Italy has doubled a flat tax on foreign income of new residents, dealing a blow to wealthy expatriates seeking to escape the prospect of higher taxes elsewhere in Europe.
Prime Minister Giorgia Meloni’s cabinet approved on Wednesday an increase in the annual tax on foreign income for new tax residents. Italy up to €200,000.
The current 100,000 euro tax incentive, while popular with wealthy individuals, has been controversial among Italians, especially in the financial capital Milan, where the recent influx of super-rich has been blamed for a sharp rise in property prices and other increases in living costs.
Finance Minister Giancarlo Giorgetti, who on Wednesday referred to the tax as the “so-called flat tax for billionaires,” told a news conference that the increased tax was still set at a level that would remain “interesting” to wealthy foreigners.
He later clarified to the Financial Times that the higher tax would only apply to people who take up tax residency in Italy from now on, and not to those who have already moved there.
Rome also wanted to avoid a race to the bottom with other nations by trying to attract individuals and businesses through tax breaks.
“If this competition begins, countries like Italy, which has very limited fiscal space, are inevitably destined to lose,” the finance minister said.
Meloni defended the decision on social media, saying the government “considered it right to double the amount of tax” on wealthy foreigners because it wanted to “mitigate a measure that seemed extremely generous.”
Italy last year posted a budget deficit of 7.4 percent of gross domestic product, more than double the 3 percent limit set by the EU.
Italy has become a popular country destination for the world’s super-rich, thanks to generous tax incentives introduced in 2016 in an effort to reverse the country’s long-term brain drain.
The flat-tax scheme, launched after the Brexit vote prompted many Europeans resident in Britain to return home, allows new foreign residents in Italy, or Italians returning after at least nine years of living abroad, to pay a flat tax on any foreign income or assets for 15 years.
So far, the scheme has been credited with attracting at least 2,730 billionaires to settle in Italy.
“It will definitely reduce the number of people who want to go to Italy,” said Tim Stovold, a partner at Moore Kingston Smith, an accountancy firm, although he estimated that anyone with more than £7m in wealth would still find the regime “interesting”.
The tax breaks were criticized by Many Italiansespecially in Milan, where the influx of the wealthy has been blamed for a 43 percent rise in property prices over the past five years, and a nearly 20 percent increase in rents in the two years to March.
Many investors had expected the flow of big spenders to Italy to continue as Britain’s new Labour government prepares to abolish the UK’s controversial “non-domicile” regime, which had allowed wealthy foreigners to avoid paying tax on their overseas income.
Three Hills Capital Partners, a London-based private equity firm, saying Last month he was preparing to launch a private members’ club in Milan in the fall, the latest in a series of luxury venues to open in the city.
Other destinations in Europe and the Middle East remain popular with wealthy expatriates, including Dubai, which does not charge personal taxes to individuals, and Switzerland, which operates a “forfait” system, whereby wealthy individuals agree with local authorities on the taxes they pay.
In Greece, some expats can also benefit from a flat annual tax of €100,000 for up to 15 years. Individuals must have lived outside Greece for seven of the last eight years and have invested a minimum of €500,000 in Greek real estate, bonds or shares.s.
Asset managers said Italy’s decision illustrated the risks of moving to a different country based on tax incentives, noting that these can change quickly depending on the prevailing political wind.
The French returned home and international companies expanded their operations after Emmanuel Macron was elected seven years ago, attracted by his business-friendly principles and tax cuts.
But faced with the prospect of tax increases and years of political stalemate following France’s snap election in June, many are now reconsidering their stance and drawing up contingency plans.
One French investor, who is in the process of moving from London to Milan to take advantage of the Italian scheme, said that while he is not rethinking his plans at the moment, “it makes it more expensive” and the direction of travel is worrying.
He added: “This sends a signal that this is not a stable regime, which I think is terrible.” Referring to the increase in the flat tax rate, he said: “You have to ask yourself: €100,000, then €200,000, then €400,000?”