In its Ruling n.83 of February 14, 2022, the Italian Tax Agency confirmed that Italy’s substituted tax regime (so-called flat tax, or forfeit) for high net worth individuals applies in a case in which international executives or managers of multinational companies perform their functions partly in Italy and partly outside of Italy, where the group’s local subsidiaries or business units are located. Italy operates a special tax regime by means of which a foreign or Italian national who has not been a resident of Italy in at least nine of the previous ten tax years, can move to and establish his or her tax residency in Italy, and elect to pay a fixed tax of 100,000 euro per year in substitution of the regular income tax on his or her foreign source income. The election is effective for fifteen years (but the taxpayer can opt out of the regime prior to the completion of the fifteen-year period without paying any additional tax). The repatriation of the income does not trigger any additional tax, and the taxpayer can work or engage in a business in Italy while being taxed under the substituted tax regime. In that case, any Italian source income is taxed under the regular income tax. For the purpose of the substituted tax, the source of the income is determined under the sourcing rules of the Italian income tax code. For employment or professional services income the source is the place where the employment is carried out or the services are performed. In ruling n. 83, the Tax Agency held that the employment income of an international executive or managerial personnel working partly within and partly without Italy for a multinational enterprise is allocated to Italian sources or foreign sources based on the number of days spent in Italy and abroad. The days in the computation can be calendar days or working days, with any fraction of a day spent in Italy counting as a full day. Depending on the nature of the functions performed (preparatory and ancillary work, compared to actual work performed on a project), the allocation based on “working” days can lead to a significant amount of income being allocated to a foreign source (or vice versa). The same is true in the case of a business or professional services carried out on specific projects. The tax administration also clarified that the same criteria apply for the purpose of determining the source of income arising from stock options, grants, deferred compensation, or similar incentives treated as employment income. In that case, the allocation is made with reference to the portion of the vesting period of the stock options or grants during which the employment was carried out in Italy and abroad. Upon exercise, the value of the stock allocated to the part of the vesting period in which the work was carried out abroad is foreign-source income falling within the scope of the substituted tax.