Personal Income Tax
An individual is deemed to be tax resident in Italy when, for the greatest part of the tax year, they:
Italian resident individuals are subject to tax in Italy on the basis of their worldwide income. Conversely, non-resident individuals are taxed only on income realised in Italy.
Income is deemed to be realised in Italy when:
Specific rules apply to certain types of income. Individual income is classified into the following categories:
As a general rule, the overall taxable income per year is subject to tax in the hands of resident individuals based on progressive rates, as follows:
Certain regional and municipal surcharges apply on the total taxable income, at different rates depending on the region and municipality of tax domicile of the individual (the overall rate of such surcharges can range between 1.5% and 4%).
Investment and trading income (eg, capital gains, interest on bonds and similar securities, income from derivatives contracts, income from qualifying investment funds, etc) is subject to a rather favourable tax treatment; indeed, such income is not included in the ordinary income, being generally subject to a flat 26% substitute tax to be applied by an authorised Italian resident intermediary (eg, an Italian bank) intervening in the 'payment,' or where the financial instruments are held.
Investment and trading income arising from participation in companies that are resident in a black-listed state are subject to proportional and progressive personal income tax rates up to 43%, plus surcharges.
Capital gains realised upon disposal of immovable property are not subject to tax in Italy, provided that the property has been held for at least five years prior to the disposal or has been inherited.
Italian Tax Regime for New Resident Individuals
Individuals wishing to move their tax residence to Italy may benefit from a favourable and optional regime provided that they have been considered non-residents for at least nine out of the ten tax periods prior to the first tax period of the regime’s validity.
On the one hand, the regime provides for the optional application of a yearly EUR100,000 substitute tax (increased by EUR25,000 per year for each additional family member included in the regime) on any foreign-source income received by new Italian residents. On the other hand, Italian-source income is ordinarily subject to personal income tax at a progressive rate of up to 43% (plus local surcharges).
The main features of the regime for new resident individuals are:
Italian Tax Regime for Inpatriate Workers
Non-Italian resident workers who – irrespective of their citizenship and state of residence – transfer their tax residence to Italy, as of tax period 2020, shall be subject to Italian personal income tax, for five tax periods, on a portion equal to 30% of their income from employment, income assimilated to employment income, self-employment income and business income, provided that certain requirements are met. Moreover, the personal income tax basis would be further reduced to 10% if the workers transfer their residence to certain Southern Italian regions.
The inpatriate regime is available to individuals subject to the following conditions:
Italian Tax Regime for Inward Pensioners
Non-Italian resident individuals holding foreign pensions and moving their tax residence to certain municipalities of Southern Italy (with fewer than 20,000 inhabitants) shall benefit from the application of a flat tax rate of 7% on any foreign source income, provided that certain conditions are met.
In addition, under the inward pensioners regime, taxpayers are exempt from wealth taxes and from fiscal monitoring fulfilments on real estate and financial assets held abroad.
The option for the Inward Pensioners' Regime has a ten-year validity.
Corporate Income Tax
A company qualifies as Italian resident if for the greater part of the tax period it has its legal seat, place of effective management or main business purpose in Italy.
Any profits arising from business activities carried out by an Italian company are considered as business income and subject to corporate income tax at the ordinary rate of 24% on its net income. The taxable base is represented by the income deriving from business activity carried out in Italy as reported in the profit and loss account of the relevant financial year adjusted according to the tax law provisions concerning business income.
Only 5% of the dividends paid by Italian resident companies or by companies located in white-listed states are subject to Italian corporate income tax in the hands of the company receiving the dividends at the ordinary rate of 24% (with an effective tax rate equal to 1.2%).
If certain conditions are met, capital gains are subject to Italian corporate income tax only for 5% of the relevant amount, with an effective tax rate equal to 1.2%. Such regime applies if:
As a general rule, tax losses can be offset each year up to a limit of 80% of the taxable income. Tax losses that exceed this can be carried forward without any time limitation.
In addition, a regional income tax is levied at a 3.9% ordinary rate, which can be increased by 0.92% depending on the specific region. The taxable base is represented by the difference between the value of the production and the costs of the production as taken from the company’s profit and loss account, so that it roughly corresponds to the corporate income tax taxable base plus interest expenses and employment costs.
If a company qualifies as dormant, corporate income tax rate is increased by 10.5%.
Inheritance and Gift Tax
Any transfer of assets and rights as a result of death, gift or other gratuitous transactions is subject to Italian inheritance and gift tax as follows:
The allowances provided apply to each beneficiary. Transfers in favour of people with disabilities are subject to tax on the value exceeding EUR1,500,000.
Cadastral and mortgage taxes would be levied on any transfer of Italian-situs real estate at a 3% aggregate rate. These transfer taxes would apply on top of the inheritance and gift tax and regardless of whether such transfers are exempt for inheritance and gift tax purposes.
The contribution of Italian-situs assets to a trust is subject to inheritance and gift tax. In such a case, the application of the relevant progressive rate should be made on the basis of the relationship existing between the settlor and the identified beneficiaries (if any) at the time of the relevant transfer to the trust. The 8% rate shall be levied when the beneficiaries of the trust are persons other than those benefiting from the reduced rates, or the trust has no beneficiaries, or the beneficiaries cannot be identified.
As a general rule, the taxable base for inheritance and gift tax purposes is the fair market value of the transferred assets at the moment of death, gift, or other gratuitous transfer.
Please note that specific exemptions could be applicable in case of transfer to disabled persons.
Furthermore, exemptions from inheritance and gift tax are provided for certain assets, as follows:
Under certain Supreme Court interpretations, the transfer of assets to a trust shall not be subject to inheritance and gift tax upon the initial transfer to the trust, but upon the subsequent distribution to the beneficiaries.
In principle, no general 'net worth tax' is levied in Italy. However, any individual or company owning Italian real estate (either a building or land) is subject to a local property tax (IMU), regardless of their status and residence. IMU applies on the 'cadastral value' (valore catastale) of the real estate. The cadastral value is a 'standard' value, to be determined by multiplying the ordinary average income (rendita catastale) – set by the relevant municipal office for each property – by a specific coefficient that varies depending on the property cadastral category. IMU applies at the base rate of 0.76%, which can be increased or decreased by a percentage up to 0.3% depending on the municipality where the property is located.
