This article provides an overview of the Italian flat tax , as an alternative to the UK res non dom.
Abolition of UK Res Non Dom
The UK government announced in the 2024 Spring Budget its intent to abolish the long-standing “resident non-domiciled” (res-non-dom) regime effective April 6, 2025. This regime allowed High Net Worth Individuals (HNWI) and Ultra High Net Worth Individuals (UHNWI) residing but not domiciled in the UK to pay taxes on foreign income and gains only when remitted to the UK. The change includes transitioning to a global taxation framework and introducing a four-year Foreign Income and Gains (FIG) regime for new UK residents. These measures aim to generate additional revenue to reduce labour taxation but may lead to a significant outflow of wealthy taxpayers.
The proposed tax reform mainly includes:
Worldwide Taxation:
All res-non-doms will automatically be considered domiciled in the UK, subjecting their global income and gains to UK tax.
Transitional Relief (2025-2026):
- 50% reduction in tax on foreign income remitted to the UK.
- A 12% flat rate on foreign income and gains repatriated during the transitional period.
Introduction of FIG Regime:
A four-year tax exemption on foreign income and gains for first-time UK residents within the last 10 years.
Offshore trust distributions to FIG residents will be exempt, provided specific conditions are met.
Changes to Offshore Trusts:
From April 2025, offshore trusts will be subject to transparency rules, taxing the settlor on foreign income and gains.
Inheritance and Gift Tax (IHT):
Offshore trusts established by res-non-doms will no longer be excluded from UK inheritance tax (IHT) on foreign assets.
A new residence-based IHT framework will impose tax obligations for up to 10 years post-residency.
Labour Party Position:
Labour has proposed stricter measures, opposing transitional relief and aiming to end protections for offshore trusts.
The Italian Flat Tax Regime
Among the jurisdictions of greatest interest for the relocation of HNWIs and UHNWIs is undoubtedly Italy, where, starting from 2017, the so-called Res Non Dom Regime was introduced.
Subjects in scope
The regime applies to individuals regardless of their nationality.
First of all, it is necessary for the interested individual to transfer his tax residence from a foreign country to Italy. Secondly, the interested taxpayer must demonstrate that, for at least 9 of the last 10 tax periods, he has been resident outside of Italy.
Contrary to the lump-sum tax regime in Switzerland, which does not apply to Swiss citizens, the italian flat tax may also apply to Italian citizens, should they too have proof that for at least 9 of the last 10 tax periods they have been resident elsewhere and, upon application, are transferring their residence back to Italy.
The benefits of this regime may also be extended to family members (spouse, offspring, parents, in- laws, siblings) of the applicant. The same rules on the transfer of residence to Italy that apply to the applicant, also apply in this scenario.
Italian flat tax
The regime allows for an annual 200.000 € substitute tax to be applied on foreign earned income, including profits and capital gains deriving from participations in off-shore companies.
The payment of such italian flat tax covers all the foreign income derived by the relevant taxpayer and thus the latter does not have to pay any further tax in Italy on its foreign income.
It is possible to exclude some countries from the option, thus applying the tax credit method.
An important exception is related to the sale of non-portfolio participations related to entities resident outside the Italian territory.
Non-portfolio participations are defined as shares and any other shareholding in the capital or assets of the investee company characterised by a percentage of voting rights exercisable in the ordinary meeting exceeding 2% or 20%, or a shareholding in the capital or assets exceeding 5% or 25%, depending on whether the securities are traded on regulated markets or other shareholdings.
Any capital gain related to such participation, even though considered to be sourced abroad, is not covered by the substitute flat tax if the relevant sale occurs within the first five in years in which the relevant taxpayer has moved to Italy.
Where the scheme is extended to the family members, there is the obligation to pay a substitute tax of € 25.000 for each and every member who wants to benefit from such regime.
Income from Italian sources
Unlike what happens in Switzerland with the lump-sum tax regime, the Italian Res Non Dom Regime does not provide for the impossibility for beneficiaries to generate income from Italian sources, which will be regularly taxed with the ordinary tax brackets (up to 43%).
Other benefits
The regime also grants some other specific benefits, such as:
- it exonerates the taxpayer from reporting the assets held and to pay some specific Italian estate taxes on foreign immovable properties and financial assets (IVIE and IVAFE);
- the Italian CFC regime does not apply with respect to the entities held abroad which fall under the scope of the regime;
- the Italian inheritance and gifts tax is due only with respect to assets located in Italy.
Additionally, based on the interpretation of Italian Tax Authorities:
- the taxpayer who benefits from such regime is considered to be a resident also under tax treaty law, hence it is allowed to benefit from the Italian tax treaty network,
- the presumption of the company’s tax residence, based on the place of effective management, would not apply solely due to the relocation of the new resident director to Italy. The Italian Tax Authorities also allow inward taxpayers the regime—either at the time of entry or during a subsequent tax period— to declare the foreign entities they intend to manage directly from Italy. They may request an opinion on the compelling “foreign nature” of the income derived from such entities and attributable to them.
Ruling request
Ahead of benefitting from the beneficial tax regime, the interested taxpayer can apply for a tax ruling from the Italian Tax Authorities. This way the taxpayer can have certainty on the presence of the conditions that are required in order to benefit from the regime.
The ruling request, which shall be replied to within 120 days, can even be filed ahead of the taxpay- er moving his tax residence to Italy.
Duration
The substitute tax on foreign income shall commence in the first or second tax period that the taxpayer has moved his tax residence to Italy and shall cease to apply after 15 years.
The above regime is an extremely attractive alternative for HNWIs who are considering relocation or intend to exit the UK following the removal of Res Non Dom.
Strategic Considerations for Affected Individuals – Italian flat tax as a possible Safe Harbour
Many affluent individuals relocating to Italy are choosing the prosperous regions of Liguria (Italian Riviera) and Lombardy (Milan area, Como lake). Italy offers a relatively low tax burden, making it an attractive destination for millionaires, particularly those from high-tax jurisdictions like the UK.
Additionally, Italy’s economy outperforms many other European nations, further enhancing its appeal.
In this context, many UK Res-Non- Dom individuals are expected to be managers active in the finance and private equity sectors, often owning offshore entities, such as trusts, to hold their financial interests or property.
Under the UK Res-Non-Dom system, these were covered by the remittance basis or excluded from the UK’s often very burdensome inheritance and gift tax.
On the other side, the recent legislation enacted in Italy implemented significant changes for the private client sector, affecting the rules on the tax residence of individuals and legal entities and making essential changes to the current regulations on inheritance and gift tax (IHGT).
Additionally, Italy’s recent legislation on the taxation of income distributions from offshore opaque trusts has clarified some long-standing uncertainties in its tax rules.
However, challenges remain, particularly regarding the rules governing the identification of privileged tax jurisdictions and the inclusion of taxes paid by third parties or the trust itself in foreign jurisdictions. Further complexities involve distinguishing between income and capital, documentation requirements, and trustees’ discretion in categorising distributions.
Settlers, trustees and family offices should then seek legal advice to understand the impact of the Italian flat tax rules on such entities or trust structures.
*Articolo scritto insieme a Maurizio di Salvo