Italy taxes various categories of financial income – namely dividends, interest and capital gains – earned by private investors outside the carrying on of a trade or business, by way of a substitute tax charged on the gross amount of the income at the flat rate of 26 percent.

With effect from January 1, 2018, capital gains are no longer categorized as gains realized from the sale of qualified shareholdings (i.e., shareholdings exceeding a minimum percentage of a company’s stock measured by vote or value), which were partially exempt under Italy’s participation exemption rules, and partially taxed, as ordinary income, and gains realized from the sale of portfolio shareholdings (which were subject to the substituted tax), and are all taxed at the 26 percent substituted tax rate.

In case of dividends, interest and capital gains earned through an Italian-based bank or financial intermediary, the bank or financial intermediary which collects the income on behalf of its customers applies the 26 percent substituted tax and credit the net amount of the income to the customers.

In case of dividends, interest or capital gains that are earned form investments held outside of Italy, and without the intermediation of an Italian-based bank or financial institution, the taxpayer is required to self-report the income on a separate section of his or her Italian income tax return, and compute the 26 percent substituted tax, which adds up to the ordinary income tax due on taxpayer’s general income.

One significant issue arising from Italy’s method of taxation of financial income described above is that no foreign tax credit is allowed to be computed, on the Italian income tax return, for any foreign income tax paid in respect of foreign-source financial income earned from investments held outside of Italy and reported by an Italian resident taxpayer on the Italian income tax return.

Under the general provisions of the Italian income tax code, any foreign tax credit for foreign income taxes paid on foreign-source income is limited by a fraction that bears, at the numerator, the foreign-source portion of the taxpayer’s general income, and, at the denominator, the total amount of the taxpayer’s general income.

Since the income subject to the 26 percent substituted taxed is separately stated on the return and does not fall within the taxpayer’s general income pool, and the 26 percent substituted tax is charged separately from the general income tax due on taxpayer’s general income, the result of the limitation fraction is zero.

The 26 percent substituted tax is mandatory. Neither the provisions of the tax code nor the mechanical steps for the preparation of the Italian income tax return give the taxpayer the election to report the financial income within the general income pool, compute the Italian tax on that income at graduated rates, and compute and take a credit for the foreign income taxes paid on that income to educe the Italian general income tax, even when that computation would lead to a lower tax than the tax computed by charging the 26 percent substituted tax rate.

For American taxpayers living in Italy, the issue affects the taxation of dividends and interest earned from their U.S. investments. Capital gains are generally classified as foreign source, under the U.S. Internal Revenue Code, based on the residency of the taxpayer, which would allow a foreign tax credit in the United States for the Italian substituted tax paid in Italy.

For all other Italian-resident taxpayers (Italian citizens or foreign national alike) which invest outside of Italy, the issue extends to capital gains realized from the sale of shares of or other ownership interests held in foreign entities, and which are subject to tax in the foreign country in which the entity is organized, based on the criteria of the entity’s residency or place of organization. That is particularly true for gains realized from the sale of shares in privately-held company, such as start-ups and the like.

We believe that Italy’s 26 percent substituted tax on financial income, with the denial of a foreign tax credit for foreign income taxes paid on foreign source financial income, is a potential violation of the provision of Article 23 of Italy’s tax treaties. The typical languages of a treaty’s Article 23 requires Italy to grant a foreign tax credit for foreign income taxes paid on foreign source income, and under Italy’s constitutional law system, tax tarries prevail over domestic tax law.

The language of Article 23 of Italy-U.S. income tax treaty appears to support the taxpayer’s position. In particular, the first part of paragraph 3 of Article 23 appears to clearly require that Italy grants the credit, by providing as follows:

“If a resident of Italy derives items of income which are taxable in the United States under the Convention (without regard to paragraph 2(b) of Article 1 (Personal Scope)), Italy may, in determining its income taxes specified in Article 2 of this Convention, include in the basis upon which such taxes are imposed the said items of income (unless specified provisions of this Convention otherwise provide). In such case, Italy shall deduct from the taxes so calculated the tax on income paid to the United States, but in an amount not exceeding that proportion of the aforesaid Italian tax which such items of income bear to the entire income”.

The second part of paragraph 3 of Article 23 allows Italy to deny the foreign tax credit solely in the event that a particular item of foreign income is subject to a flat rate withholding tax separately from the general tax on general income, at the request of the taxpayer:

“However, no deduction will be granted if the item of income is subjected in Italy to a final withholding tax by request of the recipient of the said income in accordance with Italian law”.

As explained above, the 26 percent substituted tax is mandatory, and the Italian income tax code does not grant the taxpayer the ability to declare the income in the general income pool and reduce his or her tax by a credit for the foreign income taxes paid on foreign-source financial income.

We are not aware of any court case, administrative guidance or tax ruling addressing the issue.

Considering the dramatic increase of the substitute tax rate on financial income, which raised from 12.5 percent to 26 percent in the last few years, the issue has clearly become substantial for many taxpayers. It is reasonable to expect that the matter will be brought to the attention for the Italian tax administration, in form a ruling request, or, more likely, the denial of the credit will be challenged and the matter will be ultimately decided by the tax courts or the Supreme Court.

With its resolution n. 53/E issued on May 29, 2019 the Italian tax agency issued some important clarifications on the exact scope of the Italian international tax reporting rules in case of foreign assets held through trusts, foundations or similar entities.

In particular, the ruling focuses upon the interpretation of the term “beneficial owner”, which applies and is used to identify the individuals subject to the duty to report.

Under Italian law (article 4, paragraph 1 of Law Decree n. 167 of 6/28/1990), resident individual taxpayers and non-commercial entities such as foundations and trusts have the duty to report, on a specific section of their Italian income tax return (so called section RW), any assets that they own outside of Italy, which are capable of producing foreign-source income taxable to Italian taxpayers in Italy.

The duty to report falls upon those individuals who are the legal owners of the foreign reportable assets, as well those individuals who indirectly own the assets through intermediaries, fiduciaries, conduits or similar legal arrangements, through which they have the dominion and control over those assets and enjoy the economic benefit of the income arising therefrom.

The term beneficial owner has been enacted to properly extend the duty to report beyond the mere holding of the legal title to foreign assets, to the actual control and enjoyment of those assets and associated income.

The tax statute does not uses its own definition of the term beneficial owner, but, rather, it incorporates by reference the definition of the term beneficial owner which is provided in the anti money laundering legislation.

As recently amended by way of Legislative Decree n. 90 of 2017, which transposed into Italian law the provisions of the EU IV Anti Money Laundering Directive (2015/849/EU), Italian anti money laundering law provides (at the new article 20 of legislative decree n. 231 of 2007) that, in case of private foundations, trusts and similar entities, beneficial owners are: the settlor, the trustee, the guardian, the beneficiaries of the trust, if identified, or the class or classes of persons for the ultimate benefit of which the assets are held in trust.

