Italian tax news

Milan, 20/09/2024

Substitute tax for new residents doubles by way of the introduction of law decree no. 113/2024.

New tax regime implemented for frontier workers residing in specific municipalities.

Tax treaties rules on severance payments made for work performed in italy.

Language requirements on transfer pricing documentation.

Determination of income for italian permanent establishments in the insurance industry.

SUBSTITUTE TAX FOR NEW RESIDENTS DOUBLES BY WAY OF THE INTRODUCTION OF LAW DECREE NO. 113/2024

By way of Law Decree no. 113/2024 (so-called “omnibus Decree”) the substitute tax due every fiscal year by individuals who, by transferring their tax residence to Italy, benefit from the Italian res non-dom regime referred to in Art. 24-bis of the TUIR has been doubled from 100,000.00 to 200,000.00 Euros. The substitute tax shall be levied in lieu of any other taxes on all foreign sourced income of the individual, while Italian sourced income is subject to taxation as per the ordinary Italian tax rules under the TUIR. The higher tax concerns those individuals who transfer their tax residence to Italy as of 11 August 2024. Amendments to the Law Decree can be approved within 8 October 2024.

NEW TAX REGIME IMPLEMENTED FOR FRONTIER WORKERS RESIDING IN SPECIFIC MUNICIPALITIES

By way of Art. 6 of the Law Decree no. 113/2024 (so-called “omnibus Decree”), a special tax regime has been introduced for those frontier workers residing in specific municipalities which are within 20 km from the border with Switzerland (these have been listed in Annex 1 and 2 of the Decree). Beneficiaries of this new special tax regime, in lieu of progressive individual income tax rates with the right to tax credit for income produced abroad, will be able to opt to be taxed on employment income produced in Switzerland by applying a substitute tax for individual income tax and related surcharges equal to 25 % of the taxes paid in Switzerland on such income, without the right to a tax credit. The new rule already applies as of the fiscal year 2024.

TAX TREATIES RULES ON SEVERANCE PAYMENTS MADE FOR WORK PERFORMED IN ITALY

With the publication of ruling no. 167 of 1 August 2024, the Italian Tax Authorities clarified the treatment of the severance pay (in Italian “trattamento di fine rapporto”, or TFR) of an individual who transferred his residence from Italy to the Netherlands. The individual had worked in Italy for a Dutch foundation; in that same year, upon termination of the employment relationship, the Dutch foundation paid the individual his wages and severance pay.

By applying the double tax treaty between Italy and the Netherlands, Article 15 states that:

• the portion of severance pay referring to the periods of employment prior to the years that the individual moved his residence to the Netherlands is taxed exclusively in Italy as income produced in Italy by a person residing there (Article 15, paragraph 1);
• otherwise, the part of the severance indemnity accrued during the years when the individual moved his residence to the Netherlands (interim period lasting less than 183 days) would be subject to exclusive taxation in the Netherlands (Article 15(2)).

LANGUAGE REQUIREMENTS ON TRANSFER PRICING DOCUMENTATION

The Italian Tax Authorities, with the publication of tax ruling no. 174 of 21 August 2024, clarifies that the “National Documentation” (Country file) on transfer pricing must be prepared and submitted in Italian. This is one of the two optional reports that are to be prepared on an annual basis in order to benefit from the transfer pricing penalty protection (Art. 26 of Law Decree no. 78/2010). The second optional report is the so-called Master file, which illustrates all intercompany transactions and pricing methods on the group. The “National Documentation” (Country file) describes only intercompany transactions and pricing methods relating to the local entity. According to the Italian Tax Authorities, the National Documentation (referring, by its nature, to domestic transactions) must necessarily be presented in Italian, while it is permissible to present its attachments, and the Master file in English.

DETERMINATION OF INCOME FOR ITALIAN PERMANENT ESTABLISHMENTS IN THE INSURANCE INDUSTRY

The Italian Tax Authorities, in their ruling no. 176 of 21 August 2024, analyzed a case concerning an insurance company with its registered office in another EU member state, operating in Italy through a secondary office, which for tax purposes qualified as a permanent establishment in Italy.

To determine the income attributable to the Italian permanent establishment, Article 111 of the TUIR provides that, in determining the income of those engaged in insurance activities, the change in compulsory technical reserves contributes to the formation of income for the year “up to the maximum amount established by law.” Being based in another Member State, the permanent establishment was not subject to the supervision of IVASS (Institute for the Supervision of Insurance), but to that of the home member state regulatory authority. The Italian Tax Authorities confirmed that, changes in technical reserves, even if formed in accordance with the rules of the home member state, are relevant for the purposes of determining taxable income in Italy, if they are made in compliance with the civil and supervisory rules provided for by the Member State’s regulations in adherence to the EU ones, and then attributed by means of functional and factual analysis to the Italian permanent establishment. Therefore, by virtue of regulatory harmonization, the expression “up to the maximum amount established by law” in Article 111 of the TUIR should be understood as also including the laws of the company’s home country.

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