The new Italian special tax regime for High Net Worth Individuals moving to Italy (the Substitute tax regime) and the new Italian tax rules for qualifying carried interest schemes

The new Italian special tax regime for High Net Worth Individuals moving to Italy (the Substitute... Abstract The Italian Budget Law 2017 provides for a special new tax regime for individuals who transfer their tax residence to Italy. This special tax regime was introduced in order to make the transfer of tax residence to Italy appealing and, in particular, to attract high-net worth individuals. More precisely, the Budget Law 2017 introduces an optional regime (‘the Substitute tax regime’), which provides for, amongst other things, a substitute tax on foreign source income and gains, as better explained below under the section entitled ‘The Substitute tax regime’. Furthermore, Law Decree 24 April 2017, No 50, introduced new Italian tax rules for qualifying carried interest schemes. These rules, which are described under the section entitled ‘New Italian tax rules for qualifying carried interest schemes’, will make Italy more attractive for top executives in the private equity industry. This may also facilitate their move to Italy under the Substitute tax regime. The forfait tax regime for High Net Worth Individuals moving to Italy has been clarified through implementing provisions and administrative guidelines. This article describes the forfait tax regime in the light of such clarifications. It further highlights the new Italian tax rules for carried interest schemes: these rules make Italy more attractive for funds managers and facilitate their move to Italy. The Substitute tax regime1 As from calendar year 2017, Budget Law 2017 has introduced a new optional Substitute tax regime for individuals that transfer their tax residence to Italy. This Substitute tax regime provides for, among others, a substitute tax equal to 100,000 euros per year on foreign source income and gains. On 8 March 2017, the Revenue Agency issued the implementing regulations of the Substitute tax regime (the ‘Implementing decree’). On 23 May 2017, the Revenue Agency issued a Circular letter (the ‘Circular letter’) in order to address a number of interpretative issues raised by the Substitute tax regime. The conditions The Substitute tax regime is available to individuals, whether Italian or foreign nationals, who acquire Italian tax residence, subject to the following conditions: the individual must have been non-resident of Italy for Italian income tax purposes in at least nine of the 10 years prior to the first year of effect of the option for the Substitute tax regime; and the individual must exercise the option for the Substitute tax regime. The aforementioned option could be exercised with or without the presentation of an advance ruling request to the Revenue Agency (for further details on the ruling please see section ‘The ruling’). The non-residence in at least nine of the previous 10 years For income tax purposes, an individual is regarded as a resident of Italy if at least one of the following conditions is fulfilled for most part of the year (the tax period coincides with the calendar year and there is no split-year concept): he/she is registered with the Italian Official Register of the resident population (‘anagrafe della popolazione residente’); or he/she has his/her residence in Italy for civil law purposes. Residence is defined by the Civil Code as the place where the person has his/her habitual abode; or he/she has his/her domicile in Italy for civil law purposes. Domicile is defined by the Civil Code as the place in which a person established the main seat of his/her business and interests. Therefore, for each year, the status of non-resident is met if none of the above three connecting factors with Italy was met for most of the year. With the aim to address individuals to assess if they meet or not one of the above connecting factors, the Revenue Agency issued a check list that allows a preliminary assessment on the eligibility for the Substitute tax regime. The option The option for the Substitute tax regime must be exercised in the income tax return for the first year of election of the regime. Such income tax return must generally be filed within 30 September of the subsequent year. In particular, the option for the Substitute tax regime is exercised: with the filing of the tax return related to the tax period in which the individual moved tax residence in Italy; or with the filing of the tax return related to the tax period following the one in which the individual have moved the tax residence in Italy (eg individuals who acquired tax residence in Italy in 2016 may apply for the Substitute tax regime as from the tax year 2017 by exercising the option within September 2018). Exercising the option the individual needs to indicate: personal data, the Italian social security number, and the residence address in Italy, if already resident; the non-residents status in Italy for a period of at least nine of the 10 years prior to the first year of effect of the option for the Substitute tax regime; the last jurisdiction(s) where the taxpayer was resident prior to the first year of effect of the option for the Substitute tax regime; the foreign states or territories that the individual intends to exclude from the scope of the Substitute tax regime (for further details on the optional exclusion see section ‘The optional exclusion’). The ruling As already