The issue addressed in the ruling was whether an Italian resident trustee of an Italian resident trust with investments outside of Italy, who falls within the definition of beneficial owner of those investments as provided in the anti money laundering statute, had the duty to report the investments on his own income tax return.

The taxpayer took the position that the meaning of the term beneficial owner as set forth in the anti money laundering legislation, and incorporated by reference into the tax statute, must be interpreted in a way that is consistent with the ratio and overall purpose of the income tax reporting rules, namely that of allowing the tax administration to monitor the existence of foreign assets owned or controlled by Italian resident taxpayers potentially generating foreign source income taxable in Italy. In that context, according to the taxpayer, the trustee should have no duty to report, on his own income tax returns, the foreign assets of the trust that he owns and administer not for his own benefit, but on behalf of the trust and in the interest of the settlor and the trust’s ultimate beneficiaries.

The Italian tax agency, in its ruling approving the position of the taxpayer, confirmed that the tax reporting rules apply in case of foreign investments legally or beneficially owned by Italian resident taxpayers, the income arising from which would be taxable to them in Italy. The objective of the tax reporting rules is to allow the tax administration to monitor those assets and associated income and make sure that such income is properly taxed in Italy, to the taxpayers who own it, whenever the income is realized and a tax becomes due. The tax administration acknowledged that the anti money laundering definition of beneficial owner should not apply literally, but should be interpreted – and narrowed down, if required – so that it is consistent with the scope and purpose of the international tax reporting rules, as previously clarified.

The clarification is very important, in principle, and is relevant also in other situations in which the same issue would arise.

One situation concerns trusts classified as fiscally nontransparent (opaque) trusts for Italian tax purposes, which own investments located outside of Italy. Opaque trusts are those trusts which do not have identified beneficiaries with an immediate right to current distributions out of the income or principal of the trust. In that case, the income arising from the investments held in trust is attributed to and treated as income of the trust, for Italian tax purpose, and it is not immediately taxed to the beneficiaries of the trust, in Italy. Following the logic set forth in ruling 53/E, under those circumstances no duty to report the trust’s foreign assets should fall upon the trust’s Italian resident beneficiaries. Indeed, the trust beneficiaries to do not own those assets, and are not taxable on the income of the trust earned out of them.

Similarly, under the same circumstances, the settlor of the trust who does not retain any right to the principal or income of the trust, should not be subject the duty to report.

It is interesting to monitor the future developments in this area of Italian tax law, in which some uncertainty still lingers with particular regard to tax reporting of foreign assets and taxation of foreign source income of foreign trusts with Italian resident settlor and beneficiaries.

We attach below a link to resolution n. 53/E of May 29, 2019:


With its decision n. 5608 of December 10, 2018 the Italian Provincial Tax Court of Milan ruled against the (ab)use of so called “unit linked” life insurance policies for tax avoidance purposes.

The decision of the tax court refers to the latest rulings of the Supreme Court on the matter and represents a significant step towards a more decisive step towards a crack-down on a potentially abusive tax practice.

Under Italian tax law, in case of cash value life insurance policies a taxpayer is allowed to defer the payment of the tax on the increase in value of the policy until the payment of the value of the policy to the beneficiaries, upon the death of the policyholder, or to the policyholder, upon the expiration or surrender of the contract. At that time, the difference between what the taxpayer gets back and what he or she paid by way of insurance premiums is taxed as income from capital, with a fixed-rate 26 percent tax withheld directly by the issuer.

A Unit-Linked Insurance Policy is a combination of a life insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company providing such insurance is pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds. Each policyholder has the option to select a personalized investment mix based on his/her investment needs and risk appetite. Like mutual funds, each policyholder’s Unit-Linked Insurance Plan holds a certain number of fund units, each of which has a net asset value that is declared on a daily basis and varies based on market conditions and performance of the plan’s underlying investments. A portion of premium goes towards mortality charges i.e. providing life cover. The remaining portion gets invested funds of policyholder’s choice. Invested funds continue to earn market linked returns.

The Tax Court referred to the Supreme Court’s ruling n. 10333 of 2018 which upheld the decision of the Appellate Court of Milan n. 220 or 2016.

According to ruling n. 1033, in the absence of some required traits of a typical permanent life insurance policy, such as the guarantee of the payment of the principal amount of premiums upon termination of the contract and the assumption by the issuer of risk of death of the policyholder (demographic risk), the contract should be treated as an investment plan (i.e. a mutual fund) and the taxpayer should be taxed currently on the income arising from the insurance policy’s underlying investments.

Under the facts of the case, the policyholder (a well known professional soccer player) underwrote an investment plan labelled as life insurance policy and issued by a foreign company, which gave him the unlimited right to make withdrawals from or payments to the insurance plan, during the course of the contract, and the power to direct and manage the investment of the underlying assets, while the issuer’s only obligation was that of paying an amount equal to the net asset value of the underlying investments at the time of the policyholder’s death or the contractual termination of the policy.

The tax court treated the contract as a financial investment, applied the imputed rate of return provided for under article 6 of Law Decree n. 167 of 1990 (in the absence of a taxpayer’s of the actual amount of income generated by the underlying investments), and assessed a tax of euro 64,004 plus interest and a penalty in the amount of euro 76,804.80.

Italian taxpayers should consider different strategies to obtain the benefits of deferral of tax on income arising from their financial investments, such as the use of nonresident discretionary or support trusts properly planned and designed to provide adequate protection of the invested capital and desired benefits in case of death or upon retirement.

A link to the Tax Court’s decision is provided below:
CTP 10-12-2018 n. 5608)

The Italian financial newspaper “Il Sole 24 Ore” reported today that Koering, the French-owned conglomerate which controls some of the most renowned and revered luxury brands in the world, such as Gucci, Bottega Veneta, Saint Laurent, Pomellato and others associated to clothing, jewelry, bags and other luxury products, settled a tax case with the Italian tax agency pursuant to which it will pay to Italy the record amount of euro 1.250 billion in assessed and unpaid income taxes and penalties relating to the period 2011-2017.

The case originates from a criminal inquiry started by the Italian tax police (“Guardia di Finanza”) in the month of December 2017, and was closed on November 27, 2018 with the recommendation to the criminal judge to charge the current and former president and chief executive officer of the Italian company Guccio Gucci S.p.A. with the crimes of tax evasion and failure to file Italian income tax return. Under Italian criminal code, failure to file a tax return when due is independently classified as a tax crime, whenever the unpaid tax due exceed a certain threshold (currently set at euro 50,000) and is punished with imprisonment for a minimum of eighteen months up to a maximum of four years. The general manager of the company who should have filed the tax return is personally liable for the crime. The general provisions of the criminal code would still require criminal intent, but criminal investigators and judges often issue the charge for the crime, leaving it to taxpayers and prosecutors to argue during the criminal proceedings and at trial about the actual existence of the criminal intent, which is a mental state difficult to prove or disprove and often inferred form the circumstances of the case.

