income tax on capital gains on real estate owned for more than five years. Furthermore, anti-avoidance provisions targeting the use of business assets by shareholders or partners or the use of dummy companies or partnerships do not apply to trusts.
Income tax law provides for a sort of transparency regime for trusts that have 'identified beneficiaries'. The income imputed to the identified beneficiaries qualifies as income from capital and is subject to progressive tax rates if the beneficiaries are individuals. A beneficiary qualifies as an 'identified beneficiary' to the extent that he or she holds a current unconditional right to claim a share of the income generated by the assets held in trust; for example, the whole or a percentage of the income of the trust or the income from certain assets held in trust.
Revocable trusts are disregarded for income tax purposes so that the income from the trust assets is imputed directly to the settlor. Furthermore, the income can be imputed directly to the settlor or the beneficiaries should the overall analysis show that either the settlor or the beneficiaries have a power or de facto control or influence to manage the trust assets or dispose of either the assets held in trust or the income from such assets. In these cases, the income is subject to tax as if it were cashed directly by the settlor or the beneficiaries. In Circular No. 61 of 27 December 2010, the tax authorities provided a non-exhaustive list of examples of disregarded trusts, including trusts that can be terminated by the settlor or the beneficiaries, trusts where the beneficiaries have a right to receive advancement of capital and trusts where the settlor has the power to change the beneficiaries. Also, the power of the settlor to revoke the trustee may be one of the factors leading to the trust being disregarded by the tax authorities.4
Distributions of income to the beneficiaries
The tax authorities clarified that distributions of income from resident opaque trusts are not subject to income tax in the hands of the beneficiaries since the income has already been subject to tax at the level of the trust.5
On the other hand, the income tax regime for distributions of income, including capital gains and accumulated income and capital gains, from a non-resident opaque trust with foreign-sourced income to an Italian-resident beneficiary is not clear.
The distributions of income are not relevant to income tax to the extent that the trust is either transparent or disregarded.
Inheritance and gift tax
Following the 2006 reform of inheritance and gift tax, the tax authorities hold that inheritance and gift tax will be due by the trustee at the time of the addition of the assets to the trust fund and that the applicable rate and the possible exempt amounts are calculated by making reference to the relationship between the settlor and the beneficiaries (this approach to levy inheritance and gift tax on the addition to the trust fund has been upheld, with reference to trusts created after the 2006 reform of inheritance and gift tax, by the majority decisions of the Supreme Court; in judgment No. 3886 of 25 February 2015, the Court also upheld the view of the tax authorities that, to the extent that the settlor is a beneficiary, the applicable gift tax rate is the highest 8 per cent rate). In certain instances, however, favourable inheritance and gift tax rates and exempt amounts may not be effectively benefited from. For instance, in the event of a discretionary trust having a class of beneficiaries with different degrees of family relationship with the settlor, the highest rate will apply as the capital may be wholly distributed to the family member that qualifies for the highest rate. Exemptions from inheritance and gift tax for the transfer of businesses and participations in companies and partnerships to the spouse or descendants may be feasible (see Section II.ii). From an income tax perspective, the transfer of assets from the settlor to the trustee does not trigger the taxation of the latent gains and the tax basis is rolled over to the transferee.
The tax authorities have further stated that distributions to the beneficiaries will not be a taxable event for inheritance and gift tax purposes, since inheritance and gift tax was applied at the time the addition to the trust fund was made. However, according to the Supreme Court (decisions Nos. 25478, 25479 and 25480 of 18 December 2015), to the extent that the addition to the trust fund occurred prior to the 2006 reform of inheritance and gift tax, the distributions to the beneficiaries should be a taxable event, since the addition of assets to the trust fund was not a taxable event prior to the 2006 reform.
ii Life insurance policies
Life insurance policies are widely used thanks to the high flexibility they grant to the policyholder, who can wholly or partly redeem the policy or change the beneficiaries at any time. From an income tax perspective, the income is not taxed until either redemption or death of the insured. In the event of redemption or death, the income is subject to a 26 per cent tax (12.5 per cent to the extent that the income on the underlying capital consists of interest and capital gains on Italian governmental bonds and bonds issued by foreign states providing for exchange of information). The income is equal to the difference between the amount received and the premiums paid (so that the policy allows the full set-off of the underlying income, gains and losses); however, in case of death, the beneficiary is exempt from tax on the portion of the income attributable to the life risk component. Finally, transfer to the beneficiary upon the death of the insured is not mortis causa, since the beneficiary has a direct entitlement to the underlying capital, and, accordingly, is not subject to inheritance tax.
iii Gift with reservation of usufruct
The gift of bare ownership with the reservation of usufruct allows the donor, usufruct holder, to continue to enjoy the use of the asset and the income therefrom for his or her lifetime. To the extent that the asset is a shareholding the donor may also retain the voting rights. Gift tax is levied on the value of the bare ownership only. Such value is calculated on the basis of percentages provided by tax legislation and based on the age of the usufruct holder. Upon the death of the usufruct holder, the usufruct is extinguished and the bare owner becomes the full owner of the assets, but the consolidation of bare ownership with usufruct does not qualify as a mortis causa transfer under the Italian civil law. Therefore, it does not trigger the levy of inheritance tax.
iv Non-commercial partnership
The resident non-commercial partnership is widely used, particularly to hold real estate; it may be used to avoid the fragmentation of family real estate. Furthermore, the splitting of voting rights from profit participation rights may be achieved. Individuals other than family members may be prevented from acquiring an interest in the partnership and from being involved in the management of the real estate. The resident non-commercial partnership is fiscally transparent. Therefore, the beneficial regimes applicable to real estate held by individuals are preserved (e.g., the exemption from income tax on gains on real estate owned for more than five years). Furthermore, anti-avoidance provisions targeting the use of business assets by shareholders or partners or the use of dummy companies or partnerships do not apply to the resident non-commercial partnership.
V OUTLOOK and CONCLUSIONS
The introduction of the new Italian forfait tax regime for individuals moving to Italy (see Section II.iv) has made Italy one of the most appealing European jurisdictions for high net worth individuals to move to. The regime has gained significant success and specific provisions have been issued to ease the granting of entry visas for non-EU nationals.
For those outside the scope of the aforementioned new Italian forfait tax regime, the scope of reporting obligations on foreign-held assets (see above) has been broadened as a consequence of the expansion of the notion of beneficial owner by the EU Directive 2015/849 of 20 May 2015. This expansion is particularly relevant to Italian-resident beneficiaries of non-resident trusts.
1 Nicola Saccardo is a partner at Maisto e Associati.
2 Trusts whose settlor, beneficiaries and trust property are closely connected with Italy.
3 Circular No. 48 of 6 August 2007.
4 This approach was rejected by the provincial tax court of Novara, judgment No. 73/06/13 deposited on 21 May 2013. More recently, another first degree local court (Provincial tax court of Varese, Chamber 3, judgment No. 305 of 28 May 2015) rejected the assessment of the tax authorities. In particular, the tax authorities claimed that a trust was to be disregarded on the ground that the protector had significant powers, the protector and the beneficiaries had, by way of a joint decision, the power to remove and appoint the trustee ad nutum, and the trustee was entitled to a limited remuneration. On that occasion, the court held that such elements were not sufficient to disregard the trust.
5 Circular No. 48/2007; Ruling No. 425 of 5 November 2008.