mentioned, the ruling is optional and not mandatory; the individual can opt for the Substitute tax regime without a prior assessment by the tax authorities. The ruling may be helpful to obtain confirmation that the individual was non-resident of Italy in at least nine of the 10 years prior to the first year of effect of the option and/or income or gains have foreign source and/or a company or trust is to be disregarded or not. As for timing, the tax authorities must reply to the ruling request within 120 days (in case additional information and documentation are required, a new deadline of 60 days starts from the submission of such additional information and documentation). With the Implementing decree has been also issued a checklist to be attached to the ruling request that allows a preliminary assessment of the Revenue Agency on the eligibility for the Substitute tax regime. The taxpayer must indicate the presence of the necessary requirements to access the regime, by compiling the checklist and by submitting the relevant documents to support the replies included in the checklist. The ruling request may be filed prior to the transfer of the tax residence to Italy. The regime The Substitute tax regime provides for: a substitute tax on foreign source income and gains; and additional benefits for the purposes of reporting obligations, wealth taxes and inheritance and gift tax. Each of the above features is described in further details below. The substitute tax on foreign source income and gains All foreign source income and gains (with the exclusions under sections ‘The exception’ and ‘The optional exclusion’) are subject to a substitute tax equal to 100,000 euros per year. Such substitute tax applies in lieu of the levy of income tax according to general rules, irrespective of the amount of foreign source income and gains. The income and gains within the scope of the substitute tax are not subject to any additional income taxation, even if remitted to Italy. The tax authorities have provided useful guidelines on the application of the regime. Particularly, they have taken the view that: In case of income or gains owned by an individual subject to the Substitute tax regime through a disregarded company (or trust or other entity), the income and gains of the disregarded company are to be imputed to the individual and can qualify for the Substitute tax regime under the ordinary conditions (ie provided that they are foreign source and not capital gain from the sale of a substantial shareholding); The transfer to Italy of an individual who effectively manages a (not disregarded) company (or trust or other entity) and is subject to the Substitute tax regime is not per se sufficient to attract the tax residence of such company into Italy; and Controlled foreign companies legislation does not apply to individual subjects to the Substitute tax regime. Exception Capital gains (and losses) on substantial shareholdings2 realized in the first 5 years of tax residence are excluded from the scope of the substitute tax and are subject to income tax under general rules.3 Please note that during such 5-year period substantial shareholdings are subject to reporting obligations on foreign-held assets (see section ‘Additional benefits’). The optional exclusion The individual can opt for all income and gains sourced in one or more foreign states to be excluded from the scope of the substitute tax and, therefore, be subject to income tax under general rules. The selection of the foreign states that are excluded, at the discretion of the individual, from the scope of the substitute tax could be broadened over time. The exclusion may, depending on the treaty provisions and their interpretation in the foreign jurisdiction, allow the individual to benefit from reduced taxation in the state where the income and gains are sourced. Please note that assets held in the excluded states are subject to reporting obligations on foreign-held assets and to quasi-wealth taxes and that assets situated in the excluded states are within the scope of inheritance and gift tax (see section ‘Additional benefits’). Additional benefits As mentioned above, the option for the Substitute tax regime triggers additional benefits, apart from the levy of the substitute tax on foreign source income and gains. Resident individuals are generally subject to reporting obligations on foreign-held assets that are either owned or beneficially owned or in any case at their disposal. However, during the years of effect of the Substitute tax regime, the individual is not subject to such reporting obligations (save for the exception under section ‘The exception’ and the exclusion under section ‘The optional exclusion’). Resident individuals are also subject to quasi-wealth taxes (Imposta sul Valore delle Attivita’ Finanziarie Estere at 0.2 per cent at and Imposta sul Valore degli Immobili all’Estero at 0.76 per cent) on the foreign-held financial products and foreign real estate that they own. However, during the years of effect of the Substitute tax regime, foreign-held financial products and foreign real estate are exempt from wealth taxes (save for the exclusion under section ‘The optional exclusion’). Finally, during the years of effect of the Substitute tax regime, foreign-situs assets (save for the exclusion under section ‘The optional exclusion’) are not within the scope of inheritance and gift tax (which generally applies to world-wide assets if the deceased or donor is resident of