Lump sum taxation in Italy: how does it work for Ukrainians?
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Due to the recent implementation of automatic tax information exchange in Ukraine, an increasing number of wealthy individuals are considering the option of relocating their tax residency to another country. As we've discussed in previous articles, popular choices for personal relocation include Cyprus, the UAE, and Monaco. However, not everyone is comfortable with the scorching climate of the UAE (which now requires a 90-day residency per year) or the 60-day residency requirement in Cyprus. Additionally, some people may be hesitant about the high cost of living in Monaco.
Nevertheless, high net worth individuals generally prefer to stay in Europe and are willing to pay taxes for the privilege of residing there.
In recent years, certain EU countries such as Switzerland and Italy have introduced favorable tax regimes specifically tailored to these individuals. These regimes offer the opportunity to pay a fixed tax rate per year, regardless of the individual's worldwide income. Let's delve into these regimes in more detail.
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The fixed income tax rates in Italy and Switzerland
These tax regimes primarily attract individuals with extremely high incomes, often in the multimillion-dollar range. It's worth noting that the fixed tax rates are usually high:
- Italy – €100,000;
- Switzerland – CHF 150,000 to CHF 400,000.
However, for a high net worth individual (HNWI) earning, let's say, million annually, it might be more appealing to pay €100,000 in Italy rather than 5,000 (19.5%) in taxes in Ukraine. Additionally, one would have the opportunity to live in a beautiful and civilized country.
One significant advantage of obtaining tax residency in Italy under the lump sum taxation regime is the exemption from declaring foreign companies or Controlled Foreign Corporations (CFCs).
Now, let's delve into the specific characteristics of this tax regime in more detail.
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Lump Sum Taxation in Italy
This tax regime was specifically designed for individuals who are planning to move to Italy but have never been tax residents of Italy before (or haven't been tax residents for many years prior to applying). It is also intended for those who intend to pay taxes on their foreign income in Italy.
Under this regime, all foreign income of individuals is completely exempt from taxation in Italy*, on the condition that the individual pays a fixed annual tax rate of €100,000. Additionally, family members can also participate in this program by paying an extra €25,000 for each family member.
*There is no need to declare this income in Italy, and the individual is also exempt from paying the Italian "luxury tax" on it.
If the individual starts earning income in Italy, such as through employment, that income will be subject to regular tax rates in Italy.
Within this regime, any foreign assets received through gifts or inheritances are not subject to taxation in Italy. The individual is also exempt from annual taxes on foreign real estate and financial assets.
However, during the first 5 years, the preferential tax regime cannot be applied to investment profits that meet the criteria of a "qualifying shareholding" (meaning ownership stake must be over 20%). In such cases, the regular tax system is applied. So, for instance, if the applicant's main source of income is from trading securities or bonds, Italy may not be the best choice for personal relocation.
In such situations, our team of lawyers explores alternative jurisdictions for the client and their business relocation.
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How to participate in the Lump Sum Taxation program in Italy
To become a participant in the program, you need to fulfill certain requirements. First, you must not have been a tax resident of Italy for at least 9 out of the last 10 years. Second, you need to physically relocate to Italy in the year you wish to be considered a tax resident and reside there for a minimum of 183 days per year. It's important to complete the move before July 2nd of the desired tax residency year.
To apply for the program, you must submit your participation request before the deadline for filing regular tax returns, typically by November 30th of the following year for the previous tax year (for example, by November 30, 2023, for the year 2022).
In other words, to participate in the program, you need to actually relocate to Italy in the year you want to be considered a tax resident and continue to reside there for a minimum of 183 days each year to maintain your participation in the program.
There are two ways to apply for participation in the program:
- Indicate your intention in your annual tax return, which is due by November 30th each year for the previous year.
- Request a Tax Ruling** at any time. This is an optional step. The tax authority usually responds to the ruling request within 120 days.
**A Tax Ruling is a process where you provide your specific information, describe your income sources, and seek confirmation from the tax authority that, given your situation, you qualify for full tax exemption in Italy in exchange for a fixed fee of €10,000.
Individuals can participate in the preferential tax regime for 15 years.
However, we strongly advise seeking guidance from the Italian tax authorities to obtain a Tax Ruling, which helps avoid any potential misunderstandings regarding tax obligations.
This regime offers the following additional benefits:
- Visa-free or simplified entry to all European countries and the Schengen Area.
- Visa investors are not required to maintain permanent residency in Italy.
- Access to free healthcare services and enrollment in international schools and universities.
- After 5 years of holding a visa, investors can apply for permanent residency (Permesso di Soggiorno). Furthermore, after 10 years of continuous residency (starting from the initial visa issuance), individuals can apply for Italian citizenship. EU citizens have the option to apply for citizenship after 4 years.
Today, we have already assisted our clients from Ukraine with this procedure as part of organizing their personal relocation process. If you are also considering and searching for the optimal jurisdiction for either temporary or permanent residence, don’t hesitate to contact us. Our lawyers can:
- Help you determine the most suitable jurisdiction based on your specific preferences.
- Assess your tax residency status, taking into account various factors such as property ownership, movable assets, family ties, and registrations in both Ukraine and your intended country of residence.
- Assist in identifying the types of income you receive in Ukraine and abroad.
- Prepare risk assessments associated with changing your tax residency and offer strategies to minimize those risks.
- Organize the relocation process for your business or guide you through the establishment of a new company from the ground up.
- Provide expert advice on tax optimization, taking into consideration your business operations in Ukraine and more.
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Feel free to contact our specialists directly to obtain all the information you need about our services.
See more information on relocation, CFCs, and tax optimization here.