The facts of the investigation concern Guccio Gucci S.p.A., the Italian operating company of the group, and Luxury Goods International S.A., a Swiss company of the group based in the Canton Ticino of Switzerland (the predominately Italian language canton sitting at the border with Italy).

Years earlier, the Italian company, owner of the GUCCI brand, had licensed the brand to the Swiss company, together with the rights to exploit and manage the brand for the purpose of the global marketing, commercialization and sale of GUCCI products in Italy and worldwide. According to the investigators, however, most of the marketing activities for the distribution and sale of the GUCCI products actually took place at the premises of the Italian company in Milan. As a result, the investigators took the position that the Italian company, in fact, operated – and should be re-characterized – as a “silent” or undeclared permanent establishment of the Swiss company, and all of the profits of the Swiss company that are attributable to the activities carried out at its “silent” permanent establishment in Italy should be subject to corporate income tax there. In addition to that, the investigators also challenged the transfer prices charged between the two affiliated companies in respect of the license and use of the brand.

A permanent establishment in Italy is subject to the same corporate filing requirements as an Italian incorporated entity, and, for tax purposes, it is treated as a separate taxpaying entity with the duty to file an Italian corporate income tax return, report its Italian taxable income and self-assess the Italian corporate income tax due. int must keep Italian financial books and file a financial return which is the staring point for the calculation of its taxable income in Italy.

As reported in the news, the taxpayer settled the separate tax audit with the Italian tax agency for the amount of 897 million euro in taxes plus interest and penalties for a total amount of 1.25 billion euro, which is a record amount for similar tax cases in Italy. It is worth noting that a criminal tax case and a related tax audit are independent and follow separate paths. The settlement of the tax audit does not automatically terminate the criminal case, which will run its independent course (and will be ultimately decided by a criminal court according to its own interpretation and application of relevant tax law concepts to the facts of the case). The taxpayer’s strategy is that the prompt settlement with the tax agency (and the big bill that will be paid to the Italian Treasury), will help helping the taxpayer to prove its good faith, disprove any criminal intent and ultimately avoid harsher criminal penalties.

Koering is controlled by the French billionaire Francois-Henry Pinault and has a total revenue of 13.6 billion euro and EBITDA of 4.4 billion euro for 2018.

We do not know all of the details of the facts of the case, and we cannot elaborate on the reasons why the taxpayer did not decide to fight the criminal case and related tax audit in court. However, unless the facts were egregiously bad or investigators had found the proverbial “smoking gun”, the circumstance that the case was immediately settled at the outset is telling about the realistic approach taxpayers and their tax advisors sometimes prefer to take, when facing the pressure of a criminal inquiry often used as a tool to extract a quick settlement and the high degree of uncertainty of any possible litigation in court.

On this particular tax issue, the recent decision on the “Dolce & Gabbana” case should probably have offered more comfort and perhaps the incentive to face the inquiry and challenge the tax audit in the tax court. However, that was not the taxpayer’s ultimate decision, and, unfortunately, we will be deprived of the opportunity to hear what the tax department of the Italian Supreme Court would have, and the Court itself will miss the opportunity to right some wrongs of the past and restore Italy’s reputation in front of the international tax community.

Indeed, the attempt to re-characterize a duly incorporated entity as a branch is considered an extreme departure from a fundamental principle of law, which requires that the corporate form be respected, as long as some minimal corporate formalities are met, and is very well settled in the US legal system, where it finds its binding precedent in the decision of the US Supreme Court in the Moline Properties case (Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

Such an egregious departure from such a fundamental principle of law is often met with disgust and contributes to the perception of Italy as an unreliable legal system and hostile environment for international investors and multinational companies, to the ultimate detriment of the country.

By way of ruling n. 55/6/2019 filed on January 21, 2019, the Regional Tax Court of Abruzzo held that no withholding tax exemption under the EU Parent-Subsidiary Directive applies, unless the EU parent company proves that it has been “materially charged” with an income tax on the dividends in its own country of residency.

The case concerns a dividend paid by an Italian subsidiary to a EU parent company based in the Netherlands. Upon payment of the dividend, the Italian subsidiary charged the dividend withholding tax at the rate of 27 percent, as provided for under Italy’s internal tax law.

The Dutch parent then filed a petition with the tax agency’s office of Pescara, Abruzzo (in charge with international tax matters, including international tax refund claims), claiming the full refund of the withholding tax pursuant to the EU Parent-Subsidiary Directive.

According to the taxpayer, the dividend withholding tax exemption provided for under the Directive applies whenever the EU parent company is organized in one of the legal forms specifically set forth under the Directive – that is, as a taxable entity falling within the scope of – and liable to – the corporate income tax, in its own residence country. The fact that no income tax is actually paid, on the dividend received by the parent, under a participation exemption tax regime for holding companies, which exempts dividends and capital gains in the parent’s home country, should be irrelevant for the purpose of applying the Directive’s exemption.

The regional tax court (having appellate jurisdiction over Italy’s tax agency’s office in charge of international tax cases) rejected the taxpayer’s argument and held that, with no actual taxation of the dividend in the Member State of the parent, there is no double taxation and no need to apply the exemption from withholding tax in the country of source of the dividend.

The ruling is inconsistent with both the literal language and the rationale of the statute. The Directive provides that no exemption applies whenever the parent company itself, as an entity, is not liable to corporate income tax, or benefits from a tax exemption of general nature and scope. The exemption of a specific item of income does fall within the scope of this exception. The rational of the Directive is that, for the purpose of facilitating the flow of cross-border investments within the EU, the EU Member State which is the source country of the dividend should waive its taxing rights on the amount of profits repatriated to a company based in another EU Member State, after those profits have already been subject to the corporate income tax in that source country, when realized by the distributing company based there, in order to avoid an economic double taxation of the same profits, in two different Member States, upon two different affiliates entities.

The ruling, however, is in line with the most recent decisions of Italy’s Supreme Court on that issue. If appealed to the Supreme Court, it may it will give the highest court of the land another opportunity to revisit the matter. In the meantime, any tax planning structure based on the use of EU holding companies is severely at risk and under great scrutiny and potentially exposed to audits and tax assessments.