Italy). Tax authorities have clarified that the exclusion from gift tax applies also to the settlement of assets into trusts, not only to gifts. The duration The option for the Substitute tax regime is effective up to a maximum period of 15 years (it is worth mentioning that the Substitute tax regime does not require the individual to be tax resident of Italy for a minimum number of years). The option is automatically renewed every year. The effects of the option cease in if: there is a lack or partial payment of the substitute tax (the substitute tax must be paid, for every tax period covered by the Substitute tax regime, within the deadline for the payment of the income tax balance); and the tax residence of the individual is moved abroad. The option can be revoked by the individual, but, if revoked, is no more available. Therefore, no cherry picking of the Substitute tax regime is allowed over the years. In case of loss or revocation of the option, the effects of the Substitute tax regime remain valid in relation to previous tax periods. Family members The Substitute tax regime can be extended to one or more qualifying family members,4 provided that they fulfil the nine out of 10 years non-residence condition, against the payment of a further annual substitute tax of 25,000 euros (rather than 100,000 euros) per each family member benefitting from the regime. Therefore, if eg two spouses transfer their tax residence to Italy and both of them wish to benefit from the Substitute tax regime, the overall annual substitute tax would be limited to 125,000 euros. If the individual subject to the 100,000 euros substitute tax revokes the option, then the substitute tax regime automatically ceases to apply also to the qualifying family members. However, in such cases, the qualifying family member is entitled to exercise an autonomous option by paying the 100,000 euros substitute tax with effects only for the remaining tax years up to a total of 15 years (taking into account the years during which the family member benefitted from the Substitute tax regime in the capacity of family member). The extension of the Substitute tax regime to qualifying family members can be revoked without affecting the application of the Substitute tax regime to the individual subject to the 100,000 euros substitute tax. Entry into force The Substitute tax regime applies as from the calendar year 2017. Treaty application In the Circular letter, the Italian tax authorities took the position that individuals benefitting from the Substitute tax regime generally qualify as residents of Italy for treaty purposes—being subject to tax on a worldwide basis, since foreign income and gains are either subject to the 100,000 euros tax or, in case of either foreign gains on substantial shareholdings or income and gains sourced in foreign states that are voluntarily excluded from the forfait tax regime, subject to ordinary income tax—unless the specific treaty contains ad hoc provisions that may apply to individuals benefitting from privileged tax regimes (see eg the treaty with Switzerland). New Italian tax rules for qualifying carried interest schemes The Italian government enacted Law Decree 24 April 2017, No 50 which introduces several tax measures aimed at boosting economic development and stabilizing the state revenues. The Law Decree, which needs to be converted into law by Parliament within 60 days, contains—among others—specific provisions on the tax treatment applicable to carried interest schemes (previously unregulated). The Law Decree provides that qualifying carried interest schemes are in any event apt to give rise to financial income, currently subject to tax at the flat 26 per cent rate (for non-substantial shareholdings). The characterization as financial income applies to income deriving from the direct or indirect participation to companies or collective investment schemes received by employees or directors (the ‘Beneficiaries’) of such companies or collective investment schemes (or of their related parties or managers) with respect to shares, or other similar financial instruments, that have enhanced economic rights (the ‘Eligible Instruments’) subject to the following conditions: The overall investment commitment of all Beneficiaries (the ‘Relevant Investment’) must represent an actual investment of at least 1 per cent of the overall investment made by the collective investment scheme or of the net equity of the issuer company; the Relevant Investment is calculated by taking into account also (i) any co-investment made by the Beneficiaries and (ii) any amounts that are taxed as fringe benefit when the Eligible Instruments are granted (or, in case of non-resident Beneficiaries, any amounts that would have been so taxed had the Beneficiaries been subject to Italian taxation). The enhanced economic rights must accrue only after all the shareholders or investors have obtained a return equal to the invested capital plus a minimum yield as provided in the by-laws or regulations or, in case of change of control, to the extent that the other investors have realized a sales price equal at least to the invested capital plus such minimum yield. The Eligible Instruments must be held by the Beneficiaries (or by their heirs) for at least five years or, if earlier, until a change of control or a change of manager of the collective investment scheme. The issuer of the Eligible Instruments must be resident for tax purposes (or incorporated, in the case of collective