Wealthy non-doms lured by Italian flat tax

A smart move by the Italian government was the promulgation of a flat tax which came into effect on 1 January aimed at attracting foreign investors and encouraging highnet-worth individuals to move to Italy.

This scheme introduced a preferential tax regime for wealthy individuals who take up tax residency in Italy and ushers in a new visa programme specific for High Net Worth investors. Italians wishing to return can also benefit provided they prove that they have been residents in a foreign country for at least nine years in the past decade. The measure as proposed in the last budget is expected to immediately draw in at least 1,000 applicants, according to local media.

Compare this to our homegrown citizenship by investment programme which charges about €1.3 million for each naturalisation permit following a one-year residence and the purchase or renting of property for five years apart from a requirement to purchase €150,000 in government bonds. Identity Malta is only issuing 1,800 citizenship permits over a five-year window. Daniela De Bono, an academic who carried out an analysis of Maltese citizenship laws for the EU’s observatory on democracy, has said it was in the government’s interest to ensure a fair and transparent system. In this context, those qualifying for another residency scheme are not subject to tax in Malta on foreign sourced income not remitted to Malta. Nor are they subject to tax on any foreignsourced capital gains whether remitted to Malta or not.

It is important to note that as a permanent resident you are taxed at the flat rate of 15 per cent only on remitted income. Coupled with this is the ease of claiming any double tax exemption linked to Malta’s making use of over 70 DTA while persons who take up residence can receive their pensions in Malta free of tax at source and subject to a mere 15 per cent tax. Such residents also benefit from DTAs, ensuring that tax is never paid twice on the same income. Overseas capital funds invested locally are of course only taxed on any interest or dividends generated thereon, again at a 15 per cent flat rate.

Under the new Global Residence Programme, the value of immovable property bought by foreigners has to be at least €275,000 or if they rent a property for a minimum of €9,600 and €8750 in Gozo or the south of Malta. The minimum tax to be paid in advance is €15,000 on any income derived in Malta, with any further income charged at 15 per cent. Foreign residents in this programme, including their dependants, have to be covered by health insurance.

Hot on the heels of our attractive schemes came the Italian offer. This was intended to attract the super-rich to reside in their Dolce Vita playground. The Italian tax authority is offering the non-domiciled the possibility of paying a flat tax of €100,000 on their earnings outside Italy if they qualify as tax residents in the country. The exciting new rules (all approved by the Commission) mean that any Italian-source income is taxed as usual, while foreign income and gains are exempt subject to the taxpayer paying a flat rate charge of €100,000 each year. The cherry on the cake is that it can also be extended to family members, at a cost of €25,000 per member. This flat tax replaces any personal income tax normally due on foreign income. The eligibility conditions include: transfer place of residence to Italy and not having been resident in Italy in the last nine years out of the previous ten preceding their relocation to Italy. Foreigners have to have a net worth of at least €15 million in assets. Finally, one has peace of mind when applying to the tax authorities for a ruling concerning this privileged tax status which is renewable for up to 15 years, unless the individual misses any tax payments.

Another innovative approach of this flat tax regime is that the annual tax payment also exempts individuals from the usual requirement to disclose foreign investments in their tax return. No inheritance and gift tax will be due on assets located outside Italy. But what is so special about this flat tax when Britain has had the nondom scheme running for many years. The answer is that Italy started late to attract non-doms while Britain has been offering, for many years, a special “nondomiciled” status allowing the super-rich to move their fiscal residence to London and pay a tax of only £65,000 on income made abroad. What has changed now was the triggering of Article 50 this week. Because of this Brexit move, the special non-dom status previously granted to foreigners will come to an end.

Starting from next month, foreigners who have lived in the country for more than 15 years will have to pay the same taxes like all other residents. This is a massive change that will affect more than 100,000 non-doms reputed to generate €8 billion in benefits to the UK economy. Perhaps the recent offer by Italy could not have come a moment too soon. Italy with its laidback lifestyle is rather attractive to Gulf Arab and Russian businesspeople who already spend summers relaxing in Lake Como, Venezia and the lush Chianti countryside. Needless to say, if every one of the 100,000 high flyers currently living in London were to move to Italy, the state would make €10 billion which would be a healthy annual boost to the stagnant Italian economy crippled by its high debt.

The move can also be a cure for the dwindling property market. Sufficient to say that due to the recession in the Italian property sector, there has been a high rate of unemployment and a glut of properties for sale which has brought the fragile banking system to its knees. According to media reports, real estate and construction companies account for more than 40 per cent of corpo- rate bad debts – a figure which is still rising. Luca Dondi, managing director at Nomisma, an Italian economic think-tank said: “When the crisis hit Italy, homeowners refused to sell their property at a discounted price as they were betting on a strong recovery of the market in the years ahead.”

The Rome regime would not suit US citizens who are taxed on their worldwide income. They would have nothing to gain from it, but when comparing the Italy scheme to Portugal, it is a more attractive offer as the latter charges incomers a 20 per cent rate of tax for Portuguese income and an exemption for foreign income, if certain conditions are met. Malta has also joined the club to offer attractive tax residency schemes to high net worth individuals. The Opposition claim that the passport scheme has its drawbacks as it generates false hopes of increased tax revenue which are not consistent and subject to fluctuations due to competition from other small states issuing alternative schemes. In small states, the inflows to the public sector and the property market can have a sizable impact on economic activity, while the fiscal revenues, like other large windfall revenues from the IGaming sector, can be quite substantial.

Finally, critics point out that the sovereign fund created if not administered under strict good governance rules can lead to security breaches such as tax evasion and money laundering, exposing us to harmful reputational risks. Fear not party apologists reply, as Italians conferring their Dolce Vita on a plate will rescue us from such temptations.