In 2015, Italy enacted a special tax regime for high skilled workers who move to Italy to work there for an Italian employer, on assignment to an Italian affiliate of a foreign multinational, or on their own as independent consultants and service providers. Eligible taxpayers (who include Italian citizens, and foreign nationals who are citizens of a country with a tax or exchange of information treaty with Italy) must not have been Italian tax residents at any time during the five years prior to their relocation to Italy, must establish and maintain their tax residence in Italy for at least two years, must own a higher degree or perform managerial or high skill functions, and must work primarily (that is, more than 183 days) in Italy. The 50 percent taxable income deduction is limited to a period of five years and does to apply to other income, not arising from employment or performance personal services.

We reported previously about the special tax regime for foreign high skilled workers in a post issued on July 14, 2018, to which we refer for more details.

The draft legislative decree with urgent measures for economic growth put forward by the Italian Government a few days ago, and referred to as the Growth Decree, would enhance the special tax regime for foreign high skilled workers in many significant respects, including the following:

– eligible taxpayers would include foreign entrepreneurs who move to Italy to carry out a trade or business;
– the taxable income exemption (extended to business income) would increase from 50 to 70 percent, and up to 90 percent for taxpayers who establish their residence in the Italian southern regions,
– the tax exemption period would be extended for additional 5 years, with a 50 percent tax exemption, for taxpayers who, in the 12 months before, or at any time during the first five years after, establishing their residence in Italy, have purchased a residential real property in Italy,
– the tax exemption would also be extended for additional 5 years, with a 50 percent tax exemption for taxpayers with at least one, or 90 percent tax exemption for taxpayers with at least three, minor dependents in Italy claimed on their income tax return.

The special tax regime for high skilled people working or doing business in Italy, coupled with the simplified and visa free procedure for the assignment of foreign personnel to Italian affiliates of foreign-based enterprises, appears to be very attractive, and coupled with the special forfait tax regime for hight net worth individuals and the new 7 percent flat rate tax regime for foreign retirees, makes Italy a very attractive jurisdiction for globally-minded people, entrepreneurs and investors and for foreign multinational groups interested in expanding their business and workforce in Italy.

The legislative process for the draft decree to be become law requires the approval of the Government, and the final passage into law by the Parliament.

With its ruling n. 25219 of October 11, 2018, the Italian Supreme Court held that the capital gain realized by a German company from the sale of its shares of stock of an Italian company is exempt from corporate income tax in Italy, pursuant to Article 13, paragraph 4 of the Tax Treaty between Italy and Germany, except in the case the German holding company has engaged in tax evasion by way of abuse of the Treaty.


Under articles 23 and 151 of the Italian Tax Code, the gain from the sale of stock of an Italian company is Italian source income, and is subject to corporate income tax in Italy to the foreign corporate seller.

However, Article 13, paragraph 4 of the Tax Treaty between Germany and Italy exempts such gain from tax, and allocates the power to tax the gain to the contracting State of which the seller is a resident.


A German company owning all of the stock of an Italian company sold the stock and realized a gain. Pursuant to an exchange of information request to the German tax authority, the Italian tax agency ascertained that the gain had not been reported on the German company’s financial statement or corporate tax return in Germany and had not been subject to tax there. As a consequence, in the absence of any actual double taxation, the Italian tax agency asserted a tax on the gain due in Italy. The Tax Court in the first instance and the Appellate Court on appeal ruled in favor of the Tax Agency.

Supreme Court’s Holding

Based on the ruling, the fact that the German company is a resident of Germany and qualifies for the benefits of the German-Italy Tax Treaty is not in dispute. According to the Court, the absence of tax on the gain in Germany does not, in and on itself, and without further evidence of abuse, authorize Italy to apply its own tax, considering that the German-Italy Tax Treaty (at paragraphed 4 of Article 13) reserves the taxing power on the gain to the country of residence of the seller.

However, the Court added that the conclusion might be different (and Italy may have a case in asserting its own taxing power on the gain) if, pursuant also to the exchange of information between the taxing authorities of the two Contracting States, it appears that the German company is an artificial arrangement that engaged in tax evasion by abusing the benefits of the Treaty.

Unfortunately, the ruling is extremely brief and does not provide any further detail. Most likely, the Italian Tax Agency did not advance the tax evasion or treaty abuse argument and based its claim solely on the absence of double taxation due to the non taxation of the gain in Germany.


A reasonable takeaway from the ruling is that the exemption of the gain from tax in the country of residence is not sufficient to prevent the application of the Treaty and allow the taxation of the income in the country of source (Italy), unless the stock holding company in the country of residence is abusive and set up solely for the purpose of getting the benefit of the tax exemption under the Treaty.

The ruling is not entirely consistent with two other rulings from the Supreme Court, which – in a different legal context – held that the withholding tax exemption for EU inter company dividends does not apply when the dividends are not tax in the country of residence of the recipient.

With its ruling n. 32255 issued on December 13, 2018 (“Ruling 32255”), the Italian Supreme Court, Fifth Department (Tax) held that a dividend paid by an Italian subsidiary to a parent company established in a EU Member State is not eligible for the dividend withholding tax exemption granted under the provisions of Directive 90/435/EC (the “EU Parent Subsidiary Directive”, transposed into Italian domestic tax law by way of article 27-bis of Italy’s Presidential Decree n. 600 of September 29, 1973), unless the dividend is actually subject to corporate income tax in the parent company’s home country.

Ruling n. 32255 is consistent with a previous decision of the Supreme Court (n. 25264 of October 25, 2017), which we commented on this blog.

By requiring that the dividend is actuality taxed in the parent company’s home country, Ruling 32255 adds a requirement for the application of the dividend withholding tax exemption (the “double taxation requirement”), which is not part of the literal language of the EU Parent Subsidiary Directive, and – especially if adopted by national tax courts in other jurisdictions – may have far reaching implications on taxation of EU cross-border dividends.

Summary of the Law

Under Italian domestic tax law (article 27 of presidential decree n. 600 of September 29, 1973), outbound dividends are subject to withholding tax at the rate of 27 percent. The withholding tax can be reduced pursuant to a tax treaty between Italy and the recipient the dividend (provided that all treaty’s requirements for the withholding tax relief are satisfied).

However, outbound dividends are exempt from the 27 percent withholding tax, under the EU Parent Subsidiary Directive, provided that certain requirements are met, namely, that the recipient of the dividend, at the time the dividend is declared, is an entity that:

(i) is organized in one of the forms specifically set forth in an Annex to the Directive (the “legal form requirement”),

(ii) is resident of a EU Member State, under the domestic tax laws of that State, and is not treated as a nonresident entity pursuant to a tax treaty between that State and any third (non-EU) country (the “tax residency requirement”),

(iii) is subject to corporate income tax, in its own jurisdiction, and does not benefit from a general tax exemption or tax exclusion regime which is not geographically or temporarily limited (the “subject to tax requirement”), and

(iv) has been owning, directly and for an interrupted period of at least one year, 10 percent (15 percent, prior to 1/1/2009, or 20 percent prior to 1/1/2007) or more of the stock of the company that distributes the dividends (the “stock ownership requirement”).