investment schemes) in Italy or in a state that allows an adequate exchange of information with Italy. The new rules will apply to income deriving from the Eligible Instruments that is cashed as of the date of entry into force of the Law Decree. The characterization as financial income may allow to benefit from the Substitute tax regime to the extent that the carried interest remuneration derives from a participation into a non-resident company or collective investment scheme, even if the employee or director carries out his activities in Italy. Nicola Saccardo, is admitted to the Italian Bar and the Italian Association of Chartered Accountants. He is a member of the International Academy of Estate and Trust Law, as well as a member of its Executive Council and chair of its Tax Committee. He is a member of STEP Italy and a member of the International Client Global SIG Steering Committee of STEP and of the International Client London UK Satellite SIG Committee of STEP. He is ranked as a leading expert in several legal directories, including Chambers High Net Worth 2017, Legal Week Private Clients Global Elite, and Citywealth Leaders list. He is author of many publications on Italian tax matters and is frequent speaker at conferences. His areas of expertise comprise International and EU Tax Law as well as taxation of trusts, estates, and HNWIs. Footnotes 1. Please note that the new Italian special tax regime for High Net Worth Individuals moving to Italy was commented on by the author in a previous article on (2017) 23 (3) Trusts & Trustees 319. More recently, implementing provisions and administrative guidelines have been issued and have provided several useful clarifications. This present article provides an updated description of the regime, taking into account the clarifications brought by the aforementioned implementing provisions and administrative guidelines. 2. In general terms, a disposal of a ‘substantial shareholding’ arises if the shares sold in the last 12 months (i) represented more than 2 per cent of the voting rights of a company listed on a stock exchange or more than 20 per cent of voting rights of other companies, or (ii) more than 5 per cent of the share capital of a company with shares listed on a stock exchange or more than 25 per cent of the share capital of other companies. 3. Such capital gains would currently be subject to progressive taxation (limitedly to 49.72 per cent of their amount, if the participated company is not resident of a tax privileged jurisdiction). 4. In particular, spouse and children. © The Author (2017). Published by Oxford University Press. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Trusts & Trustees Oxford University Press

The new Italian special tax regime for High Net Worth Individuals moving to Italy (the Substitute tax regime) and the new Italian tax rules for qualifying carried interest schemes

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Abstract

Abstract The Italian Budget Law 2017 provides for a special new tax regime for individuals who transfer their tax residence to Italy. This special tax regime was introduced in order to make the transfer of tax residence to Italy appealing and, in particular, to attract high-net worth individuals. More precisely, the Budget Law 2017 introduces an optional regime (‘the Substitute tax regime’), which provides for, amongst other things, a substitute tax on foreign source income and gains, as better explained below under the section entitled ‘The Substitute tax regime’. Furthermore, Law Decree 24 April 2017, No 50, introduced new Italian tax rules for qualifying carried interest schemes. These rules, which are described under the section entitled ‘New Italian tax rules for qualifying carried interest schemes’, will make Italy more attractive for top executives in the private equity industry. This may also facilitate their move to Italy under the Substitute tax regime. The forfait tax regime for High Net Worth Individuals moving to Italy has been clarified through implementing provisions and administrative guidelines. This article describes the forfait tax regime in the light of such clarifications. It further highlights the new Italian tax rules for carried interest schemes: these rules make Italy more attractive for funds managers and facilitate their move to Italy. The Substitute tax regime1 As from calendar year 2017, Budget Law 2017 has introduced a new optional Substitute tax regime for individuals that transfer their tax residence to Italy. This Substitute tax regime provides for, among others, a substitute tax equal to 100,000 euros per year on foreign source income and gains. On 8 March 2017, the Revenue Agency issued the implementing regulations of the Substitute tax regime (the ‘Implementing decree’). On 23 May 2017, the Revenue Agency issued a Circular letter (the ‘Circular letter’) in order to address a number of interpretative issues raised by the Substitute tax regime. The conditions The Substitute tax regime is available to individuals, whether Italian or foreign nationals, who acquire Italian tax residence, subject to the following conditions: the individual must have been non-resident of Italy for Italian income tax purposes in at least nine of the 10 years prior to the first year of effect of the option for the Substitute tax regime; and the individual must exercise the option for the Substitute tax regime. The aforementioned option could be exercised with or without the presentation of an