Italy doubled its flat tax on foreign income for new residents. This is a blow for wealthy expats who are fleeing higher taxes elsewhere in Europe.
The cabinet of Prime Minister Giorgia Mello approved on Wednesday a hike in the annual tax on foreign income for new residents in Italy up to €200,000.
While the current €100,000.00 tax incentive is popular among wealthy individuals, it has caused controversy among Italians. This was especially true in Milan, the business capital, where recent influxes of super-rich have been blamed on a sharp rise in real estate and other increases in living costs.
At a press briefing, Finance Minister Giancarlo Giorgetti said that the levy would still be set at a rate that wealthy foreigners would find “interesting”.
Later, he clarified that this higher tax would only be applicable to those who were moving to Italy for the first time and not people that already lived there.
Rome wanted to avoid being in a race with other countries to attract individuals and businesses through tax incentives.
The finance minister stated that “if this competition begins, countries like Italy – which have very limited fiscal room – are destined to be losers.”
Meloni defended his decision on social media. He said that the government “considered it correct to double the tax” on wealthy foreigners, because they wanted to “mitigate an extremely generous measure”.
Italy’s budget deficit was 7.4% of its gross domestic product in the past year. This is more than double the EU limit of 3%.
Italy is a favorite destination of the super-rich thanks to generous tax incentives that were introduced in 2016 to try to reverse long-term brain-drain.
After the Brexit vote, which prompted many British Europeans living in Europe to return to their home countries, the flat tax scheme was launched. It allows foreigners who have just moved to Italy or Italians who are returning after at least nine years abroad to pay one flat tax for 15 years on all foreign assets or income.
The scheme is credited for attracting 2,730 multimillionaires who have settled in Italy.
Tim Stovold of Moore Kingston Smith, a firm that specializes in accountancy, said, “It is certain to reduce the number who want to visit Italy.” However, he added, anyone with more than £7mn worth of wealth will still find this regime “interesting”.
Many Italians resented the tax breaks, especially in Milan where the wealthy influx has been blamed on a 43 percent increase in real estate values over the last five years and a near 20 percent rise in rental prices in the two-year period ending in March.
Investors had anticipated that the flow of large-scale spending into Italy would continue, as the new Labour government in Britain prepares to end the controversial “non dom” regime which allowed wealthy foreigners not to pay any tax on their income earned abroad.
Three Hills Capital Partners is a private equity company based in London. Last month, announced that it was planning to open a private members club in Milan this autumn. This will be the latest of a number of high-end venues opening in the city.
Rich expats continue to flock to other destinations in Europe and Middle East, such as Dubai, which does not charge personal taxes on individuals. Switzerland also operates under a “forfait”, where wealthy individuals negotiate the tax that they will pay with local authorities.
Some expats in Greece can benefit from a flat annual tax of €100,000. This is valid for up to fifteen years. The individual must have resided outside Greece for at least seven years of the past eight and invested at least €500,000 in Greek bonds, stocks or real estate .
Wealth managers pointed out that Italy’s decision illustrated the risks associated with moving countries based on fiscal incentives, noting that they can quickly change depending on the political winds.
Following the election of Emmanuel Macron in 2010, French people returned to France and international companies expanded their operations, drawn by his tax-cuts and business-friendly tenets.
Many are reconsidering their plans after the snap French election of June. They fear tax increases and political stagnation for years to come.
A French investor who is moving from London to Milan in order to benefit from the Italian scheme said that he has not changed his plans, but “it is more expensive”, and the direction is worrying.
He said that the flat tax rate was increasing, and he wondered: “Do you think it will be €100k in a few years, €200k then €400k?”
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