Under the provision of article 27, paragraph 3-ter of the Presidential Decree n. 600 of September 29, 1973, dividends paid to a company which does not qualify for the exemption under the EU Parent Subsidiary Directive, but:

(i) is organized in the form of a corporation or other equivalent legal form,

(ii) is resident in a EU Member State, and

(iii) is subject to corporate income tax in its State of residence,

are subject to a reduced withholding tax of 1.20 percent. The reduced withholding tax rate is aimed at equating the taxation of outbound dividends to that of domestic inter company dividends, whereby dividends are not subject to withholding and are partially exempt, under Italy’s participation exemption regime, resulting in an effective tax rate of 1.20% in the hands of the corporate shareholder (in compliance with the non discrimination principle and free movement of capital provision of the EC Treaty).

Facts of the Case

Under the facts of the case, an Italian corporation paid a dividend to its Luxemburg parent, charging a 27 percent withholding tax of euro 1,059,921.45 upon distribution. The Luxemburg company filed a claim for refund of the withholding tax with the Italian tax agency, pursuant to the EU Parent Subsidiary Directive’s withholding tax exemption. The Italian tax agency failed to respond within the statutory deadline (90 days). Under the applicable statute, the lack of timely response to the refund claim which is treated as a deemed rejection of the claim. As a result, the Luxembourg company filed a petition with the tax court, challenging the rejection of the refund claim. The tax court ruled in favor of the taxpayer. The tax agency appealed, and the regional (appellate) tax court ruled in favor of the tax agency, reversing the trial court judgement and validating the withholding tax. The Luxembourg company then filed a petition with the Supreme Court.


In light of the reasoning of the Supreme Court’s judgement, it is apparent that the Luxemburg company satisfied all the statutory requirements for the withholding tax exemption under the EU Parent Subsidiary Directive. Specifically, it parers to be stipulated (or undisputed) that the Luxembourg company is a corporation resident in Luxembourg and subject to corporate income tax there.

However, the Supreme Court held that the dividend withholding tax exemption cannot apply, because the Luxembourg company benefitted from a dividend tax exemption under a participation exemption regime provided for under Luxemburg law. According to the Supreme Court, the fact that the Luxemburg company is a taxable entity and is subject to Luxemburg corporate income tax does alter that conclusion, because the exemption from tax on the dividends in Luxemburg is sufficient to avoid any double taxation of the dividends which would otherwise result from the application of the Italian withholding tax.

The Supreme Court argues that the ratio of the EU Directive’s dividend withholding tax exemption is that of preventing a double taxation of the dividends (first, by way of a withholding tax charged in the country of source, at the time of the distribution of the dividends, and then by way of the income tax charged in the shareholder’s country of residence upon receipt of the dividends). According to the Court, when there is no double taxation of the dividends as a result of the dividend exemption in the shareholder’s country of residence, the withholding exemption has no reason to apply, considering that the Directive’s withholding exemption cannot result in a double non taxation of the dividends.

The Supreme Court does not directly discuss the meaning of the term “subject to tax” used in the EU Parent Subsidiary Directive. That term, in the Directive, is used in reference to the recipient of the dividend, which must be a taxable entity liable to tax in its country of residence. Generally, two alternative interpretations of the term have been debated, one interpretation requiring that the entity itself be “liable to tax”, that is, be classified as a taxable entity and falling within the scope of a corporate income tax, in its own jurisdiction (regardless of the fact that it actually pays a tax, on the income it receives and for which it claims a tax relief), and another interpretation requiring that the entity be “subject to tax”, that is, it actually pay a tax, on the specific item of income it receives and for which the tax relief is claimed.

Rather, the Court seems to inject an additional, overarching requirement for the application of the Directive’s dividend withholding exemption, namely, that the dividend be subject to double taxation (in the country of source and in the country of residence), while exemption should not apply when it would result in a double non taxation of the dividend.

Previous Case Law

Ruling 32255 is directly in line with The Italian Supreme Court’s ruling n. 25264 of October 25, 2017, also from the Fifth Department (Tax), in which the Supreme Court held that the actual payment of the corporate income tax in the parent company’s home jurisdiction is required for the parent company to benefit from the dividend withholding tax relief under the EU Parent Subsidiary Directive, and that no exemption applies to a dividend paid by an Italian company to its Dutch parent which benefits from a participation exemption regime resulting in the exemption of the dividend from corporate income tax in the Netherlands.

Possible Developments and Open Questions

The Italian Supreme Court did not discuss the possible application of the reduced 1.20 percent withholding tax. Indeed, the dividend in question was distributed in 2003, prior to the enactment of the reduced withholding tax rate. As discussed in the summary of the law paragraph, above, also for the purpose of the application of the reduced withholding tax rate, it is required that the corporate recipient be subject to corporate income tax in its EU Member State of residence (indeed, the language of the statute, on that particular requirement is very similar to – and drawn from – the language of the Directive). The reduced withholding rate is aimed at equating the Italian taxation of an outbound dividend to the taxation of a domestic dividend, whereby the company which receives the dividend is exempt on 95 percent of the amount of the dividend, and is taxed on 5 percent of the amount of the dividend, at the corporate tax rate of 24 percent, resulting in an effective tax rate of 1.2 percent. It is not clear whether the Court would reach a similar conclusion, under similar facts, when the issue is that of the application of the reduced withholding tax.

Another legitimate question is whether the Court would reach the same conclusion, with respect to the application of the Directive’s full exemption, when the EU parent company is at least partially taxed on the dividend, under a partial exemption regime.

Furthermore, it is interesting to see whether the Italian Supreme Court’s novel interpretation of the EU Parent Subsidiary Directive, as requiring a double taxation of the dividend for the withholding exemption to apply, is followed by other courts, in other EU jurisdictions, leading to more far reaching challenges to the tax treatment of inter company dividends throughout the EU, and further challenging tax planning structures for EU inbound investments, based on the use of EU holding companies located in favorable taxing jurisdictions.

Finally, readers should note that Italian Supreme Court’s decisions are not binding precedents, and that the Court can rule differently on the same issue arising in separate cases. If contrasting decisions on the same issue emerge within the Court, a case can be referred to the full bench for a decision resolving the contracts and establishing a uniform interpretation of the law on that particular matter.

