On 16 October the Italian Government preliminarily approved the draft legislative decree implementing Law 111/2023, which brings important revisions to the preferential regime for so-called repatriated workers, rules around individual tax residence, and criteria for corporate residency.
Proposed changes to the preferential regime for Repatriated Workers
Starting from 2024, the Italian government aims to tighten the eligibility norms for its preferential tax regime for so-called "repatriated workers."
It is proposed that the scheme should only apply to workers possessing high qualifications and specializations.
The benefit will be restricted to employment and assimilated income, as well as self-employment income generated in Italy. Business income of company owners is notably excluded. Additionally, an income limit of EUR 600,000 will be introduced.
Tax relief will be capped at 50% of income, a decrease from the current 70%, while also eliminating the additional tax relief currently available for transfers to Southern Italy.
Along with the above, more stringent requirements regarding the foreign residency period and commitment to Italian residence are proposed to be implemented:
- Foreign residency period for workers is extended to three years.
- A commitment to maintain residence in Italy is extended to five years.
These adjustments seem to steer the tax incentives towards attracting high-value human capital to the Italian market while reducing the fiscal burden on the state.
Residence for Individuals: Revision of identification criteria
A shift is underway in how individual tax residence will be determined in Italy to be more adaptable to global mobility trends and nuanced individual circumstances. Based on early drafts of the tax reform legislation in circulation, the new rule considers an individual to be a tax resident in Italy – and therefore subject to worldwide taxation – if for most of the tax period (including fractions of a day) the individual:
- Has residence, which will be understood in the broadest sense;
- Has domicile focused primarily on personal and family relations;
- Is actually present in the territory of the State.
The new legislation allows for counting "fractions of a day," catering to highly mobile individuals who may not spend complete days in the country. This criterion aligns with the stance taken by the Financial Administration concerning the tax regime applicable to income earned in Italy by individuals residing in countries with double taxation agreements.
Another significant change relates to the definition of the terms residence and domicile as they relate to the territory of the State. Specifically, concerning the concept of "residence," there is no longer any reference to legal provisions, according to which residence is where a person has their habitual abode. However, there is nothing to prevent continued reference to this definition. A criterion of "mere presence" on the Italian territory for determining tax residence is introduced, echoing similar approaches in the United States and the United Kingdom.
More disruptive are the changes affecting the concept of "domicile," which should no longer be identified as the place where the individual has the main seat of their affairs and interests (both economic and personal) but rather where the person's primary personal and family relations develop.
The draft legislation proposes a change from an absolute to a relative presumption regarding the enrolment in the resident population registry, reducing the weight of such registration. Unlike the current formulation, the "relationship" between the taxpayer and the population register can be overridden by allowing the individual the opportunity to provide contrary proof concerning their actual domicile.
This shift by the legislator aims for simplification as interpretations, particularly in case law, have been rather confusing. It should alleviate the need for complex assessments of uncodified factors related to financial, economic, moral, social, and personal aspects. Consequently, it is hoped that clearer elements could reduce the initiation of proceedings by the Financial Administration.
Corporate Residency: Effective Management Takes Center Stage
The draft decree also introduces significant revisions to corporate residency rules. Criteria such as "administration" and "main purpose" are replaced by "effective management" and "day-to-day management."
- Effective place of management is defined as the continuous making of strategic decisions concerning the company.
- Day-to-day management refers to the ongoing operational decisions concerning the company.
These redefined requirements will operate in an alternating relationship, maintaining the concept of integration for most of the tax period.
The reform streamlines the criteria, anchoring them to practical aspects of management and aligning with international best practices.
Conclusion
Italy’s draft legislative decree portends a significant recalibration of its tax regime, affecting repatriated workers, individual residents, and corporations. These changes not only reflect Italy’s attempt to align its taxation rules with international standards but also represent a strategy aimed at both fiscal prudence and the attraction of high-value skills and effective corporate management to the country.
For existing and potential taxpayers - individuals and corporations alike - the coming years will require careful navigation and possibly restructuring to adapt to this new fiscal landscape.
Given the complexity and comprehensive nature of these changes, consulting with tax professionals, like Fidinam, is advisable for alignment with the new norms. Contact us via the form below or at info@fidinamgw.com to schedule a consultation.
