Individual income tax benefits

The increasing number of investment management executives relocating to Italy highlights the attractiveness of Italy’s tax incentives for high-net-worth individuals. These incentives particularly appeal to investment managers with significant future co-investment and carried interest income. Meanwhile, other countries are reviewing long-standing tax incentives, such as the UK’s removal of the remittance basis for non-UK domiciled individuals.

The most appealing scheme for investment management executives is the Lump Sum Tax Regime. This elective regime allows qualifying taxpayers to pay an annual EUR 200k lump sum tax (recently increased from EUR 100k) for all non-Italian source income, instead of standard income taxation. The regime applies to individuals who were non-resident in at least nine of the ten years before election and lasts up to 15 years. However, taxpayers may leave Italy as early as the second year without an exit tax. This regime covers foreign-source income regardless of remittance, value, or jurisdiction and it can be extended to family members, with an incremental EUR 25k charge per member.

An anti-avoidance rule applies to capital gains from the transfer of substantial shareholdings in the first five years, with some exceptions. Other benefits include exemptions from wealth, gift, and inheritance taxes on non-Italian assets and foreign asset disclosure (except for substantial shareholdings in the first five years of residency).

The Inbound Workers Regime is another election available to new residents, which underwent changes in December 2023 that reduced its appeal. This regime allows highly qualified taxpayers working in Italy for most of the year to benefit from a 50%-60% exemption on Italian-source employment income for five years, subject to a EUR 600k gross income cap.

Despite recent amendments reducing the attractiveness of these incentives, the current legislative framework suggests in new elections both regimes could apply concurrently: if an individual works most of the year in Italy and the rest abroad, they may combine both regimes. The Italian-sourced income could benefit from the Inbound Workers Regime, while the foreign-sourced income could be subject to the Lump Sum Tax Regime. Further guidance from the Italian tax authorities (ITA) is expected on this topic.

When carried interest income earned qualifies as financial income under Italian tax law, it is taxed at 26%. However, under the Lump Sum Tax Regime, if financial instruments are issued by a foreign entity and held via a non-Italian custodian bank, all income can fall in the lump sum taxation.

Taxpayers can secure advance tax rulings from the ITA to confirm their eligibility for the Lump Sum Tax Regime and its application to carried interest. 

These rulings, which take about 90 to 150 days, are binding only on the ITA.

In addition to the above, new Italian residents enjoy one of Europe’s lowest inheritance and gift tax rates (4%-8%), with exemptions up to EUR 1m per heir/donee, depending on kinship.

IME and corporate taxation

Before an investment management function relocation to Italy is made, the relevant facts should be analysed to ensure that the management activities that the individuals would perform in Italy do not trigger an Italian Permanent Establishment – PE – (i.e., an Italian taxable presence) of any of the non-resident entities that benefit from such activities – i.e., the investment fund and its subsidiaries, the investment management or advisory entity.

Investment Management Exemption

To mitigate the risk of PE exposure of foreign investment funds, Italy introduced the Investment Management Exemption (IME). This exemption establishes a safe harbour rule for investment funds dealing with a restricted range of financial instruments, preventing the activity of Italian-based managers from creating a PE under certain conditions.

The requirements for the application of the IME regime are as follows:

i.    The fund (and its subsidiaries) is established/resident for tax purposes in a foreign jurisdiction included in the list of countries that allow an adequate exchange of information with Italy – white-list countries;¹

ii.    The fund qualifies as an independent vehicle, as per the criteria set out by a Ministerial Decree published on 4 March 2024. This Decree distinguishes between: 

• Undertakings for collective investment (UCIs) compliant with the UCITS IV and AIFMD Directives (EU Directives), 
• UCIs which have substantial features similar to those under letter (a) above and they or their investment manager are subject to regulations substantially equivalent to the EU Directives, 
• Entities other than UCIs that are subject to prudential supervision, with an exclusive or principal purpose to invest the capital raised from third parties in accordance with a predetermined investment policy, and for which the following conditions are met:

