Italian flat tax regime
The new residents regime favours the individual’s tax position by offering a flat tax of €200,000 on income generated abroad.
Place of effective management of the company
However, at the corporate level, it’s essential to verify whether the role of the new resident in the foreign companies could bring these companies under Italian taxation, particularly due to the requirement regarding the place of effective management (Article 73, paragraph 3 of the TUIR, as well as the so-called POEM under DTAs).
Let’s consider the case of a company incorporated abroad, owned and managed solely by the new domiciled person, which receives periodic dividends from it. By itself, the dividend paid by the foreign company would qualify as foreign-source income, falling under the flat tax.
The question arises as to what would happen if the company’s Italian tax residence were challenged because its sole director is based in Italy. For the new resident, the dividend would lose its foreign-source nature, as it would be paid by a company tax resident in Italy, and thus would be subject to ordinary taxation.
Italian Revenue Agency position
In circular no. 17 of 23 May 2017, the Italian Revenue Agency ruled that foreign companies that are not merely intermediaries, as operating companies carrying out an effective business activity abroad, substantial owners of the income resulting therefrom, can also meet the requirements to be considered residents in Italy.
According to the Revenue Agency, however, it’s necessary to take into account the particular status recognized to new residents in relation to income produced abroad, even in the case of natural persons who, acting as the center of imputation of the management choices of foreign entities, transfer their residence to Italy.
In such cases, the presumption of the company’s tax residence, based on the place of effective management, would be inoperative if related solely to the relocation of the new resident director to Italy.
The Revenue Agency reaches a different conclusion if the foreign entities are managed not only by the new resident but also by other individuals residing in Italy who do not fall under the new residents tax regime. In such a case, the income of these foreign companies may be subject to taxation in Italy under Article 73 of the TUIR.
To mitigate any risks related to this situation, the same circular suggests a solution: it’s permitted for taxpayers benefiting from the regime to inform the tax authorities of the foreign entities they intend to manage directly from Italy and request an opinion on the (continuing) foreign nature of the income earned by these entities and attributable to them.
This opinion may be requested when entering the regime or during a subsequent tax period.
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