08/08/24

EU: Italy doubles tax for wealthy foreigners

As published on: ft.com, Wednesday 7 August, 2024. 

Italy has doubled a flat tax on the foreign income of new residents, in a blow to rich expats seeking to flee the prospect of higher levies elsewhere in Europe. 

Prime Minister Giorgia Meloni’s cabinet on Wednesday approved a rise in the annual levy on overseas income for new tax residents in Italy to €200,000.

The current €100,000 tax incentive, while popular with wealthy individuals, has been controversial among Italians, especially in the business capital Milan, where the recent influx of the super-rich has been blamed for a sharp increase in real estate prices and other rises in living costs.

Finance minister Giancarlo Giorgetti, who on Wednesday referred to the levy as the “so-called flat tax for the billionaires”, said at a press conference that the increased levy was still set at a level that would remain “interesting” to wealthy foreigners.

He later clarified to the Financial Times that the higher levy would only apply to people taking up tax residency in Italy from now on, and not those that had already moved there.

Rome also wanted to avoid a race to the bottom with other nations in trying to lure individuals and companies through tax breaks.

“If this competition starts, countries like Italy — which has very limited fiscal space — are inevitably destined to lose,” the finance minister said.

Meloni defended the decision on social media, saying the government ‘’considered it right” to double the tax on wealthy foreigners, as it wanted to ‘“mitigate a measure that seemed extremely generous”. 

Italy recorded a budget deficit of 7.4 per cent of gross domestic product last year, more than twice the 3 per cent limit set by the EU.

Italy has emerged as a popular destination for the world’s super-rich, thanks to the generous tax incentives started in 2016 in an effort to reverse the country’s long-term brain drain.

The flat tax scheme, launched after the Brexit vote prompted many British-based Europeans to return home, allows new foreign residents to Italy, or Italians returning from at least nine years living abroad, to pay a flat tax on any foreign income or assets for 15 years.

So far, the scheme has been credited with attracting at least 2,730 multimillionaires to take up residence in Italy.

“It will definitely reduce the number of people wanting to go to Italy,” said Tim Stovold, partner at Moore Kingston Smith, an accountancy firm, though he estimated that anybody with more than £7mn in wealth would still find the regime “interesting”.

The tax breaks were resented by many Italians, especially in Milan, where the influx of the wealthy has been blamed for a 43 per cent increase in real estate prices over the past five years, and near 20 per cent rise in rentals in the two years to March.  

Many investors had expected the inflow of big spenders into Italy would continue as Britain’s new Labour government prepares to abolish the UK’s controversial “non-dom” regime, which had allowed wealthy foreigners to avoid paying any tax on their overseas income. 

Three Hills Capital Partners, a London-based private equity firm, said last month it was preparing to launch a private members’ club in Milan in the autumn, the latest in a series of upmarket venues to open in the city.

Other destinations in Europe and the Middle East remain popular for rich expats, including Dubai, which charges no personal tax on individuals, and Switzerland, which operates a “forfait” system, whereby wealthy individuals agree the tax they pay with local authorities.

In Greece, some expats can also benefit from an annual flat tax of €100,000 for up to 15 years. Individuals must have lived outside of Greece for seven of the last eight years and have invested a minimum of €500,000 into Greek real estate, bonds or stocks.

Wealth managers said Italy’s move illustrated the risks of moving country based on fiscal sweeteners, pointing out that these can change swiftly depending on the prevailing political wind. 

French people returned home and international businesses expanded operations following the election of Emmanuel Macron seven years ago, attracted by his business-friendly tenets and tax cuts.

But faced with the prospect of tax hikes and years of political deadlock following France’s snap election in June, many are now having second thoughts and making contingency plans.

One French investor, who is in the process of moving from London to Milan to take advantage of the Italian scheme, said that while he is not rethinking his plans at the moment, “it makes it more expensive” and the direction of travel is worrying.

He added: “It sends a signal that it’s not a stable regime, which I think is terrible.” Nodding to the increasing rate of flat tax, he said: “You have to wonder, €100k, then €200k, then €400k?”

Tags

Italy EU tax Wealth tax Expats Housing crisis Foreign Income Tax