advance ruling request to the Revenue Agency (for further details on the ruling please see section ‘The ruling’). The non-residence in at least nine of the previous 10 years For income tax purposes, an individual is regarded as a resident of Italy if at least one of the following conditions is fulfilled for most part of the year (the tax period coincides with the calendar year and there is no split-year concept): he/she is registered with the Italian Official Register of the resident population (‘anagrafe della popolazione residente’); or he/she has his/her residence in Italy for civil law purposes. Residence is defined by the Civil Code as the place where the person has his/her habitual abode; or he/she has his/her domicile in Italy for civil law purposes. Domicile is defined by the Civil Code as the place in which a person established the main seat of his/her business and interests. Therefore, for each year, the status of non-resident is met if none of the above three connecting factors with Italy was met for most of the year. With the aim to address individuals to assess if they meet or not one of the above connecting factors, the Revenue Agency issued a check list that allows a preliminary assessment on the eligibility for the Substitute tax regime. The option The option for the Substitute tax regime must be exercised in the income tax return for the first year of election of the regime. Such income tax return must generally be filed within 30 September of the subsequent year. In particular, the option for the Substitute tax regime is exercised: with the filing of the tax return related to the tax period in which the individual moved tax residence in Italy; or with the filing of the tax return related to the tax period following the one in which the individual have moved the tax residence in Italy (eg individuals who acquired tax residence in Italy in 2016 may apply for the Substitute tax regime as from the tax year 2017 by exercising the option within September 2018). Exercising the option the individual needs to indicate: personal data, the Italian social security number, and the residence address in Italy, if already resident; the non-residents status in Italy for a period of at least nine of the 10 years prior to the first year of effect of the option for the Substitute tax regime; the last jurisdiction(s) where the taxpayer was resident prior to the first year of effect of the option for the Substitute tax regime; the foreign states or territories that the individual intends to exclude from the scope of the Substitute tax regime (for further details on the optional exclusion see section ‘The optional exclusion’). The ruling As already mentioned, the ruling is optional and not mandatory; the individual can opt for the Substitute tax regime without a prior assessment by the tax authorities. The ruling may be helpful to obtain confirmation that the individual was non-resident of Italy in at least nine of the 10 years prior to the first year of effect of the option and/or income or gains have foreign source and/or a company or trust is to be disregarded or not. As for timing, the tax authorities must reply to the ruling request within 120 days (in case additional information and documentation are required, a new deadline of 60 days starts from the submission of such additional information and documentation). With the Implementing decree has been also issued a checklist to be attached to the ruling request that allows a preliminary assessment of the Revenue Agency on the eligibility for the Substitute tax regime. The taxpayer must indicate the presence of the necessary requirements to access the regime, by compiling the checklist and by submitting the relevant documents to support the replies included in the checklist. The ruling request may be filed prior to the transfer of the tax residence to Italy. The regime The Substitute tax regime provides for: a substitute tax on foreign source income and gains; and additional benefits for the purposes of reporting obligations, wealth taxes and inheritance and gift tax. Each of the above features is described in further details below. The substitute tax on foreign source income and gains All foreign source income and gains (with the exclusions under sections ‘The exception’ and ‘The optional exclusion’) are subject to a substitute tax equal to 100,000 euros per year. Such substitute tax applies in lieu of the levy of income tax according to general rules, irrespective of the amount of foreign source income and gains. The income and gains within the scope of the substitute tax are not subject to any additional income taxation, even if remitted to Italy. The tax authorities have provided useful guidelines on the application of the regime. Particularly, they have taken the view that: In case of income or gains owned by an individual subject to the Substitute tax regime through a disregarded company (or trust or other entity), the income and gains of the disregarded company are to be imputed to the individual and can qualify for the Substitute tax regime under the ordinary conditions (ie provided that they are foreign source and not capital gain from the sale of a substantial shareholding); The transfer to Italy of an individual who effectively manages a (not disregarded) company (or trust or other entity) and is subject to the Substitute tax regime is not per se sufficient to attract the tax residence of such company into Italy; and Controlled foreign companies legislation does not