Italy: the new Monaco for HNWs?

Italy: the new Monaco for HNWs?

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 For fairly obvious reasons, many high net worth individuals (HNW’s) with links to the UK choose not to be UK tax resident. This is becoming even more prevalent now, with some long term UK resident non-doms choosing to leave the UK to avoid becoming deemed UK tax domiciled under the “15 out of 20 years rule” introduced with effect from April 2017.

Becoming non-UK tax resident is arguably much easier than it was previously, in view of the certainty provided by the Statutory Residence Test (SRT). Rather than relying on case law and, in many cases, having to make a “distinct break” from the UK to cease UK tax residency (which was always a very subjective test) the SRT legislates very prescriptively as to what one must do to avoid UK residency status. It is then just up to the taxpayer in question to follow the rules.

So leaving the UK may be the easy part. The hard part, it would seem, is deciding where to go.  In some instances, this will be a low/no tax jurisdiction, which limits the options somewhat. Monaco has traditionally been a favoured location but in our experience it is often disliked by clients – difficulty in finding suitable accommodation, the perceived glamour limited to the Grand Prix weekend only and extremely high costs being just a few examples of the complaints raised.

So where else may HMWs move to? The Channel Islands is a possibility but they are small and the climate is not always seen as a particular attraction. Spain has its own non-dom regime (the Spanish Impatriates tax regime or “Beckham Law” as it is commonly known) which broadly limits the HNW’s liabilities to Spanish source income only. It does however, generally require the HNW to have a labour contract with an unconnected Spanish employer – which may simply not be feasible.  There has also been talk of a similar regime being introduced in France but, as yet, this has not materialised.

In December 2016, Italy introduced what is in effect its own non-dom regime called the Italian flat tax. Whilst bearing a number of similarities to the UK non-dom regime, it is actually far more generous. The key features of the regime are as follows:

  • To be eligible for the regime, the HNW simply needs to acquire a property in Italy (purchased or leased) and to be registered at the Italian General Register Office of any Italian city for more than 183 days within the calendar year. Having done that, there is actually no legal requirement for Italian tax purposes to spend any time in Italy at all. Albeit we have yet to see how the regime will work in practice.  The rationale for spending considerable time in Italy would therefore be to avoid any risk of Italian residence being seen as artificial and to prevent other jurisdictions claiming tax residence elsewhere instead.
  • A charge that is the rough equivalent of the Remittance Basis Charge (RBC) of a flat tax of €100,000 per year to benefit from the regime
  • No tax on income and gains generated outside Italy (save for on certain capital gains derived from transfers of shareholdings in non-Italian companies)
  • No tax on the remittance of any non-Italian income or gains – therefore no concerns about creating a source of clean capital, a considerable boon compared to the UK non-dom regime
  • No wealth tax equivalent on financial assets and properties owned outside of Italy
  • Full exemption from Italian Inheritance tax and gift tax on non-Italian assets
  • Automatic renewal of the regime every year for up to 15 years – the maximum time that the regime can apply
  • The ability for other family members to benefit from the regime at a cost of €25,000 per year
  • The option to obtain an advance ruling from the tax authorities that the regime will apply – the less previous links to Italy, the more likely the regime will apply

So, at a cost similar to the RBC, non-doms can continue to enjoy non-dom status, in a warm climate and without having to worry about making taxable remittances. Like anywhere, there are pros and cons to Italy but in many non-doms eyes it may be preferable to the alternatives.

We have experience of taking clients into the Italian flat tax regime; if you have any further queries please do not hesitate to contact one of the client team.

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