Staying Less Than 2 Years in Italy? The Penalties for Beneficiaries of Italian ‘Impatriati’ Expat Tax Scheme

Understand the intricacies and penalties of the "Regime Degli Impatriati" Italian tax scheme for expatriates, with a deep dive into its mandatory two-year residency rule.

Federica Bertoldi
October 1, 2023
11:22
0 comments

Share it on

Overview of Penalties within the "Regime Degli Impatriati" Tax Scheme

Seeking to make tax processes more transparent and less daunting for expatriates and retirees, Expatax offers in-depth information about various tax implications. This article dives into the "Regime Degli Impatriati" or expatriate tax scheme in Italy, particularly concentrating on the penalties attached to not fulfilling the scheme's residency requirement of at least two tax years. You can reach out to our "TAX AI" for any further queries at the bottom of the page.

Mandatory two-year residency under the scheme

The "Regime Degli Impatriati" can give a massive tax break of 70% to 90% for up to 10 years, for both employees and self-employed who take up residency in Italy (it also applies to qualifying EU and Italian citizens). One of the conditions is the requirement for beneficiaries to stay in Italy for a minimum period of two years following their arrival. Non-compliance can result in serious ramifications for the worker, including loss of incentive rights and application of penalties and interests on previously enjoyed benefits.

Deciphering the "Two-Year Presence in Italy"

For foreign workers under this scheme, the "two-year presence in Italy" commences from the tax year of their fiscal residency in Italy. This biennium should comprise at least 183 days in each of the two considered tax years. Note that the year you move to Italy may not necessary be your first tax year in Italy (if, for instance, you do not spend enough time in Italy that year) [Read more here].

Contract-specific implications on residency

Interestingly, the obligation of maintaining Italian residency bears no relation to the consistency of employment during these two years. Thus, even if a fixed-term employment contract ends before the completion of two years, or if the employer prematurely terminates the employment relationship, the foreign worker still retains the benefits as long as they maintain residency in Italy for the designated span.

Moving out before completion of the two-year residency

If beneficiaries decide to shift their fiscal residency out of Italy before completing the stipulated two tax years, they are expected to reimburse the tax benefits availed. This balance settlement process occurs via the submission of an Italian income tax declaration, following which the higher debt towards the Revenue is calculated. Penalties for false reporting and delay interests then apply to this amount. To sum this up, the penalty would equate to 90% to 180% of the extra personal income tax (IRPEF) that would have been paid if the expat hadn't been a beneficiary of the scheme, plus legal interest.

In practical terms, if the expat tax scheme had given the expat a savings of EUR 10,000, the penalty would amount to EUR 9,000 to EUR 18,000. However, behind these truly scary numbers hides the Italian mainstay tax life-saver called "ravvedimento operoso" - literally, "voluntary tax regularisation" - which, in a nutshell, allows a reduction to approximately 11% to 20% of the lower penalty amount, depending on a few factors. Brutally simplifying, this would turn the large penalty used as an example here to a more reasonable EUR 990 to EUR 1,800 (plus interest). The calculations are complex and it's better to get them right from the start, so have a professional take care of them for you.

Conclusion: Not as bad as you thought?

The bottom line here is that, like in many other cases, the Italian taxman is made out to be far worse than reality. Draconian headline penalties for individuals that "understay" the 2-year minimum requirement for the expat tax break would most likely be slashed substantially - however, this is a domain best discussed with an expert who would take your personal situation into account and file properly. The best path forward overall is to ensure you are happy to remain a tax resident of Italy for two years. Remember that you can ask TAX AI at the bottom of the article if you have further queries.