A proportional stamp duty applies to periodic communications sent by Italian financial intermediaries to clients, relating to financial instruments deposited with them (including shares), at a rate of 0.2% on the market value of the financial instruments, if available, or on the nominal or redemption value thereof. For subjects other than individuals, an annual maximum cap of EUR14,000 is provided.
Italian resident individuals holding real estate properties abroad shall be generally subject to a wealth tax on the value of the property (IVIE). IVIE applies at a rate of 0.76% and is due in proportion to the percentage of ownership and the holding period.
Furthermore, Italian resident individuals with financial activities abroad are generally subject to a wealth tax (IVAFE). IVAFE applies at a rate of 0.2% on the value of the financial activity and is due in proportion to the percentage of ownership and the holding period. The taxable basis corresponds to the market value at the end of each calendar year (or at the end of the holding period); if this is not available, the relevant value is the nominal or redemption value. IVAFE applies at a fixed tax rate of EUR34.20 on bank accounts held abroad.
The direct acquisition of real estate is subject to indirect taxes depending on the following aspects:
The sale of Italian real estate is subject to VAT if the seller is a VAT-taxable person. Where the supplier is not the construction/refurbishment company (impresa di costruzioni/ristrutturazioni) of the properties, the following regime applies:
Conversely, if the seller is the construction/refurbishment company of the properties, the applicable regime for both commercial and residential buildings is depicted as follows:
In all the abovementioned situations, the VAT amount is agreed between the parties.
The sale of Italian real estate which is out of the scope of VAT or VAT-exempt is subject to registration tax at a proportional rate depending on the type of immovable property. The taxable base is the transaction value, as declared by the parties in the transfer deed; the taxable base is represented by the fair market value (valore venale) of the property. In this scenario, transfer of each immovable property is subject to mortgage and cadastral taxes at the fixed amount of EUR50 each. However, provided that the transaction concerns a residential property, and the purchaser is a private individual, it is possible to pay transfer taxes on the so-called cadastral value of the real estate, as determined in paragraph 1.1 Tax Regimes, above.
A favourable regime would apply where a residential property is acquired by an individual with the purpose of being their primary residence (prima casa); indeed, in such a case, registration tax applies at the 2% rate, while mortgage and cadastral taxes apply at the flat rate of EUR50 each, provided that certain conditions are met.
For inheritance and gift tax purposes, as regards immovable property, the taxable base is the fair market value; this being said, Italian tax authorities cannot assess a value higher than that declared in the donation deed or in the inheritance tax return, if it is at least equal to the cadastral value of the real estate. See 1.1 Tax Regimes, above, for further details.
Moreover, it is worth noting that mortgage and cadastral taxes are levied on any transfer of Italian-situs immovable property at an aggregate 3% rate, which applies regardless of whether the transfer is exempt from inheritance and gift tax.
Italy has implemented both the Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard (CRS). The Italian tax authorities can readily obtain financial information on investments and properties held in another jurisdiction that applies the CRS.
Furthermore, Italy is part of a diversified regional and international network of bilateral and multilateral information-based administrative co-operation. Italy has ratified the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. In addition, Italy is an EU member state and has thus implemented EU secondary law in this area. Italy has an extensive network of tax treaties. In this regard, the exchange of information is channelled primarily through double tax treaties (providing for measures specifically addressing the avoidance of international double taxation, measures of administrative co-operation) and through tax information exchange agreements (TIEAs).
As regards money laundering, banks and other financial intermediaries and institutions, advisers, lawyers and other persons engaged in other (non-financial) activities must submit to the Italian Financial Intelligence Unit (Ufficio Investigazioni Finanziarie or UIF) a suspicious transaction report “whenever they know, suspect or have reason to suspect that money-laundering or terrorist financing is being or has been carried out or attempted.”
The Italian entrepreneurial fabric is principally composed of small and medium-sized family enterprises in which the decision-making process is entirely delegated to the entrepreneur-founder. Therefore, in planning succession it is necessary to balance the interests of the family and the interests of the family company.
There is still a tendency for the older generation to be unwilling to start planning their succession in advance. In the light of this, the Italian legislator has recently introduced different legal instruments to facilitate and encourage succession planning (see 4.2 Succession Planning, below).
Italian citizens increasingly move abroad for reasons of study, work or to find better business opportunities, and so most traditional Italian families have been replaced by families with cross-border dimensions.
Therefore, in planning the succession of such families it has become necessary to consider the opportunities that the rules of jurisdictions that differ from Italian jurisdiction can offer in terms of tax laws or rules of inheritance.
An important step forward within the European Union is represented by EU Regulation No 650/2012 (based on the 'habitual residence' concept) which has made succession planning more flexible with reference to related civil aspects, even if such legislation does not prevail over mandatory domestic rules (see also 2.3 Forced Heirship Laws, below).
Instead, with reference to tax issues, it is worth pointing out that international estate structuring implies consequences both at national and international level that could impact on generational handover.
Italian law provides for two types of succession: legitimate succession and testamentary succession.
Testamentary succession applies where the deceased has drafted a valid will. The estate is assigned to the heirs in compliance with the provisions of the will, save for the shares reserved for the spouse and children.
Forced heirs are entitled to receive and enjoy their reserved shares immediately upon the opening of the succession, without any restriction, lien or condition.
Although the testator may formally violate the reserved shares in their will, it is without prejudice that the forced heirs may challenge this, alleging that their reserved share was infringed by the will provisions.
In all other cases, legitimate succession applies. The estate is assigned to the spouse and to descendants, ascendants, siblings, other relatives and, on a residual basis, to the state, according to percentages provided by the law.
Pursuant to Italian law, the common ownership of property between spouses is the legal patrimonial system of the family (save where spouses have made different choices).
