Italy Tax Exempt Income

Exempt Income for Non-Resident Individuals:

• Income Not Produced in Italy: Generally, income sourced outside of Italy is not subject to Italian income tax for non-resident individuals. This includes salaries for work performed abroad, foreign pensions, and income from foreign investments (subject to specific rules and potential withholding taxes at the source country).
• Certain Capital Gains: Capital gains derived from the sale of certain assets located outside of Italy are typically not taxable in Italy for non-residents, unless the assets are held through a permanent establishment in Italy.

Exempt Income under Specific Regimes for Resident Individuals:

• Lump-Sum Tax Regime for High-Net-Worth Individuals: Individuals who opt for this regime pay a fixed annual substitute tax of €200,000 on their foreign-sourced income.
  Consequently, their foreign income is exempt from standard Italian income tax (IRPEF).
  This also extends to exemptions from wealth tax (IVAFE & IVIE) and inheritance/gift tax on foreign assets.
• Certain Social Benefits: Specific social welfare payments and benefits provided by the Italian government may be exempt from income tax, regardless of the recipient's nationality.
  Examples include:
  • War pensions.
  • Pensions and allowances for legally blind, deaf-mute, and severely disabled individuals.
  • Social pensions.
  • Revenues from the National Institute for Insurance against Accidents at Work (INAIL) for permanent disability or death.

Exempt Income for Foreign Investment Funds:

• Under specific conditions, dividends and capital gains derived by foreign Collective Investment Undertakings (CIUs) established in EU/EEA states that allow for adequate exchange of information may be exempt from withholding tax in Italy.
  
• This aims to align the tax treatment with Italian CIUs.

Exempt Income for Companies/Permanent Establishments (Specific Cases):

• Participation Exemption (for dividends and capital gains): Under certain conditions, dividends received by Italian resident companies from qualifying subsidiaries (including foreign subsidiaries) may be 95% exempt from Corporate Income Tax (IRES).
  
• Similar exemptions can apply to capital gains from the sale of qualifying shareholdings.
• Strict requirements regarding the holding period, classification, and the subsidiary's tax residency apply.
• Income of Foreign Permanent Establishments (under specific conditions): Italian companies may opt for an exemption of income derived from their foreign permanent establishments, provided certain requirements are met, and the election is applied consistently to all foreign PEs.

Important Considerations:

• Tax Treaties: Double Taxation Agreements (DTAs) between Italy and the investor's country of residence may provide for exemptions or reduced tax rates on specific types of income. The specific provisions of the applicable treaty should always be consulted. Italy has DTAs with numerous countries worldwide.
• Residency Status: The tax treatment of income and the availability of exemptions heavily depend on whether the foreign investor is considered a tax resident in Italy.
• Documentation: Proper documentation is always required to claim any tax exemption.
• It is crucial for foreign investors to seek professional tax advice in Italy to determine the specific exemptions applicable to their individual circumstances and ensure compliance with Italian tax laws.
• Income Not Produced in Italy: Generally, income sourced outside of Italy is not subject to Italian income tax for non-resident individuals. This includes salaries for work performed abroad, foreign pensions, and income from foreign investments (subject to specific rules and potential withholding taxes at the source country).
• Certain Capital Gains: Capital gains derived from the sale of certain assets located outside of Italy are typically not taxable in Italy for non-residents, unless the assets are held through a permanent establishment in Italy.

Exempt Income under Specific Regimes for Resident Individuals:

• Lump-Sum Tax Regime for High-Net-Worth Individuals: Individuals who opt for this regime pay a fixed annual substitute tax of €200,000 on their foreign-sourced income. Consequently, their foreign income is exempt from standard Italian income tax (IRPEF). This also extends to exemptions from wealth tax (IVAFE & IVIE) and inheritance/gift tax on foreign assets.
• Certain Social Benefits: Specific social welfare payments and benefits provided by the Italian government may be exempt from income tax, regardless of the recipient's nationality.
  Examples include:
  • War pensions.
  • Pensions and allowances for legally blind, deaf-mute, and severely disabled individuals.
  • Social pensions.
  • Revenues from the National Institute for Insurance against Accidents at Work (INAIL) for permanent disability or death.

Exempt Income for Foreign Investment Funds:

• Under specific conditions, dividends and capital gains derived by foreign Collective Investment Undertakings (CIUs) established in EU/EEA states that allow for adequate exchange of information may be exempt from withholding tax in Italy.
  
• This aims to align the tax treatment with Italian CIUs.

Exempt Income for Companies/Permanent Establishments (Specific Cases):

• Participation Exemption (for dividends and capital gains): Under certain conditions, dividends received by Italian resident companies from qualifying subsidiaries (including foreign subsidiaries) may be 95% exempt from Corporate Income Tax (IRES).
  
• Similar exemptions can apply to capital gains from the sale of qualifying shareholdings.
  
• Strict requirements regarding the holding period, classification, and the subsidiary's tax residency apply.
• Income of Foreign Permanent Establishments (under specific conditions): Italian companies may opt for an exemption of income derived from their foreign permanent establishments, provided certain requirements are met, and the election is applied consistently to all foreign PEs.

Important Considerations:

• Tax Treaties: Double Taxation Agreements (DTAs) between Italy and the investor's country of residence may provide for exemptions or reduced tax rates on specific types of income.
  
• The specific provisions of the applicable treaty should always be consulted.
  Italy has DTAs with numerous countries worldwide.
• Residency Status: The tax treatment of income and the availability of exemptions heavily depend on whether the foreign investor is considered a tax resident in Italy.
• Documentation: Proper documentation is always required to claim any tax exemption.