In 2017, Italy introduced a special tax regime intended to attract Italian and foreign nationals who have been resident outside of Italy for at least nine of the previous ten years, to transfer their tax residence to Italy and pay a fixed amount of €100,000 in lieu of the Italian regular income tax on their foreign source income. Taxpayers qualifying for the special regime are taxed on their Italian source income at usual graduated rates. The fixed amount tax paid under the new regime also substitutes all national and local wealth taxes and Italy’s estate and gift taxes on foreign assets. In addition, taxpayers who elect for the special tax regime are exempt from the duty to report their foreign financial accounts and investments on their Italian income tax return as required under Italy’s international tax reporting rules.

On March 8, 2017, the Italian Tax Administration issued the Regulation n. 47060 setting forth technical provisions for the application of the special tax regime.

On May 23, 2017, the Italian Revenue Agency issued Circular n. 17/E providing administrative guidance in the interpretation and application of the special tax regime.

The special tax regime is not limited to Italian nationals, does not limit a taxpayer’s ability to work, invest or do business in Italy, and does not provide for any mandatory remittance of the foreign income that is subject to the lump-sum tax.

Since the world-famous soccer player Cristiano Ronaldo decided to leave Real Madrid in Spain and join the Italian top team Juventus in Italy (a decision some speculate was predicated also on his ability to benefit from the attractive new Italian special tax regime), Italian’s lump-sum tax for new-resident high net worth individuals has attracted more attention. Less than two years after it was enacted, it is probably still too early to fully assess its impact and the tax agency’s approach in administering it. However, now that it is settled as a permanent feature of the Italian tax system, a further review appears to be worthy.

Class of Taxpayers for Whom It is Designed.

The special tax regime is not limited to a particular class of taxpayers. It extends to both Italian national and foreign nationals, it does not put any limit on the activities a taxpayer can be engaged in while resident in Italy, and does not require that the income subject to the lump-sum tax be remitted back to Italy. A taxpayer who elects for the special tax regime is free to work, invest or operate a business in Italy and earn Italian wages, investment or business income, in respect of which he or she is going to be taxed under the regular income tax.

As a practical matter, since the lump-sum tax applies in lieu of the regular income tax on taxpayer’s foreign source income, the special tax regime is designed in particular for foreign individuals with significant investments, activities or business interests outside of Italy, who earn large amounts of foreign source income subject to zero o low income taxes in the country from which it is derived.

Fiscal Residency Requirements

The special tax regime is offered to Italian or foreign national individuals who have not been Italian tax resident individuals for at least nine of the previous ten years, and are Italian tax residents in the tax year for which they make the election.

Tax residence is determined under Italian tax law, pursuant to one of three alternative criteria that must be met for more than 183 days during a given tax year: registration on the register of Italian resident population, place of habitual abode (intended as a regular place of living where taxpayer intends to stay indefinitely, rather than temporarily or for some specific and limited-time purpose), and domicile (intended as the main place of an individual’s personal, professional and economic interests). Once one of those criteria is met, tax residence retroacts to the first day of the tax year during which any of those criteria is met.

The registration test is completely within the taxpayer’s control and easy to apply. Instead, the residence and domicile tests depend on the facts and circumstances of each particular case, and are more controversial and open to interpretations. In some recent rulings, the Italian Supreme Court took the position that, for the purpose of the domicile test, under certain circumstances the presence of significant economic interests in Italy may prevail over the location of all personal and family ties in a foreign country, while, traditionally, personal ties were given more weight than economic interests.

It is reasonable to argue that Italian nationals who were resident of Italy at one point in time and transferred their residency to a foreign country will receive special scrutiny, and the disclosure of information about their non-Italian tax residence and possible continuing contacts with Italy in the past may expose them to potential audit over their past non-Italian resident tax years (in addition to making them ineligible for the tax regime). Those who transferred their residence to tax havens will have to overcome the presumption that their tax residency is in Italy unless they demonstrate that they actually moved and lived there.

Foreign nationals who purchased resale estate in Italy and, upon the suggestion from local notaries and accountants (without considering its international tax ramifications), registered themselves as Italian resident individuals at their Italian home’s address in order to benefit from an abatement of the transfer taxes at the time of the purchase, triggered Italian tax residency under the registration test and may be ineligible for the special tax regime. Those foreign nationals are often able to tie break themselves to their home country, where they actually lived and kept all their interests, under their home country’s tax treaty with Italy, and avoid any tax liability in Italy (on non-Italian income) for the years in which they have inadvertently been Italian tax residents under the registration test. However, a tax treaty’s tie breaker rules cannot be used to overcome Italian tax residency, as determined under Italian internal law, and claim the special tax regime.

Foreign nationals who never registered as resident in Italy but regularly visited the country, own homes, run businesses or hold other investments in Italy, will have to provide information about their presence and activities in Italy to allow the Italian revenue agency to assess whether they have ever been Italian tax resident under the residence or domicile test.

Election Requirement

The special tax regime is elective. Eligible taxpayers must file an election with their income tax return for the first year in which they are Italian tax residents, or the immediately following tax year.

Taxpayers can, but are no longer required to, apply for an advance ruling on their eligibility for the special regime. If they file for an advance ruling, taxpayers must provide specific information on the relevant facts and circumstances that concern their possible tax residence in Italy in the prior ten-year period. The tax agency has 120 days to respond to the ruling request and failing to respond is equivalent to a positive answer. If the agency asks for additional information, a new 120-day period starts running from the date of the request. SAs a result, taxpayers must carefully prepare their ruling applications to avoid delay.

The Italian tax administration issued a checklist of twenty items that must be properly disclosed and documented, either in the advance ruling application, or by way of an attachment to the tax return electing for the special regime. Taxpayers must use the check list when they review their facts and circumstances and assess their eligibility with their tax advisors, before making the election.

Nothing is said in the law or the administrative guidance issued by the tax administration about a possible situation in which a tax return electing for the special tax regime does not provide, in its attachment, a complete and sufficient set of information in response to all of the items on the check list. To avoid the risk that the election is treated as ineffective, taxpayers should work carefully in preparing a complete response to the agency’s questionnaire.

The election is valid for and automatically expires after 15 years.

Special Election for Family Members

The election for the special tax regime can be extended to a taxpayer’s family members. Whenever a family member becomes an Italian tax resident, within the 15-year period of the initial election, the taxpayer who filed the initial election, and his or her family member that then qualifies, can file the election for the special tax regime. Following the election, the family member is subject to a lump-sum tax of 25,000 euros on his or her foreign source income and enjoys all other benefits of the special tax regime. The family member’s election remains in place, for the remaining part of the 15-year period, even when the principal taxpayer’s initial election is revoked or earlier terminated.

Termination of the Election

Taxpayer is free to terminate the election any time. The election automatically terminates when the taxpayer moves her tax residence outside of Italy or fails to pay the lump-sum tax. Finally, the election expires after fifteen years.