Common ownership includes:
Conversely, any property owned before the marriage individually by each spouse or acquired after the marriage as a result of a gift or succession, as well as any property of strictly personal use to each spouse, shall not be included in common ownership.
Under the common ownership regime, the administration of property is granted to each spouse severally.
The carrying out of any activity in excess of the ordinary administration, as well as the execution of any contract transferring rights above property in common ownership, belong to each spouse severally.
Acts adopted by one spouse without the consent of the other spouse may be declared null, should they concern immovable properties or movable assets recorded in public registries.
Should such acts be referred to any other movable asset, the spouse who has adopted the act without the consent of the other spouse is required to restore common ownership to the state it was in before the adoption of the act, or to pay to the other spouse an amount equal to the value of the asset.
As a general rule, pre-nuptial agreements are deemed null and void in Italy, since they violate public order rules and, in particular, the principle according to which all rights arising from the celebration of marriage and expressly provided for by Italian law are not negotiable rights (meaning spouses cannot waive such rights).
On February 2019 the council of ministers approved a draft of law concerning, inter alia, the introduction of prenuptial agreements, in order to allow spouses or future spouses, and partners or future partners of civil unions, to regulate their personal and economic relationships, to prepare for any future crisis between them and to predetermine guidelines for the management of the family and for the education of the children.
The transfer of immovable property is a taxable event for personal income tax purposes. Capital gains realised are subject to personal income tax in Italy at a progressive rate of up to 30%. As an alternative, individuals may opt for the application of a 20% substitute tax regime on the capital gain (such regime does not apply to building lands). However, capital gains realised upon disposal of immovable property are not subject to tax in Italy, provided that the property has been held for at least five years prior to disposal, or it has been inherited.
In the case of immovable property received by gift, the five-year holding period is determined relative to the date on which the immovable property was acquired by the donor. In this scenario, the relevant taxable base is equal to the difference between the price agreed and the purchase price paid by the donor.
A common practice carried out for estate-planning purposes is the gift of sole bare ownership (nuda proprietà) on assets (eg, immovable properties or participation in companies, or interests in partnerships) with the retention of lifetime right of usufruct on such assets in the hands of the donor (see also 4.1 Asset Protection). The transfer of bare ownership on an asset is subject to gift tax at the applicable rate depending on the relationship between the donor and the donee.
In such a case, the taxable base depends on the kind of assets transferred. For instance, in the case of transfer of bare ownership on an immovable property, the taxable base is the cadastral value minus the value of the usufruct retained by the donor. The value of the usufruct depends on the age of the donor (ie, the usufruct holder); the lower the age of the donor, the higher the value of the usufruct to be subtracted from the value of the full ownership. At the death of the usufruct holder, the bare ownership will automatically consolidate with the usufruct. Such consolidation happens free of any Italian taxes.
Historically, individuals have transferred shares in their family business by gift to their descendants, to pass wealth across generations with possible tax advantages. Frequently, gifts are combined with the mechanism of usufruct and bare ownership. Since 2006, individuals may manage the succession of their estate through the so-called patto di famiglia, which grants relevant tax benefits to all parties involved (see also 4.1 Asset Protection and 4.2 Succession Planning).
In particular, a specific exemption under inheritance and gift tax is provided in order to facilitate the transfer of participations in companies, interest in partnerships and transfer of businesses in favour of certain family members (ie, spouse or descendants).
The exemption for the abovementioned transaction applies, provided that the beneficiary:
The first condition above does not apply to transfer of partnerships.
The Italian tax authorities have clarified that the exemption applies, provided that certain conditions are met with regard to:
Italy does not have a specific regulation regarding transfer of digital assets (such as email accounts or cryptocurrency) for the purpose of succession. Therefore, by interpretation of the general succession rules, it is considered that the transfer of digital assets should be expressly regulated by the will, indicating the heirs entitled to receive the assets and also the access codes to be used by the heirs.
Italian law provides for different planning vehicles in order to prevent the fragmentation of complex assets.
Individuals who wish to segregate assets and pass on their wealth usually incorporate a family enterprise, set up an unlimited liability company, or settle a trust.
Foundations are mainly used for charitable purposes.
Recently, the Italian legislator has introduced new rules to encourage the establishment of non-profit entities and the settlement of trusts for the benefit of individuals with serious disabilities.
Italy does not provide for a domestic regulation regarding trusts. However, Italy did ratify the Hague Convention of 1 July 1985, on the law applicable to trusts and their recognition, with Law No 364 of 16 October 2006. It follows that the setting up of a trust in Italy shall comply with the Hague Convention provisions and be subject to the foreign governing law selected by the settlor.
Despite this, the legislator has introduced rules governing the tax treatment of trusts. For further details, see 3.3 Tax Considerations: Fiduciary or Beneficiary Designation.
From a tax perspective, trusts are recognised as taxable entities.
The tax residence of trusts is determined according to the general principles set forth for other entities subject to corporate income tax, see 1.1 Tax Regimes.
Italian tax law provides for a set of presumptions under which certain trusts are regarded as resident in Italy for income tax purposes, as long as certain conditions are met. These presumptions are rebuttable, subject to evidence that the trust’s effective place of management and main purpose were not located in Italy for more than 183 days in a given tax year.
In principle, non-resident trusts are regarded as taxable persons for Italian corporate income tax purposes, to the extent that they are not regarded as 'interposed' under Italian law.
A trust is considered interposed and consequently disregarded for tax purposes – so that the relevant assets are considered not to haveeffectively been transferred from the settlor to the trustee – where the powers of management of the trustee are somehow limited or even merely influenced by the settlor or beneficiaries. Where the trust is considered interposed, income arising from the trust assets is imputed to the settlor and/or the beneficiaries, depending on the specific facts and circumstances, and taxed accordingly.
Non-resident trusts are taxable on Italian source income only.
