3 febbraio 2020
Which are the main domestic and cross-border tax issues arising from the enforcement of the Italian special tax regime for inbound pensioners?
Il Punto di Gianmaria Favaloro e Raimondo Rossi
Starting from 2019, an inbound pensioner – who qualified as tax resident, at least, for the previous five fiscal years, in a ‘white list’ Country (Ministerial Decree 04.09.1996 ) – might benefit from a 7% flat tax rate on all the foreign-sourced income and gains (i.e., not limited to the non-Italian sourced pension), up to ten (1+9) years from the transfer of the tax residency to Italy. Among the mandatory requirements, an eligible individual must perceive a foreign pension income likewise has to transfer his/her residency in a Municipality, with no more than 20.000 inhabitants, located in one of the Italian southern Regions (namely: Sicily, Sardinia, Calabria, Campania, Basilicata, Abruzzo, Molise, and Puglia). Besides, the option for the regime provides for an exemption from the Italian wealth taxes due on the financial assets and real estate held outside of Italy (so-called IVIE e IVAFE) as well as from the tax monitoring obligations. Conversely, the eligible pensioner shall not benefit from an exemption and/or special tax rates on the ordinary Italian sourced income – subject to the ordinary progressive tax rates (from 23% to 43%) – except for financial income and capital gains arising upon the disposal of shareholdings, subject to a 26% substitutive tax. Surprisingly, concerning the Italian inheritance and gift tax, no exemption has been foreseen for the assets held abroad (please note that from a civil law perspective, the Regulation (EU) No. 650/2012 might apply accordingly). However, it is worth highlighting that the Italian inheritance and gift tax rates are among the lowest in Europe, as well as the applicable exemption thresholds all among the highest.
As already said, an individual – to be eligible for the regime – must perceive a foreign pension income under Art. 49, par. 2, let. a) of the Italian Income Tax Code (TUIR). As a general rule, all the income perceived following the termination of a working activity and by virtue of specific seniorities in terms of contribution shall fall within the said ‘pension income’ category. Thus, according to the above mentioned domestic definition, all the income that qualify as such according to the provisions of the (foreign) sourcing Jurisdiction shall fall within the category of ‘pension income of any kind and/or equivalent checks’ (Art. 49, par. 2, let. a), TUIR). Furthermore, also in the case of foreign pension income arising from voluntary payments made by the individual, he/she should not meet any risk in terms of withdrawal from the special tax regime. Indeed, even if the period of the voluntary contributions does not coincide with the years actually worked by the individual, as soon as the pension income is perceived starting from the retirement date, it might be considered – in any case – compliant with the above-mentioned domestic definition.
From a cross-border tax perspective, in accordance with the OECD and UN Model Tax Convention, the taxing right on the pension income lies in the hands of the Country of residence of the pensioner. On the contrary, in case of pensions paid by a public body in relation to non-commercial activity, the taxing right lies exclusively in the hands of the source Country (Artt. 18 and 19 of both OECD and UN Model Tax Convention (2017)). These provisions, combined with the non-harmonized framework of taxation of pensions among different Countries (also within the European Union), various taxation schemes arise dealing with pension income, from E-E-T to T-E-E), have to be duly considered by the inbound retiree, mainly because Italy applies an E-T-T scheme both for the domestic and foreign pensions.
Given the above, the 7% substitutive tax applies to all the non-Italian income perceived by the pensioners, including foreign financial income and capital gains arising upon the disposal of shareholdings (with no limitation for ‘qualified shareholdings’). In this regard, under the Italian ordinary taxation regime, all the financial income and capital gains (other than the one arising from low-tax Jurisdictions, according to specific rules) – perceived on a worldwide basis by tax residents individuals – are generally subject to a final 26% substitutive taxation. Thus, due to the application of the said special tax regime, the 26% substitutive (flat) tax rate shall fall to 7%. If so, the retiree should communicate the special status to the Italian tax resident intermediary (if any) involved in the management of the financial assets, before cashing the foreign-sourced income.
Moreover, the eligible individual ought to consider the existence of any ‘exit tax’ in the Country where the retiree held the tax residency before the relocation to Italy. Eventually, the exit tax is levied by the ‘Country of departure’ through a deemed realization for tax purposes of certain assets (e.g., shareholdings) at the time of the relocation to another Country or through an extension of the tax liability of the departing taxpayer for a certain period after relocation (trailing tax). Other Countries provide for the recapture of previously claimed deductions and deferrals (clawback). Particularly, with reference to shareholdings, the exit tax on accrued and unrealized increase in value is traditionally justified by the theory of economic allegiance that allocates taxing rights in relation to such assets to the Country of residence of the investor, generally, on a pro-rata temporis basis.
Under the special tax regime, upon the relocation to Italy, the ‘exit tax’ eventually levied from the Country of departure should be duly assessed both based on the well-established EU principles – to ensure the correct allocation of taxing rights among Member Countries (inter alia, Cases De Lasteyrie de Saillant, X&Y, N. v. Inspecteur, Van Hilte-Van der Heijden, Bachmann and recently Wächtler) – and of the Double Tax Treaty (if any, in force between Italy and the Country of departure). In this regard, from an Italian tax perspective, it is undeniable that the possible ‘cash flow issue’ arising from the application of an exit tax in the Country of departure might be outweighed by the consequential step-up of the value of the same foreign assets. Notably, the ‘entry’ step up granted by the Anti Tax Avoidance Directive (ATAD) – included in Art. 166-bis of the TUIR – does not apply to assets held by individual taxpayers acting out of the course of business (as a retiree reasonably should be). Hence, as provided under Italian Tax Authorities guidelines (Circular Letter No. 17/E/2017 and Resolution No. 67/E/2007 (dealing with Italy – Germany DTT)), the Italian tax basis step-up arises only in case of application of an exit tax in the Country of departure.
Finally, with reference to any possible withdrawal from the special tax regime, it is worth highlighting that, as of today, an individual acting out of the course of business does not trigger any exit taxation in Italy.