Scope of the Special Tax Regime

The scope of the special tax regime extends to foreign source income and foreign assets and has three important effects: exclusion of foreign source income from the scope of the regular income tax, exclusion of foreign assets from the scope of the Italian estate tax and exemption from the duty to report foreign assets and financial accounts on the Italian income tax return.

No Regular Income Tax On Foreign Source Income

The 100,000 euros fixed-amount tax applies in lieu of the regular income tax on foreign source income. The source of income is determined under the provisions of article 23 of the Italian Unified Tax Act.

Italian tax law source rules differ from US source rules in many important respects and offer great tax planning opportunities to maximize the benefits of the special tax regime.

The first and most prominent example is that of royalties. The source of royalty income is determined by reference to the residence of the payer (licensee), rather than the place of use of the license. As a consequence, royalties paid to a sports athlete for the right to use his or her image in sports products advertising campaigns, or by an artist for the rights to publish or sell his or her music, books, etc. by a foreign sponsor, production or publishing company, are entirely foreign source income, regardless of the place of use of the license and the fact that the use of the image or the sales may be carried entirely or partly out in Italy. Cristiano Ronaldo will be able to license his image rights to a foreign company and receive foreign source tax free royalties for the use of his image in advertising campaigns run entirely in Italy. Conversely, he will be better advised not to license his image rights to an Italian company as a remuneration for foreign run advertising campaigns, which would generate Italian source royalties fully taxed under the Italian regular income tax.

The source of capital gains is the place in which the property is located, rather the residence of the seller. For gains from the sale of stock or ownership interest in non-corporate entities, the gain is sourced with reference to the place of incorporation or organization of the entity. As a result, gain from the sale of stock of a U.S. corporation would be non-US source income, not taxable in the U.S., and foreign source income falling within the scope of the fixed amount tax in Italy.

Dividends and interest are sourced by reference to the residence of the payer. However, dividends and interest earned through mutual funds, which are not treated as fiscally transparent entitles, are separately characterized as income form mutual funds and sourced by the place of organization of the fund. As a result, even investments in Italian stock and bonds can generate nontaxable foreign source financial income if held and managed in a foreign organized mutual fund.

Similarly, income earned through trusts and similar arrangements, is classified as income from trust and sourced by the place of administration of the trust (rather than with reference to the source of the underlying items of income), which, in turn, is presumed to be the place in which the trustee is domiciled (unless taxpayer proves that the actual administration of the trust is carried out in a different place). A revocable trust is disregarded and the settlor is treated as the owner of the assets the income of the trust, which, in turn, is sourced with reference to the source of the underlying items of income deriving from the trust assets. Non-revocable trusts are generally treated as opaque, unless the settlor retains certain control powers over the trust that result in the trust being treated as fiscally transparent. As a result, a taxpayer has the opportunity to lump his (Italian or foreign) investments into a foreign administered trust, and earn entirely foreign source income not taxable under the regular income tax.

Income from services is sourced with reference to the place of performance. As a result, a soccer player playing games inside and outside the country, must allocate part of his salary to Italian games and treat it as Italian source income taxed under the regular income tax, and part of his salary to foreign played games and treat it as foreign source income nontaxable under the regular income tax. Italian law does not set forth any clear rule setting for the methods for the allocation of the income. In case of wages paid for general services, the allocation is made on the basis of the time spent in Italy compared to time spent abroad while performing those services. However, for remuneration paid for work on specific projects or tasks, the allocation should be made with reference to the place where the project or task is carried out.

In a case like the one of Cristiano Ronaldo, there may be a fair argument to sustain that a substantial part of his salary should be allocated to games plaid in the International competitions such as the European Champions League (considering that Juventus has acquired him just for that purpose, having barely missed to win it in the last three seasons, when it reached the finals and lost to superior teams such as Barcelona and Real Madrid), most of which are plaid outside of Italy, and allocate a big chunk of his salary to those games plaid outside of Italy, treating it as foreign source not taxable under the regular income tax. A rock musician receiving compensation for recording a record or performing at concerts outside of Italy would clearly earn foreign source services income not taxable under the regular income tax.

No Estate and Gift Taxes On Foreign Assets

Italy operates an estate tax, which is charged on Italian-situs properties of non resident individuals, or worldwide properties of resident individuals, transferred at death. For individuals who are resident in Italy at the time of death, the Italian estate tax applies on their worldwide estate.

Similarly, the Italian gift tax applies to any transfer for no consideration of any Italian-situs property, when the transferor is a non resident individual, or any property wherever located in the world, when the transferor is a resident individual.

Fiscal residency, for Italian estate and gift tax purposes, is determined pursuant to the same rules that apply to determine Italian fiscal residency for income tax purposes (to which we referred earlier in this article).

The special tax regime exempt foreign assets from the application of Italian estate and gift taxes.

No International Tax Reporting of Foreign Assets

Under Italian tax law, a resident taxpayer is required to report, on section RW of his or her Italian income tax return, all of his or her financial as well as non-financial assets (such as homes, luxury boats, jewelry, artwork, and the like), regardless of whether they generate income (as in the case of rental real estate), or not (as in the case of primary residence, vacation homes, etc.).

The international tax reporting of foreign assets is often very expensive and time consuming.

The election for the special tax regime exempts the taxpayer from the duty to report his or her foreign assets under Italy’s international tax reporting rules.

No Asset-Value Taxes On Foreign Assets

Italy applies a tax on the fair market value of foreign real estate, at the rate of 0.76%, and a tax on the fair market value of foreign financial assets, at the rate of 0.2%.

Both taxes do not apply in case of an election for the special tax regime.

Special Tax Regime and Tax Treaties

One issue that emerged in the context of the enactment of the special tax regime concerns whether a taxpayer who elects for the special tax regime is eligible for the benefits of a tax treaty between Italy and the foreign country of source of the income.

The Italian tax administration in its Circular N. 17/E took the position that a taxpayer should be eligible to treaty benefits, considering that he or she is tax on his or her worldwide income, by reason of being a resident of Italy for income tax purpose, albeit through the regular income tax, as far as his or her Italian source income, and a fixed amount tax that applies in lieu of the regular income tax, as far as his or her foreign source income. As a result, the Italian tax administration announced that it will issue certificates of tax residency to Italian taxpayers who elect for the Italian tax regime.

It must be noted that a taxpayer can always decide to exclude certain countries from the application of the special tax regime. In that event, he or she would qualify for a foreign tax credit in Italy for the amount of any income tax charged on income from sources in that country, and would definitely be able to claim the benefits of the treaty between Italy and that country to limit any source country tax on that income.