Italian law provisions distinguish between opaque trusts (ie, discretionary trusts) and transparent trusts (ie, trusts whose beneficiaries are identified). Income realised by an opaque trust is subject to corporate income tax in the hands of the trust itself. By contrast, income realised by a transparent trust is directly attributed to the beneficiaries on an accrual basis – regardless of any actual distribution – in the same proportion as indicated in the trust deed or in other subsequent deeds or, where there is a lack of any such provisions, in equal parts.
As regards the income tax of the beneficiaries, any distribution made by a non-resident opaque trust should not be subject to income tax in the hands of the beneficiaries.
Given that Italy has no proper trust law, there have been no developments in this regard. However, in accordance with the established practice of the Italian tax authorities, should the settlor retain extensive control rights, the trust will be disregarded for tax purposes.
The most popular method of asset protection is the fondo patrimoniale, a family agreement whereby the partners may assign properties or other registered assets for the purpose of satisfying the needs of the family. Neither the assets nor the income produced by them can be claimed by third parties for purposes other than those assigned.
Trusts are commonly used in Italy to pass wealth and control from generation to generation.
A trust is frequently combined with the tool of usufruct. The settlor may transfer the bare ownership of the shares of the family business to the trustee and, at the same time, the settlor may retain the right of usufruct, in order to enjoy the economic rights and preserve the power of management of the business.
The same result may be achieved by establishing an unlimited liability company and combining it with the tool of usufruct.
Alternatively, the settlor may subscribe to a life insurance policy and appoint the trustee as the beneficiary of the insurance policy and the settlor's children as the beneficiaries of the trust. Upon the death of the settlor, the insurance company will pay the capital to the trustee and the children of the settlor will receive the trust assets only after reaching an appropriate age, at which point, the trust will be terminated.
It is worth noting that an entrepreneur may transfer shares with non-voting or limited rights to their descendants in order to pass on the majority of their wealth, while retaining control over the family business, and to predetermine who among their descendants will have future leadership of the company.
Italian law provides for so-called Patto di famiglia, by means of which an entrepreneur may transfer going concerns, branches of activity and shares of a company to their descendants. The agreement also includes, as parties, their spouse as well as all the future forced heirs of the entrepreneur. The descendants who benefit from the assignments pay the forced heirs a sum equivalent to the reserved share to which they are entitled, unless they renounce their share, entirely or partially. As a consequence of the execution of the agreement, the forced heirs shall not challenge such agreement alleging the infringement of their reserved share.
No discount is provided in case of transfer of partial interest in an entity lacking marketability and control.
For personal income tax purposes, the taxable base of the transfer of a partial interest in an entity is equal to the difference between the price agreed and the tax value of the interest. Capital gain is taxed in the hand of the seller at a rate of 26%.
For inheritance and gift tax purposes, the taxable base is equal to the fair market value. An exemption from inheritance and gift tax is provided for where there is a partial transfer of interest in partnerships in favour of the spouse or the descendants of the transferor, provided that the five-year holding period condition is met.
Family disputes over inheritance have gradually increased in recent years.
Most of the disputes among heirs seem to arise from the violation of the reserved share (see also 2.3 Forced Heirship Laws.). Indeed, should the will of the deceased not comply with the reserved shares, heirs (or their descendants) may challenge the will by means of a legal action, a so-called azione di riduzione, which enables them, in the event that the legal action is upheld, to take back the reserved shares. It is worth pointing out that disputes among relatives are also frequently connected to the management of the family business.
In addition to the above, creditors may bring a clawback action to avoid fraudulent transfers made by their debtor/trust-settlors in favour of a trust, which has been settled to pursue clearly elusive purposes, thus breaching civil, tax and bankruptcy provisions. Such disputes often imply uncertainty with regard to the applicable law and jurisdiction, also considering that Italian law does not have domestic legislation on trusts (see also 3.2 Recognition of Trusts).
Italy does not have a mechanism for compensating aggrieved parties in wealth disputes or disputes involving trusts, foundations or similar entities.
Under Italian law, fiduciaries are required to adopt a corporate form in order to assume the administration of assets on behalf of third parties.
Moreover, in order to carry out their activities, fiduciaries are required to obtain authorisation from the competent public authority. The granting of such authorisation is subject to compliance with certain capital and governance requirements by the fiduciary.
The rules of conduct applicable to fiduciaries typically require them to carry out their business in accordance with general standards of good faith and fair dealing, without being subject to specific obligation. However, a certain type of fiduciary (so-called 'dynamic fiduciary') is subject to the same regime of intermediaries providing investment services to clients, which includes special rules on conflict of interests, inducements, evaluation of the consistency of the investments with the characteristics of the client, and so on (see also 6.3 Fiduciary Regulation, below).
Italian law does not recognise the principle of piercing the corporate veil.
Upon acquiring legal personality, a foundation benefits from patrimonial autonomy and therefore the directors of the foundation are liable to the entity only in respect of the breach of the provisions concerning the mandate.
Given that Italy has no proper trust law (see also 3.2 Recognition of Trusts), the liability of the trustee is regulated exclusively by the governing law, unless the settlor wishes to subject the trustee to a law that differs from the governing law or, alternatively, to both the governing law and a law that differs from the governing law, in line with Article 9 of the Hague Convention.
Depending on the type of activity carried out, Italian law distinguishes between two categories of fiduciary companies, which are subject to different sets of rules: these are 'static' fiduciaries and 'dynamic' fiduciaries.
Static fiduciaries are entitled to administer the client’s assets without any discretion to dispose of the rights or goods of the client. In their administration activity, they act in accordance with the clients’ requests and instructions, in compliance with the standards of fairness and good faith.
Dynamic fiduciaries are entitled to discretionally administer the client’s portfolio. As a consequence, they are subject to the stricter regulatory constraints provided for entities which carry out the investment service of portfolio management as set out by the Consolidated Law on Finance (for further details on such regulatory constraints, see 6.4 Fiduciary Investment, below).
In this regard, static fiduciaries are required to obtain authorisation only from the ministry of economic development, while dynamic fiduciaries are required to obtain additional authorisation, granted by the Italian authority of financial markets (Commissione Nazionale per el Società e la Borsa, or Consob), which is subject to stricter capital and organisational requirements.
