Italy plans to reduce preferential taxes for foreigners and returning Italians

By Moustafa Daly

The Italian government proposes restricting a preferential tax regime that gives foreigners and returning Italian diaspora tax cuts applicable to 70% of their income.

The ”Lavoratori Impatriati” currently makes Italy an attractive destination for its expat population and foreigners, including entrepreneurs and digital nomads. 

“The Lavoratori Impatriati tax regime may need some tweaking, but the feeling is that the proposed changes will result in a very strong reduction of the inflow and of the attraction to the country of high-value human capital,” says Alessia Ajelli, lawyer at LCA Studio Legale.

What are the new changes to Italy’s Lavoratori Impatriati tax regime?

The regime gives anyone who hasn’t been a tax resident of Italy in the two years before application the right to get a tax reduction of 70% to 90% for up to ten years.

The government now proposes to limit the tax breaks to 50% across the board. Extending the tax breaks beyond five years will no longer be possible if the amendment is adopted.

The proposal also increases the prerequisite of having resided abroad for two years to three.

Additionally, a maximum income of €600,000 limit is to be introduced. Individuals making this figure or more will have to pay normal tax rates regardless of whether other conditions apply.

“Unfortunately, changing the tax regime as it has been forecasted as of now will mostly have a negative impact on the attraction power of our country for highly qualified professionals, who until now may have considered moving back to Italy, perhaps with their family, taking in great consideration the possibility to benefit from the Lavoratori Impatriati tax regime,” cautions Ajelli.

For foreigners, Ajelli expects Italy to continue being attractive despite the restrictions. “As for investors and entrepreneurs, these changes may not have such a substantial impact as there will be still the possibility for them to benefit from the flat tax regime,” she explains. –They could still benefit from a 50% tax reduction for five years, which remains a considerably high percentage.

Why is Italy changing the Lavoratori Impatriati tax regime?

The lack of specifics makes the regime susceptible to abuse, which the government is now trying to address.

“The purpose of the changes is to counter the alleged abusive conducts,” reveals Ajelli. 

“For example, moving back and forth within the same group (e.g., the employee of an Italian company gets hired by a foreign company in the same group and then, after two tax periods abroad, returns to Italy as a newly hired employee of the Italian company or another company in the group based in Italy).

“The changes also aim to limit the duration of the tax benefits that could be enjoyed by new tax residents in Italy,” the attorney adds.

If adopted, the proposed changes are expected to come into effect by Dec. 31, 2023 – applying only to applications made after this date with no retroactive effect, according to media reports.

“The changes to the Lavoratori Impatriati tax regime are not final yet since we need to wait until the end of the year to see if the Government is going to confirm the tax regime in its new form,” says Ajelli.

“However, as of now, we do not expect major changes to the proposal, even though the great criticism and objections that have been raised so far may (hopefully) somehow lead the Government to make some most expected adjustments,” the lawyer concludes.

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