1.  No person holds more than 20% of share capital or assets,
2. The capital raised is managed upstream in the interest of the investors and autonomously from them;

iii.    Regarding the foreign investment vehicles described under ii.c) above only, the investment manager operating in Italy does not hold any role in the management and control bodies of the fund, or any of its foreign subsidiaries and does not hold an interest granting more than 25% in the profit of the fund;

iv.    The remuneration received by the investment manager entity, to the extent arising from intercompany transactions, is supported by local qualifying transfer pricing documentation, prepared consistently with the recent Revenue Agency guidance on the application of the arm’s length requirement to the investment management sector.

ITA²  provided critical clarifications confirming that: 

i.    The IME regime does not apply to the investment manager and its affiliates. Consequently,     foreign investment managers must continue to assess their Italian PE risk on a case-by-case basis;

ii.    The independence requirement for an investment manager entity can be deemed to be met where a delegation of functions occurs, to the extent that:

1. The delegation complies with EU Directives (or, for UCIs non-EU, with the foreign regulatory law framework substantially equivalent to EU Directives) — i.e., the delegating manager must ensure that delegations do not result in the manager becoming a mere “empty-box” entity.
2.  The delegated entities are resident in Italy or in a white-list country.
3.  For non-EU based UCIs, the foreign jurisdiction’s regulatory framework provides for delegation rules that adhere to EU Directives principles.

Challenges of the IME regime and need for reform: a case study

While the IME regime provides valuable protection for funds, it does not extend to foreign investment managers employing executives who relocate to Italy. Consequently, the management entities remain exposed to PE risk.

Moreover, under the “multiple-taxpayer approach” adopted by ITA, the relocation of a single individual may result in multiple PEs, particularly when a foreign investment management entity delegates services to another entity under a sub-management agreement. This raises significant concerns, as the ITA could recognise a PE not only for the employing entity but also for any other delegating entity above the chain.

In Figure 1 below, the Lux AIF/Lux SPV should be covered by the IME regime considering that:

i.    The Lux AIF/Lux SPV are established for tax purposes in a white-list country;

ii.    The Lux ManCo is compliant with AIFM Directive

iii.    The UK Sub-Manco is established for tax purpose in a white-list country and the delegation complies with EU Directives

However, since Lux ManCo has delegated functions to UK Sub-Manco, if an individual employed by the latter is relocated to Italy the ITA might in principle assess a PE for either the UK entity or the Luxembourg entity. 

Figure 1

To address this issue, a structural amendment could be introduced to the Italian permanent establishment provisions of Article 162 of the Italian Corporate Income Tax Act (CITA) to limit the multiple-taxpayer approach and broaden the IME regime’s coverage. Specifically, when an investment management entity already has a subsidiary or an existing PE in Italy and an arm’s length amount of income is attributed to the risks/functions undertaken in Italy, this existing taxable presence should prevent the assessment of a taxable presence of other non-residents. At most, the Italian statutes could require the PE exemption of the manager to be subject to prior clearance with the competent Italian office under an advance pricing agreement.

Referring to the above example, if the UK entity already had a PE in Italy or incorporated a subsidiary there, and all income generated from activities conducted in Italy were determined under an OECD compliant arm’s length approach, an amendment of the Italian statutes could provide for clearance from other PE risk, for IME to result in a much more effective incentive to the growth of the local industry.

Conclusion

Revising Article 162 CITA and the multiple-taxpayer approach would boost Italy’s competitiveness, enabling business growth without unfair tax burdens. While Italy attracts high-net-worth individuals and investment professionals, the success of these regimes depends on ongoing refinements and the ITA’s practical oversight of their expanding taxpayer base.

_{1. Please be aware that the US, Cayman Islands, Jersey, Ireland and Luxemburg – i.e., the jurisdictions in which funds are commonly established – qualify as white-list countries for IME regime purpose.}

_{2. Please refer to Circular Letter No. 23/E/2024-}