In general, static fiduciaries do not have legal restrictions in administering clients’ assets, other than the indications that may come from the clients themselves.
By contrast, dynamic fiduciaries must follow the rules laid down by the Consolidated Law on Finance when managing clients’ assets. For example, they must respect the general management strategy agreed with the client and they must evaluate the suitability of the investments with the client’s investment purposes, risk profile and financial situation, and invest only in suitable products (for example, highly risky investments are unlikely to be suitable for retail clients and, thus, the fiduciary should not include them in their portfolio).
With respect to foundations in general, Italian law does not provide any explicit limit to their investment choices and leaves it to the foundations to eventually define internal asset allocation rules.
As for trusts, it should be noted that Italy recognises trusts established under foreign law but does not provide a specific national regime (see also 3.2 Recognition of Trusts). Thus, the law under which the trust has been established applies, also with regard to the investment of the trust’s assets.
The concepts of domicile and residency are mainly used for tax purposes.
In general, to obtain Italian residency, a person has to be enrolled in the registry of resident population (anagrafe della popolazione residente). To this purpose, a foreign national is required to have a valid passport, a residence permit and available housing.
With reference to the requirements for Italian residence and domicile for tax purposes, refer also to 1.1 Tax Regimes, above.
Italian citizenship can be acquired by a person born to a parent who is an Italian citizen, or by a person born on Italian territory, if the parents are unknown, stateless or cannot transfer their citizenship to their children, as per the laws of the state of which they are citizens.
Foreign minors can acquire Italian citizenship by recognition or judicial ruling on maternity/paternity when the relevant parent is an Italian citizen, by adoption by an Italian citizen, or where one or both parents living with them acquire Italian citizenship.
Foreign persons of age can acquire Italian citizenship by recognition or judicial ruling on maternity/paternity only if, within a year of the recognition or ruling, they chose Italian citizenship through an express declaration. An older adoptee of age becomes an Italian citizen after five years of legal residence in Italy from the time of the adoption.
The foreign spouse of an Italian citizen can acquire Italian citizenship, upon request, two years after the marriage, if they live in Italy, or after three years, if they live abroad.
In addition, there are different cases in which Italian citizenship can be granted by presidential decree to foreigners who have been legally resident in Italy for at least ten years, or for special merits.
Italian legislation provides foreigners of Italian origin facilitated ways to acquire citizenship(see also 7.1 Requirements for Domicile, Residency and Citizenship, above).
A recent Italian law provides significant tax advantages in favour of trusts set up for the benefit of individuals affected by serious disabilities.
These tax advantages are subject to several conditions. In particular, the purpose of the trust shall be exclusively social inclusion, care and assistance of the individual with serious disabilities and such purpose shall result expressly from the trust deed; the trust shall be settled by public deed; the trust deed shall identify uniquely all the parties involved, the specific needs of the individual with disabilities to the benefit of whom the trust is settled, the care activities required, the duties of the trustee, including accountability, the individual appointed to verify compliance with the provisions of the trust deed, the use of the remaining trust assets; the beneficiary of the trust shall be exclusively the individual affected by serious disabilities; the trust assets shall be used exclusively for the trust purposes; the trust shall terminate upon the death of the individual with serious disabilities.
As regards trusts, where the abovementioned requirements are met, the following benefits are granted:
The same advantages apply to the establishment of special funds to assist severely disabled persons without family support and of the so-calledvincoli di destinazione, pursuant to Article 2645-ter of the Italian tax code.
Specific benefits are provided for the execution of an insurance policy (eg, deductibility of expenses incurred for insurance policies aimed at the protection of persons with severe disabilities).
Since Italy does not provide domestic regulations regarding trusts, the appointment of a guardian does not require any court proceeding.
It follows that even if a trust is settled in favour of individuals with serious disabilities (see also 8.1 Special Planning Mechanisms), the appointment of the guardian shall not be subject to any judicial procedure.
Depending on the level of disability and the related needs of the disabled person, Italian law distinguishes three different levels of assistant with respectively decreasing powers and prerogatives towards the disabled:
The appointment procedure varies according to which protection regime is to be applied. However, in all three cases, a decision must be rendered by a judge, ex officio or upon request made by the same disabled person, by a public attorney or, more frequently, by the disabled person's relatives.
From a social security point of view, incentives have been made available in the form of tax deductions in order to promote private pension plans. Although these tax-related measures have recently been reduced, the law-making approach is still aimed at encouraging people to invest in private pension funds.
Pursuant to Italian law, children born in or out of wedlock, or adopted, enjoy the same rights.
Italian law expressly gives the same legal status to all children and it defines kinship as the relationship among descendants of the same progenitor, whether in the event of children born in or out of wedlock or adopted.
Such provisions apply only to full adoption, however. According to Italian law, kinship does not apply to individuals adopted at the age of 18.
Italian law recognises civil partnerships between individuals of the same sex.
A civil partnership is registered by a civil registrar and involves a declaration made by the same-sex couple in the presence of two witnesses.
All provisions referring to marriage and including the words 'spouse' or 'spouses' or equivalent terms, automatically apply to both parties in a civil partnership in order to ensure full protection of their rights, as well as compliance with the obligations arising from same-sex civil partnerships.
According to Italian law, provided that the civil partnership is duly registered before the Italian competent authority, transfers in favour of the surviving partner of a same-sex couple are subject to inheritance tax at a rate of 4%, on the value of the assets exceeding EUR1,000,000.
Italian law grants tax benefits in favour of non-profit entities established for public-interest purposes – to be pursued through specific activities selected by the legislator, carried out exclusively or primarily – and enrolled in the register called Registro Unico Nazionale del Terzo Settore.
In particular, mortis causa transfers and gifts in favour of such entities are not subject to inheritance and gift taxes.
In addition, gifts are partially deductible from the taxable basis for income tax purposes.
Foundations and trusts are commonly used in Italy for charitable purposes.
