The Italian Stability Law for 2019 finally approved on 30 December 2018 has introduced a new article (art. 24-ter) in the Income Tax Act (ITA). It includes a substitute tax of 7%, in lieu of ordinary taxation, on all non-Italian-sourced income earned by foreign pensioners transferring their tax residence in the southern regions of Italy. The special regime is optional and available for the fiscal year in which the transfer of residence occurs and for the following 5 years. Despite its novelty, the potential field of application of the regime already appears quite narrow. Contrary to the special regime for High-Net-Worth-Individuals (HNWIs) inserted in art. 24-bis ITA in 2017, the new regime for incoming pensioners is in fact subject to several requirements. These requirements are summarized below in bullet points and a short clarification is provided for each of them.
Requirements for 7% income tax
Subjective requirements
The new regime is limited to pensioners. The identification of the applicant as a “pensioner” is made through a reference to the person in question receiving “pension income” as defined by art. 49(2)(a) ITA, which for income tax purposes includes pensions in the same category of income from dependent employment. Foreign pensions are therefore defined not based on a renvoi to the domestic tax rules of the relevant foreign state — and indeed, which state? The country in which the entity paying the pension is located or the country of the taxpayer’s last tax residence?, but by way of a “mirror reading” of the Italian relevant tax rules.
Interestingly, the definition of art. 49(2)(a) ITA includes not only “pensions of all kinds” but also other similar payments (even non-periodic or lump-sum). As explained by the Italian Ministry of Finance in the Circular Letter No. 1 of 1973, pension remuneration in particular includes sums paid in respect of past employment other than dependent employment (e.g. self-employment), disability pensions, and survivor’s pensions. Instead, the regime does not seem to be equally available to individuals receiving social security or war pensions, since under Italian income tax such kinds of pensions are exempt.
It should also be considered that no distinction is made under Italian income tax between pensions from private and public employment, as instead provided by arts. 18 and 19(2) of the OECD Model. Given the broader possibility to tax pensions from public employment granted to the source state under art. 19(2) of the OECD Model, which Italy consistently follows in its tax treaties, it can however be assumed that the new special regime would appeal especially to those receiving a pension from private employment, since this latter is taxed only in the recipient’s residence state.
The regime entails a look-back period. The option for the special regime is in fact restricted to pensioners who have not been Italian tax resident for at least 5 years before exercising the option in the first income tax return. Tax residence is determined based on the three alternative criteria laid down in art. 2(2) ITA, i.e. (i) registration in the municipality register of resident individuals, (ii) domicile in Italy under art. 43(1) of the Civil Code, or (iii) residence in Italy under art. 43(2) of the Civil Code.
