Italy has implemented a significant change to its tax policy, doubling the flat tax on the foreign income of new residents. This move, approved by Prime Minister Giorgia Meloni’s cabinet, raises the annual levy on overseas income for new tax residents from €100,000 to €200,000. This policy adjustment comes as Italy aims to balance its fiscal needs while managing the influx of wealthy expatriates that has been both a boon and a challenge for the country.
Background and Controversy
The initial €100,000 flat tax incentive, introduced in 2016, was designed to attract wealthy individuals to Italy, reversing a long-term brain drain and positioning Italy as a desirable destination for the global elite. This scheme was especially appealing after the Brexit vote, which prompted many British-based Europeans to consider relocating. Under this plan, new foreign residents or Italians returning after living abroad for at least nine years could benefit from a flat tax on any foreign income or assets for up to 15 years.
However, this tax incentive has not been without controversy. In Milan, the influx of affluent individuals has been linked to a sharp increase in real estate prices, with property values soaring by 43% over the past five years and rental prices rising nearly 20% in the last two years. This rapid escalation in living costs has fuelled resentment among local residents, who see the super-rich as driving up prices and making the city less affordable.
Government’s Rationale
Finance Minister Giancarlo Giorgetti highlighted that the increased levy remains attractive to wealthy foreigners, maintaining its appeal despite the hike. He emphasized the importance of avoiding a race to the bottom in offering tax breaks to attract high-net-worth individuals, noting that Italy’s limited fiscal space makes it vulnerable in such competitions.
Prime Minister Meloni defended the decision, stating that it was necessary to mitigate what was perceived as an overly generous measure. Italy is grappling with a budget deficit of 7.4% of GDP, more than double the EU's 3% limit. The increased tax is seen as a step towards addressing these fiscal challenges while ensuring that the country’s tax regime remains competitive.
Impact and Reactions
The tax hike is expected to impact the flow of wealthy expatriates into Italy. Tim Stovold, a partner at Moore Kingston Smith, suggested that the number of new arrivals might decrease, although those with substantial wealth—over £7 million—might still find the tax regime appealing.
The move also highlights the risks associated with relocating based on tax incentives, which can change swiftly with political and economic shifts. Wealth managers point to similar scenarios in other countries, such as France, where tax policies have fluctuated with changing governments.
Broader Implications
Despite the tax increase, Italy remains an attractive destination for the super-rich, competing with other popular locations like Dubai, Switzerland, and Greece. Each of these places offers unique tax advantages, such as Dubai’s no personal tax policy and Switzerland’s negotiable tax arrangements.
The change in Italy’s tax policy sends a signal about the potential volatility in tax regimes and the importance of considering long-term stability when making relocation decisions. This shift may prompt wealthy individuals to reconsider their plans or seek more stable environments, balancing fiscal benefits with political and economic certainty.
As Italy navigates its fiscal challenges and aims to maintain its appeal to the global elite, the doubling of the flat tax on foreign income marks a significant step in recalibrating its approach to attracting and managing wealth within its borders.
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