Foundations allow the allocation of certain assets for specific charitable purposes. The directors of the foundation are entrusted with the management of the assets and they are liable vis-à-vis third parties. The government controls and monitors the activity of the directors in order to ensure, inter alia, that the assets of the foundation are used for the specific charitable purpose set out in the bylaws of the foundation.
Foundations are set up by public deed and acquire legal personality, further to a legal procedure which may take up to 180 days.
Trusts are regularly used for charitable initiatives, both by public entities and individuals. A trust is a very flexible tool and it allows segregation of the financial and economic resources to be used for public utility.
Furthermore, the settlor may verify, personally or through the activity of a protector, the performance of the purposes of the trust and the management of the assets by the trustee.
Italy has never been among the most attractive countries for foreign investors, due to several reasons, such as the instability of the political system and the quite high taxation on both individuals and corporations.
However, despite the high taxation on income, Italy has very favourable tax rates on inheritance and donations (from 4% to 8% of the estate with free-tax allowances up to 1,000,000 euro) and it allows the transfer of movable and immovable assets between the generations with a very low imposition.
Therefore, in order to attract foreign people to Italy, the Italian Government has recently introduced some special tax regimes and other favourable measures aimed to incentivise foreigners to move their tax residence to Italy and, thus, to invest in the country.
The Introduction of Special Tax Regimes
The tax regime for new HNWI’s residents
With the 2017 Italian Budget Law, indeed, the new Article 24-bis of the TUIR (Italian Tax Code) has been introduced, which provided for the first time ever in Italy a special flat-tax regime applicable to the foreign high net worth individuals transferring their tax residence to Italy.
The legislation, inspired by the successful experiences recorded by other foreign countries, provides a substitutive tax on all income produced abroad by the new resident instead of the ordinary taxation, in derogation of the general principle of 'worldwide income taxation', that is applicable to all individuals who qualify as tax-resident in Italy.
The concept of 'tax residence' in Italy is, however, quite different from that of those “common law” countries, such as the United Kingdom, in which the 'res non-dom' regime has been successful over the years.
In Italy, an individual is a tax resident if at least one of the following conditions is met:
The new tax regime is available to individuals moving their tax residence to Italy – on the terms described above – provided they have not been resident in Italy in nine out of the ten previous years. The option can be extended to one or more related persons (registered partner, children, parents etc) on the same conditions.
In order to obtain the special tax regime, the taxpayer should opt for it through his or her Italian tax return relating to the tax period in which he or she moves to Italy.
However, a preliminary ruling request can be filed with the Italian Revenue Service, in order to obtain confirmation that each specific case fulfils the conditions required for granting the benefits.
The request can be approved or rejected within 120 days, and the decision is final. If no answer is provided, the request is deemed approved. The approval is binding on Italian Tax Authorities as a whole.
In exercising the option, the taxpayer must indicate the country of his or her last tax residence. It is stated that, in addition to ordinary international exchange of information procedures, this information will be shared with the country of origin of the incoming taxpayer.
The special regime consists of a derogation from the ordinary 'worldwide income' principle applicable to Italian tax residents: all foreign-source income generated during the validity of the option is subject to an overall forfait flat tax.
This 'substitutive tax' is fixed at EUR100,000 per year, plus EUR25,000 per year for each family member covered by the option. The flat tax must be paid on ordinary due dates for tax filings.
Since the above tax represents a 'substitutive tax' of the Personal Income Tax (so-called IRPEF), no rule of ordinary taxation will be applied (ie, no Italian tax credit is granted for any taxes paid abroad).
However, the tax payer can request exclusion of income generated in certain countries from the substitutive tax system, so that they will be subject to ordinary taxation and tax credit may be granted (the so-called 'cherry-picking' system).
The categories of foreign income that may be covered by the new tax regime are: income from foreign real estate; foreign-source investment income; income from employment work performed abroad; income from self-employment activities performed abroad; business income derived from foreign permanent establishments; capital gains derived from sale of foreign assets and miscellaneous income derived from foreign sources.
Capital gains derived from disposal of qualified capital shares in foreign companies are expressly excluded from the special regime if realised within the initial five years of the validity of the option, and are therefore subject to ordinary taxation.
A capital share is 'qualified' when (i) it represents a share of 25% or more in the capital or net worth of a company, or more than 20% of the votes to be exercised at ordinary shareholder meetings, if the company is not listed on a regulated exchange; or (ii) it represents a share of 5% or more in the capital or net worth of a company, or more than 2% of the votes to be exercised at ordinary shareholder meetings, if the company is listed on a regulated exchange.
The effects of the regime
Taxpayers admitted to the special regime (and their relatives if the option is extended to them) will only pay the substitutive tax on all foreign-source income unless they have requested the exclusion of any country.
However, they will be subject to ordinary Italian taxation on their domestic income.
In addition, they are exempted from reporting obligations concerning assets held abroad by the tax residents in Italy and therefore are not required to file the so-called 'RW Form' and they are exempted from Italian estate tax on foreign movable and immovable assets (IVIE and IVAFE).
The special tax regime can last for a maximum of 15 years from the initial exercise of the option and can be surrendered at any time by the taxpayer. The regime can also expire if the flat tax is not paid on due dates.
In both cases, it will not be possible for the taxpayer to exercise the option again.
The effects on inheritance tax and the wealth planning
Foreign assets are excluded from Italian inheritance and gift tax if the transfer takes place (as a consequence of death or donation) during the period of validity of the option. Assets located in Italy are subject to ordinary inheritance and gift tax, although it is worth noting that the Italian regime is very favourable (rates vary between 4% and 8%, with very high tax allowances).
The above provision, indeed, is quite important for good wealth planning, especially considering that the inheritance tax rates of the other Europeans countries are really high and can range between 20% and 45%.
Therefore, if the deceased benefits from the new tax regime upon the death he or she is totally exempted on the taxation of the asset held abroad.
It should obviously be considered that, if the asset is located in another country, the domestic tax law of that country can be applied.
The new favourable regime for pensioners moving to Southern Italy
After two years since the introduction of the substitutive tax regime for the new residents, the Italian Government decided to increase the tax incentives for people who want to move and invest in Italy, addressing a new tax relief to pensioners.