Constitutional Issues

The special tax regime poses some constitutional issues. Clearly, it is a departure from the general principle according to which each taxpayer should contribute to the country’s public budget in proportion to his or her paying capacity, set forth at article 53 of the Constitution. A measure of taxpayer’s paying capacity is taxable income, and the Constitutional provision of article 53 has historically been carried out through a progressive income tax.

However, it is not clear how a constitutional challenge might be brought to the Italian Constitutional Court. To bring a claim to the Constitutional Court, a taxpayer must have standing, and standing exists when a taxpayer is subject to a provision of law that subjects him or her to a less favorable tax treatment than that which applies to another category of similarly situated taxpayers. In the case of the special tax regime, a taxpayer who is subject to the regular income tax might challenge the general provisions of the regular income tax, under which he is taxed less favorably (on his foreign source income) that a similarly situated taxpayer subject to the fixed amount tax. That would assume (and require the taxpayer to demonstrate) that he or she possess an amount of foreign source income that, under the special tax regime, would entail a tax that would be lower that the regular income tax on that income. For such challenge to be upheld the Court should rule the constitutional invalidity of the regular income tax, across the board, which seems a very remote and unrealistic proposition. Moreover, a taxpayer who elects for the special tax regime is not in the same position as a taxpayer who is not eligible for the special tax regime (the former being a nonresident, not subject to tax on non-Italian source income, who voluntarily transfers his or her tax residency in Italy in exchange for being taxed under the special tax regime on his or her foreign source income), and the special regime is temporary and expires automatically after 15 years.

Other Issues

One interesting issue concerns the way in which Italy will administer the exchange of information systems it operates with foreign countries which may ask for tax information concerning individuals who have moved their residency to Italy to benefit from the Italian special tax regime. By providing taxpayers who elect for the special tax regime with a full exemption from reporting their foreign assets, Italy would not possess information, out of a taxpayer’s return, to share with a foreign tax jurisdiction. In addition, a taxpayer is not requested to separately state, on his or her Italian tax return, his or her foreign source income, which is not taxable with the regular income tax.


The Italian forfeit tax regime for nonresident high net worth individuals (who become Italian tax residents) has some very interesting features, which make it very attractive, compared to similar regimes applied in other countries, both presently and in the past.

The election for the special tax regime requires specific planning, both to determine the taxpayer’s eligibility for the regime, before it is filed, and to determine the best way to structure the taxpayer’s affairs (with specific regard to the sources of his or her income) to maximize the benefits of the regime, once the filing has been made. Every time a taxpayer moves his or her residence to Italy under the Italian registration test, while keeping significant contacts and interests in other foreign countries, the tax planning will always require an investigation into those countries’ tax laws, to determine whether the taxpayer might still have his or her residency in any of those countries, pursuant to the residence or domicile test that may apply in those countries, and to determine the taxation of local source income in combination with the Italian lump sum tax.

While some more time will need to pass before any case law or administrative tax ruling is available as to the interpretation and application of the special tax regime, the Italian tax agency so far has adopted a pro taxpayer approach, aimed at encouraging the use of the regime, which is seen as a way to attract wealth individuals to Italy ultimately resulting in a contribution to the local economy.

The preferential tax regime for the new resident workers, enacted by way of Article 16 of the Legislative Decree 147 of 9/14/2015, is now permanent and extended to non-EU citizens and independent consultants and service providers (while, originally, it was limited to EU citizens working in an employee capacity).

Given its wider scope and increasing relevance, for foreign enterprises which plan to move personnel to Italy, or foreign consultants who consider the opportunity to relocate to Italy, it is worth providing a review of the basic tax advantages of the preferential tax regime.

Eligible taxpayers include dependent workers and independent consultants and service providers, who are allowed a 50 percent deduction from the amount of taxable wages and salary or compensation for personal service performed in an independent capacity, with the personal income tax (IRPEF) applying on the remaining 50 percent portion of that income at graduated rates.

The special tax regime applies to the following categories of taxpayers:

A. dependent workers (employees) possessing a three or five year of five graduate degree, provided that:

1. in case of a foreign degree, a certificate is issued by the Italian consulate in the taxpayer’s home country, certifying that the degree is equivalent to an Italian graduate degree,

2. the taxpayer has carried out a studying or working activity outside of Italy for at least 24 months (or more) prior to his or her relocation to Italy,

3. the taxpayer is a EU citizen or citizen of a non-EU country with which Italy has an income tax convention or a tax information exchange agreement,

4. the taxpayer works as an employee or a independent consultant or service provider (for private or public organizations, and regardless of whether the work or activities are consistent with the taxpayer’s degree),

B. taxpayers who are employed in a managerial capacity of specialized skill capacity, provided that:

1. they have not been Italian tax residents in the last 5 years preceding their relocation to Italy,

2. they are employed with an Italian employer or a foreign enterprise’s permanent establishment located in Italy, or are employed on secondment or assignment to an Italian affiliate of a foreign company or enterprise,

3. they carry out their work primarily in Italy (the requirement is satisfied whenever the work is performed in Italy for more than 183 days of the year),

4. they perform managerial or specialized skill functions.

The managerial or specialized function requirement is deemed to be satisfied for taxpayers who are in possession of an 3+ year undergraduate degree in the area of management, liberal arts, scientific or high skilled professions, or technical jobs (such as software and IT developers, computer programmers, data base and computer systems programmers, program managers, etc.).

To qualify for the special tax regime, a taxpayer (1) must establish his or her tax residency in Italy during his or her employment there, and (2) must maintain his or her tax residency in Italy for at least two (2) years.

The maximum period for which the benefit applies is five (5) tax years, starting with the first year in which the taxpayer becomes an Italian tax resident.

The benefit consists in a 50 percent deduction of employment and personal services income. Assuming a total income of euro 100,000 in Italy the taxable income after the 50 percent deduction would be reduced to euro 50,000 and the Italian personal income tax (IRPEF) – without taking into account personal deductions or exemptions – would amount euro 15.320 (equal to an effective tax rate of 15.32 perfect).

Any other income, different from wages and compensation for services, continues to be taxed in full or according to the general rules.

Relocating to and establishing tax residency in Italy would still result in taxation in Italy on worldwide income, and carry with it the obligation to report foreign financial accounts and other reportable assets on the Italian income tax return. Consequently, specific pre-immigration tax planning would still be needed to make sure the employees are not subject to an overall adverse tax treatment and Italian taxation is properly coordinated with taxation still applicable in their home country.

The 50 percent income deduction appears to be very attractive and should facilitate foreign direct investments in Italy, in connection with which a foreign investor needs to move managerial or high-skilled personnel from its home country to Italy, and employe it at its Italian subsidiary or place of business.