For the expatriates who moved back to Italy for covid-19 restrictions: Added insult to injury
It is well known that the Italian tax system is not so generous with individuals: having the highest marginal tax rate of 43% up to 75,000 € and a high level of social security charges (up to 33% at the charge of employer/employee), Italy cannot certainly be considered as a tax-privileged location.
However, in the recent years the situation has improved both for inpatriates and expatriates.
Important tax cuts of up to 70% (highest tax rate 13%) have been recently established for inpatriates (i.e. individuals moving to Italy and becoming Italian tax resident). Whereas a sort of tax protection was continually guaranteed to Italian resident expatriates (i.e. individuals assigned abroad on a continuous basis and staying abroad for more than 183 days over a period of twelve months).
This latter provision (art. 51, par. 8-bis, ITA) is extremely convenient for posted employees since it allows the taxation of employment income within the limit of the “notional salaries” annually fixed by the Minister of Labor (so called in Italian “retribuzione convenzionale”) instead of the actual employment income which is usually higher. The actual tax cut varies case by case, depending on the employer’s sector, employee’s role and task; in general terms, an average tax cut of 20/30% is guaranteed for middle management roles.
However, the international health crisis caused by the spread of Covid-19 has modified the scenario, since a lot of Italian employees assigned abroad were forced to come back to Italy and keep working as “expat” from their Italian home.
Therefore, the Italian tax authority, in contrast to what has been done in other jurisdictions which have maintained the favorable rules for expats, has recently confirmed (reply no. 345 of May 17th, 2021) that such tax relief could only be applied if:
- The work activity is carried out abroad with the character of permanence or stability,
- The work carried out abroad constitutes the exclusive object of the assignment,
- The worker stays in the foreign country for a period of more than 183 days within twelve months.
It has been specified that the criteria for applying the “notional salary” is the “physical presence” of the worker outside of Italy for most of the fiscal year.
Hence, the Italian Tax Authority confirmed that those who do not fall into the above situation, including those forced to come back to Italy for Covid-19 reasons, will be taxed on their actual employment income and not on the “notional salary”, bringing a substantial disadvantage.
This employee will have to pay an amount for Italian income taxes of around 20%/30 % higher than their expatriate treatment based on the notional salary and be subject to penalties as well. The same treatment applies to payroll taxes withheld by an Italian employer in case such expatriate remained on its payroll.
In short, adding insult to injury: after the inconvenience of returning to Italy due to the Covid-19 situation, there will be higher taxation too.
In our opinion, the interpretation issued by the Italian Tax Authority is discriminatory as it infringes the principle of major force. It is hoped that the Tax Authority will reconsider its opinion shortly, adopting a similar approach to that of other countries.
Meanwhile, it is advisable that employees/employers falling into this situation will adapt a tax remediation plan in order to avoid heavy penalties (up to 90%-180% of the higher tax due) and simultaneously challenge the Italian Tax Court for a refund of the higher tax paid within the remediation plan.
Moreover, from a legal point of view, this strict vision regarding the application of the “notional salary” would require a deeper evaluation of the contractual condition of the assignments both from the employee and the employer perspective, as any fiscal consequences deriving from the assignment that could also lead to an unexpected and heavier taxation on the employee should be examined.