The 2019 Italian Budget law, indeed, introduced another special tax regime for people who want to move to Southern Italy, in order to promote the development of that area.
In order to benefit from the new regime, the taxpayer should transfer his or her residence to the South of Italy and, more specifically, to a municipality with a population of fewer than 20,000 inhabitants, belonging to the following regions: Sicilia, Calabria, Sardegna, Campania, Basilicata, Abruzzo, Molise and Puglia.
The provision, introduced by Article 24-ter of the TUIR, is aimed to incentivise foreign wealthy people to invest their money in the South of Italy, which is an area characterised by beautiful landscapes and a high quality of life, but also by a large emigration of young people, who move abroad looking for a job.
The taxpayer who opts for the new regime can benefit from a reduced tax rate of 7%, rather than a progressive tax rate up to 43%, both on the pension income and on all the income produced abroad during the period of the validity of the tax regime.
The applicants are to opt for the new regime through the tax return related to the first fiscal year for which the election is made.
The option can last for a maximum of six years and it can be surrendered at any time by the taxpayer.
In addition to opting for the new residents’ flat-tax regime, the taxpayer can request the exclusion of income generated in certain countries from the option, so that they will be subject to the ordinary taxation and the tax credit may be granted.
Finally, the new regime for pensioners also grants the possibility to the taxpayers to be exempted from reporting obligations concerning assets held abroad by tax residents in Italy (and therefore are not required to file the so-called 'RW Form') and to be exempted from Italian estate tax on foreign movable and immovable assets (IVIE and IVAFE), which is equal to 0.2% on the balance of the movable asset and 0.76% on the purchase price of the properties abroad.
The effects on inheritance tax and wealth planning
Although the two regimes introduced by the Articles 24-bis and 24-ter of TUIR have many similarities, the option available for foreign pensioners has significant differences.
Among other things, it should be noticed that the new scheme for retired people does not exempt the taxpayers from the payment of inheritance tax and the gift tax on the asset held abroad.
This is a very disadvantageous point, considering that the regime is addressed to pensioners and they are generally interested in an accurate estate planning.
However, it is again worth emphasising that the Italian tax rates are still quite generous, therefore even if they are applicable to the estate, the cost will not be too high.
Another difference between the two regimes is in the tax treatment of the capital gains on qualified foreign capital shares.
While the new residents’ regime expressly excludes from the taxable base of flat-tax any capital gains derived from the disposal of qualified capital shares in foreign companies if realised within the initial five years of the validity of the option – therefore they remain taxable according the ordinary rules - the new regime for pensioners does not say anything about that, so capitals gains realised abroad are also taxed with the 7% tax rate applied.
The above consideration should therefore be analysed very carefully by all those who are thinking about a wealth planning, considering that the two regimes are not incompatible with each other: it means, for instance, that a pensioner can opt for the regime of 24-ter of TUIR and benefit from the 7% tax rate on capital gains from qualified shares held abroad and, the following year, he or she can choose the new residents’ regime (if he or she meets the criteria) and benefit from the exemption of the inheritance tax.
New Tax Benefits for Investing in Italian Companies
The Italian Government has increased the attractive measures for those who want to invest in the Italian companies, granting many tax benefits to the investors.
Some tax measures, indeed, even if introduced only over the last few years, have been increased or extended by the 2019 Italian Budget Law and the so-called 'Growth Decree' ('decreto crescita'), which recently entered into force.
First of all, the increased tax benefits for both individuals and legal entities investing towards innovative start-ups and small- and medium-sized enterprises (SMEs) should be mentioned.
An innovative start-up is an Italian resident capital company, which meets some criteria and has as its business objective the development or marketing of hi-tech goods and services.
A small- or medium-sized enterprise is a company with fewer than 250 employees per year and with an annual revenue of under EUR50 million.
The law provides that the mentioned investments will benefit from a substantial break on Italian income tax (IRPEF allowance for individuals, IRES deduction for corporations) and the 2019 Italian Budget Law increased it from 30% to 40% (if the investment is made from 1 January 2019 to 31 December 2019) of the amount invested up to EUR1,000,000, thus the maximum annual benefit available is equal to EUR400,000.
Secondly, new rules have been provided for the so-called 'Individual Saving Plans' (Piani individuali di risparmio – or PIR), which are investment tools, introduced by the Italian Government in 2017 with the goal of matching the tax benefits of the investor with the need to boost the cash flow of the Italian SME’s (small- and medium-sized enterprises).
The investor who subscribes to a PIR under certain conditions can be exempted from any tax on profits and capital gains produced by each investment and is also exempted from the inheritance and gift tax on those assets. The tax incentives, however, are subject to investments limited to EUR30,000 euros per tax year, with a holding period of five years, and a maximum of EUR150,000 per investor.
Finally, new tax savings have been granted in relation to the European long-term investment funds (ELTIFs),which have recently entered into the Italian market and Italian legislation.
ELTIFs are long-term investments and typically illiquid. They are aimed at financing projects with an average duration from seven to ten years and, often, the instruments through which investments are made do not allow an early liquidation of their shares.
For this reason they are particularly addressed to high net worth individual investors with an asset typically higher than EUR500,000 euros, who can allocate a portion of their assets to investments at medium to high risk with an higher remuneration.
According to the new 'Growth Decree' the income derived from the above investments is tax-exempted and the investments’ asset transferred to the heirs is exempted from inheritance tax.
The Use of Trust in the Estate Planning
Italy does not have a proper trust regulation; however, the institute of trust has been recognised in Italy through the ratification of the Hague Convention of 1 July 1985 and trusts are fairly used for both family and business planning (trust as shareholders' agreement, trust holding, etc).
Trusts could indeed be very useful in estate planning, considering that the inheritance and gift taxes on the trust’s asset shall be paid when the asset is transferred to the trust and not when it is distributed to the beneficiaries, since establishment of the trust and the subsequent devolution to the beneficiaries of the trust fund are considered two autonomous events from the tax point of view, which therefore creates different tax events.