apply to individual subjects to the Substitute tax regime. Exception Capital gains (and losses) on substantial shareholdings2 realized in the first 5 years of tax residence are excluded from the scope of the substitute tax and are subject to income tax under general rules.3 Please note that during such 5-year period substantial shareholdings are subject to reporting obligations on foreign-held assets (see section ‘Additional benefits’). The optional exclusion The individual can opt for all income and gains sourced in one or more foreign states to be excluded from the scope of the substitute tax and, therefore, be subject to income tax under general rules. The selection of the foreign states that are excluded, at the discretion of the individual, from the scope of the substitute tax could be broadened over time. The exclusion may, depending on the treaty provisions and their interpretation in the foreign jurisdiction, allow the individual to benefit from reduced taxation in the state where the income and gains are sourced. Please note that assets held in the excluded states are subject to reporting obligations on foreign-held assets and to quasi-wealth taxes and that assets situated in the excluded states are within the scope of inheritance and gift tax (see section ‘Additional benefits’). Additional benefits As mentioned above, the option for the Substitute tax regime triggers additional benefits, apart from the levy of the substitute tax on foreign source income and gains. Resident individuals are generally subject to reporting obligations on foreign-held assets that are either owned or beneficially owned or in any case at their disposal. However, during the years of effect of the Substitute tax regime, the individual is not subject to such reporting obligations (save for the exception under section ‘The exception’ and the exclusion under section ‘The optional exclusion’). Resident individuals are also subject to quasi-wealth taxes (Imposta sul Valore delle Attivita’ Finanziarie Estere at 0.2 per cent at and Imposta sul Valore degli Immobili all’Estero at 0.76 per cent) on the foreign-held financial products and foreign real estate that they own. However, during the years of effect of the Substitute tax regime, foreign-held financial products and foreign real estate are exempt from wealth taxes (save for the exclusion under section ‘The optional exclusion’). Finally, during the years of effect of the Substitute tax regime, foreign-situs assets (save for the exclusion under section ‘The optional exclusion’) are not within the scope of inheritance and gift tax (which generally applies to world-wide assets if the deceased or donor is resident of Italy). Tax authorities have clarified that the exclusion from gift tax applies also to the settlement of assets into trusts, not only to gifts. The duration The option for the Substitute tax regime is effective up to a maximum period of 15 years (it is worth mentioning that the Substitute tax regime does not require the individual to be tax resident of Italy for a minimum number of years). The option is automatically renewed every year. The effects of the option cease in if: there is a lack or partial payment of the substitute tax (the substitute tax must be paid, for every tax period covered by the Substitute tax regime, within the deadline for the payment of the income tax balance); and the tax residence of the individual is moved abroad. The option can be revoked by the individual, but, if revoked, is no more available. Therefore, no cherry picking of the Substitute tax regime is allowed over the years. In case of loss or revocation of the option, the effects of the Substitute tax regime remain valid in relation to previous tax periods. Family members The Substitute tax regime can be extended to one or more qualifying family members,4 provided that they fulfil the nine out of 10 years non-residence condition, against the payment of a further annual substitute tax of 25,000 euros (rather than 100,000 euros) per each family member benefitting from the regime. Therefore, if eg two spouses transfer their tax residence to Italy and both of them wish to benefit from the Substitute tax regime, the overall annual substitute tax would be limited to 125,000 euros. If the individual subject to the 100,000 euros substitute tax revokes the option, then the substitute tax regime automatically ceases to apply also to the qualifying family members. However, in such cases, the qualifying family member is entitled to exercise an autonomous option by paying the 100,000 euros substitute tax with effects only for the remaining tax years up to a total of 15 years (taking into account the years during which the family member benefitted from the Substitute tax regime in the capacity of family member). The extension of the Substitute tax regime to qualifying family members can be revoked without affecting the application of the Substitute tax regime to the individual subject to the 100,000 euros substitute tax. Entry into force The Substitute tax regime applies as from the calendar year 2017. Treaty application In the Circular letter, the Italian tax authorities took the position that individuals benefitting from the Substitute tax regime generally qualify as residents of Italy for treaty purposes—being subject to tax on a worldwide basis, since foreign income and gains are either subject to the 100,000 euros tax or, in case of either foreign gains on substantial shareholdings or income and gains sourced