It is worth specifying that the indirect taxation of the trust has not been a straightforward matter and the Supreme Court of Justice in Italy has issued many sentences in order to clarify the tax event which determines the applicability of the inheritance or gift tax (ordinances No 5322/2015, No 3886/2015, Nos 3735 and 3737/2015, No 734/2019, sentence No 4482/2016, etc).
The advantage of anticipating the tax event for inheritance and gift tax purposes is that it allows the trust to benefit from the current – and very low – tax rates, avoiding the risk of a future increase, which was provided for by a law proposal of the Italian Parliament in 2015 but never became effective.
The current inheritance and gift tax rates are indeed very low compared to the average of the other European countries and they are calculated, in the case of trusts, on the basis of the degree of relationship between the settlor and the beneficiaries, described as follows:
A special tax exemption is granted, under certain conditions, to the transfer of the assets to the trust trust established for beneficiaries with a severe disability (recognised by the law No 104/1992), due to the provision of Law No 112/2016.
The Impact of the Reform of the Italian Civil Code on the Development of the Wealth and Estate Planning
The Italian Government has recently approved a draft law with the purpose of authorising the adoption of many decrees aimed also at reforming key aspects of the Civil Code. Many points included in the decrees mentioned, if implemented in the near future, may have a tremendous impact on wealth and estate planning.
The introduction of prenuptial agreements
One of the proposed modifications concerns the introduction of the possibility to draft prenuptial agreements for the purpose of regulating personal and property relations between the spouses in the event of a potential divorce. The effect of such provision will have a remarkable influence, since currently prenuptial agreements (as for post-nuptial agreements) are not recognised by Italian jurisdiction, with an express general prohibition provided by the Article 160 of Civil Code, which establishes the unavailability of the rights arising from the marriage.
Italian law provides for two types of conventional marital property regimes: separation of property and conventional community of property, either of which can be chosen by the parties upon marriage.
The conventional community of property regime provides that, as of the date of marriage, all property belongs to both spouses in equal shares (even if this regime is much less common nowadays).
The separation of property, instead, provides that, upon marriage, each spouse maintains exclusive ownership and the right to use and administer property acquired before and after the marriage without exception, and shall meet his or her own debts with his or her own property.
Through the introduction of prenuptial agreements the Government finally recognises the advantage regulating in advance nuptial relations in order to limit all the possible problems related to rights and obligations of the couple, since the contents of the agreement will not be delimited to property rights but also to the criteria of family life and children’s education.
Since same-sex civil unions were recognised by Italian civil law in 2016, prenuptial agreements of same sex civil couples will be subject to the same regime applying to married couples.
The abolition of ban of succession agreements
In relation to successions, the decree provides for the possibility to stipulate succession agreements, which actually are forbidden by Article 458 of Civil Code. In more detail, the possibility has been provided, under specific conditions, to enter into agreements with the aim of regulating the distribution of specific assets of the estate to certain heirs, establishing in advance the allocation of the goods. Other type of agreements may be implemented with the possibility of renouncing ahead of time to the rights that may arise from a succession.
Finally, many provisions have been established to simplify the inheritance rules according to the European Certificate of Succession introduced by Regulation (EU) No 650/2012, with the goal of giving certainty to the circulation of inherited goods.
Towards the regulation of Trust Law in Italy
The only regulatory news involving the instrument of trust was introduced by the Law No 112/2016, which has been already mentioned under the heading 'The use of trust in the estate planning', with the aim of facilitating assistance and to promote the autonomy and independence of disabled people. Thus, the legislator granted some tax benefits for the disbursements from private individuals through the institution of trusts and other juridical instruments aimed to cover a life-time's assistance to disabled people and their special needs.
Other than the above provision, the main legal framework in relation to trusts depends upon international rules, the internal judge’s decisions, and the Italian Tax Authority circulars.
The Italian Legislator, aware of the wide use of the trust for regulating different and heterogeneous issues, has provided an act which will also enable regulation of the trusts on an internal level. The rules, if implemented, will have a great impact on private clients and the whole wealth planning sector, considering that the use of the trust is increasing significantly as a result of its appreciated flexibility and possibility to regulate heterogeneous circumstances.
A specific internal law, in accordance with the principles of the Hague Convention, would be more than welcome.
The reform of the Third-Sector Bodies
New trends also concern Charitable Planning, due to a recent massive reform of the 'third sector', which involves Associations, Private Foundations and entities that aim to pursue a bountiful scope. Philanthropy is indeed recently moving towards a promising future and new forms of community charities are emerging.
In 2016, the Italian Government approved, with Law No 116/2016, a Legal Reform that introduced for the very first time a complete regulation, both civil and fiscal, for all the third-sector bodies: it gives a unitary definition and general guide lines for the activities (i.e.ie, institutional) that need to be done by them. This Reform implemented the discipline from different points of view: it has introduced a new national register but it has also reorganised the general administration.
The Italian tax legislation about philanthropic donations provides that, if the donor is an individual tax resident in Italy and he or she makes a donation to the so-called third-sector bodies, he or she can benefit from a deduction of 30% of the donation from the personal income incurred from the taxpayer (or 35% if the donor is a non-profit organisation), up to a maximum donation of EUR30,000 for each tax year.
As an alternative, donations made by cash or in-kind contributions are deductible from the taxable base of individuals, philanthropic bodies and business enterprises up to 10% of the total declared income. In addition, there is the exemption from the inheritance and gift tax for all the donations to the third-sector bodies.
In order to co-ordinate the recent modifications that have emerged from the reform, the draft law of the reform of the Civil Code established a specific enabling act to modify the articles dedicated to Associations and Private Foundations.
It is clear that developments in the private wealth sector now depend heavily on that wide range of changes to the provisions of the Civil Code that have not been this remarkable since its adoption in 1942.
The law decrees are supposed to be adopted within one year from the entrance in force of the draft law, so this massive reform will likely start in 2020 and will open a new era for the wealth-planning sector.