in foreign states that are voluntarily excluded from the forfait tax regime, subject to ordinary income tax—unless the specific treaty contains ad hoc provisions that may apply to individuals benefitting from privileged tax regimes (see eg the treaty with Switzerland). New Italian tax rules for qualifying carried interest schemes The Italian government enacted Law Decree 24 April 2017, No 50 which introduces several tax measures aimed at boosting economic development and stabilizing the state revenues. The Law Decree, which needs to be converted into law by Parliament within 60 days, contains—among others—specific provisions on the tax treatment applicable to carried interest schemes (previously unregulated). The Law Decree provides that qualifying carried interest schemes are in any event apt to give rise to financial income, currently subject to tax at the flat 26 per cent rate (for non-substantial shareholdings). The characterization as financial income applies to income deriving from the direct or indirect participation to companies or collective investment schemes received by employees or directors (the ‘Beneficiaries’) of such companies or collective investment schemes (or of their related parties or managers) with respect to shares, or other similar financial instruments, that have enhanced economic rights (the ‘Eligible Instruments’) subject to the following conditions: The overall investment commitment of all Beneficiaries (the ‘Relevant Investment’) must represent an actual investment of at least 1 per cent of the overall investment made by the collective investment scheme or of the net equity of the issuer company; the Relevant Investment is calculated by taking into account also (i) any co-investment made by the Beneficiaries and (ii) any amounts that are taxed as fringe benefit when the Eligible Instruments are granted (or, in case of non-resident Beneficiaries, any amounts that would have been so taxed had the Beneficiaries been subject to Italian taxation). The enhanced economic rights must accrue only after all the shareholders or investors have obtained a return equal to the invested capital plus a minimum yield as provided in the by-laws or regulations or, in case of change of control, to the extent that the other investors have realized a sales price equal at least to the invested capital plus such minimum yield. The Eligible Instruments must be held by the Beneficiaries (or by their heirs) for at least five years or, if earlier, until a change of control or a change of manager of the collective investment scheme. The issuer of the Eligible Instruments must be resident for tax purposes (or incorporated, in the case of collective investment schemes) in Italy or in a state that allows an adequate exchange of information with Italy. The new rules will apply to income deriving from the Eligible Instruments that is cashed as of the date of entry into force of the Law Decree. The characterization as financial income may allow to benefit from the Substitute tax regime to the extent that the carried interest remuneration derives from a participation into a non-resident company or collective investment scheme, even if the employee or director carries out his activities in Italy. Nicola Saccardo, is admitted to the Italian Bar and the Italian Association of Chartered Accountants. He is a member of the International Academy of Estate and Trust Law, as well as a member of its Executive Council and chair of its Tax Committee. He is a member of STEP Italy and a member of the International Client Global SIG Steering Committee of STEP and of the International Client London UK Satellite SIG Committee of STEP. He is ranked as a leading expert in several legal directories, including Chambers High Net Worth 2017, Legal Week Private Clients Global Elite, and Citywealth Leaders list. He is author of many publications on Italian tax matters and is frequent speaker at conferences. His areas of expertise comprise International and EU Tax Law as well as taxation of trusts, estates, and HNWIs. Footnotes 1. Please note that the new Italian special tax regime for High Net Worth Individuals moving to Italy was commented on by the author in a previous article on (2017) 23 (3) Trusts & Trustees 319. More recently, implementing provisions and administrative guidelines have been issued and have provided several useful clarifications. This present article provides an updated description of the regime, taking into account the clarifications brought by the aforementioned implementing provisions and administrative guidelines. 2. In general terms, a disposal of a ‘substantial shareholding’ arises if the shares sold in the last 12 months (i) represented more than 2 per cent of the voting rights of a company listed on a stock exchange or more than 20 per cent of voting rights of other companies, or (ii) more than 5 per cent of the share capital of a company with shares listed on a stock exchange or more than 25 per cent of the share capital of other companies. 3. Such capital gains would currently be subject to progressive taxation (limitedly to 49.72 per cent of their amount, if the participated company is not resident of a tax privileged jurisdiction). 4. In particular, spouse and children. © The Author (2017). Published by Oxford University Press. All rights reserved.

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Trusts & TrusteesOxford University Press

Published: Feb 1, 2018

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