Relocation from Israel to Italy

What Does the Relocation Process to Italy Involve?

The relocation process consists of several essential steps:

First, a thorough review of employment opportunities in Italy, cost of living (which varies between cities and regions), the local tax system, educational options for children, available healthcare services, and other important factors.

Second, consider whether, and under what conditions, you wish to take steps to terminate your Israeli tax residency and the various implications that may follow. It is important to plan how you will manage your finances and assets, including healthcare coverage. For example, although Italy offers public healthcare to legal residents, private health insurance is sometimes needed in the initial stages of relocation until resident status, registration, and practical eligibility are obtained.

In parallel, you must arrange your legal status in Italy and align it with your circumstances – for example, the appropriate visa, residence permit (Permesso di Soggiorno), work authorization, residency registration, or citizenship (as applicable).

In this regard, one of the main challenges in relocating to Italy is selecting the appropriate immigration route and residence visa. Each visa type has different requirements (age, education, income, minimum investment, employment contract, health insurance, and more). It is essential to select the visa that best suits your circumstances and to arrange it in advance, with appropriate professional support where needed.

If you wish to purchase property in Italy, it is advisable to verify in advance the rules applicable to non-EU citizens, including procedural requirements (for example, obtaining an Italian tax identification number – Codice Fiscale, opening a bank account, due diligence, transaction taxes, and reporting). As a general matter, and subject to Italian law and any applicable reciprocity rules, Israeli citizens may purchase real estate in Italy, and in particular where they are lawfully present and hold a valid residence permit where required.

Tax Aspects of Relocation to Italy

Whenever moving to a foreign country, the question arises whether you will still have tax obligations in Israel after the move. The answer usually depends on whether you have terminated your Israeli tax residency.

Termination of Tax Residency

One of the main issues in the relocation process is determining your residency for tax purposes. In Israel, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Israel. Residency status is determined according to your “center of life,” which is examined using both qualitative and quantitative tests. If you intend to settle in Italy for the long term, it may be preferable to sever your residency from Israel (for both income tax and National Insurance). Note that Israelis who sever their residency may be required to pay an “exit tax” on certain assets.

According to Section 1 of the Israeli Income Tax Ordinance, residency is determined based on the center of life test, and a rebuttable presumption based on the number of days you stayed in Israel, as follows:

• The center of life test – this is a substantive test, in which all personal, family, economic, and social ties are examined. These include permanent place of residence, place of economic activity, location of economic interests, and more.
• Days test – an individual is considered an Israeli resident if they spent 183 days or more in Israel in a single tax year, or if they spent 30 days or more in the current tax year and a total of 425 days or more in Israel during the current tax year and the two preceding years. This presumption can be rebutted if the individual proves that, despite their stay in Israel, their center of life is not in Israel.

In many cases, and in particular where the days-based presumption applies, it may be required (or at least advisable as a practical matter) to file forms and declarations with the Israel Tax Authority to support a position of termination of Israeli tax residency, including Form 1348 (“Declaration of Residency”), together with appropriate factual substantiation.

It is important to note that terminating tax residency is not necessarily a one-time event, and the ITA may review your residency status retroactively, even years after departure. Therefore, it is recommended to keep detailed documentation of actions indicating the transfer of your center of life to Italy (such as residence, employment, family circumstances, banking, schooling, etc.), and, to the extent possible and depending on your circumstances, to avoid creating new ties to Israel that could undermine the position that your center of life has moved abroad.

Double Taxation Treaty between Israel and Italy

Israel and Italy have a double taxation treaty. This treaty is intended, among other things, to allocate taxing rights between the two jurisdictions, prevent double taxation on the same income, and provide mechanisms for relief (such as credits or exemptions) where applicable. The treaty addresses matters such as determining residency in cases of dual residency, withholding tax rates on passive income (dividends, interest, royalties), and taxation of employment income.

The treaty addresses dual residency through a series of tiebreaker rules, which include the location of the permanent home, the center of vital interests, habitual abode, and nationality. For practical applications, it is recommended to rely on professional advice.

Exit Tax

Israelis leaving Israel may be required to pay an “exit tax” on certain assets. This tax is intended to capture the latent gain in assets held by Israeli residents.

According to Section 100A of the Israeli Income Tax Ordinance, an individual who ceases to be an Israeli resident may be deemed to have sold certain assets on the day before terminating tax residency (the “Exit Day”) for purposes of computing tax on gains accrued up to that date. The scope of the deemed disposition, calculation, timing of payment, and potential exceptions depend on the type of assets and the circumstances and should be reviewed on a case-by-case basis prior to departure.

There are various methods for calculating and paying exit tax liability, each with different implications for the taxpayer. The timing and structure of these payments can significantly impact the overall tax burden. It is highly recommended to consult with an international tax expert before departing Israel to develop a tax strategy that best aligns with your specific circumstances and financial goals.

How Will Terminating Tax Residency Affect the Taxation of Income?

If the move to Italy is temporary, you may remain an Israeli resident for tax purposes and, accordingly, may be liable for Israeli tax on your worldwide income and for the relevant Israeli reporting obligations. In parallel, tax liability and/or reporting obligations in Italy may arise depending on Italian domestic law, your length of stay, your status, and Italy’s tax residency tests, as well as the treaty provisions, where applicable. Where the same income is taxable in both jurisdictions, it may often be possible to mitigate double taxation through foreign tax credits or other relief mechanisms under domestic law and the treaty. This should be evaluated based on the specific facts and the type of income involved.

If the move to Italy is permanent and you have validly terminated your Israeli tax residency (based on the applicable law and your circumstances), as a general matter you may be liable for Israeli tax only on Israel-sourced income (subject to Israeli sourcing rules), while other income may be taxable in Italy depending on Italian law, your status there, and the treaty, where applicable.

Tax System in Italy

In Italy, tax residency is not determined solely by a “more than 183 days of physical presence” test. As a general matter, Italian law applies several tests (which may include the length of stay, habitual abode, domicile/center of interests, and registration in the local population registry), and meeting one of them may be sufficient to be treated as an Italian tax resident. Accordingly, your Italian tax residency status should be assessed on a case-by-case basis.

Italian tax rates and brackets may change from time to time based on legislation and regulations

• 23% for income up to 15,000 euros
• 27% for income between 15,001 and 28,000 euros
• 38% for income between 28,001 and 55,000 euros
• 41% for income between 55,001 and 75,000 euros
• 43% for income over 75,000 euros

Italian rules on capital gains taxation, corporate taxation, and any partial exemption regimes can be complex and may change over time. As a general matter, Italy applies specific rules and rates to capital gains and corporate income, and in certain cases relief or partial exemptions may apply subject to conditions

In terms of taxation of foreign income, legal tax residents of Italy must pay taxes on all worldwide income, while non-residents must pay taxes on Italian-sourced income.

Inheritance/estate tax in Italy is contingent on different factors, which primarily range from the heir and the distributed value of the asset. The rate of taxation for inheritance begins at the lowest amount of four percent for relatives closest to the deceased, and increases as the relationship status dilutes, and can reach eight percent. However, it is important to note that there is a tax-free allowance for each relationship, meaning that inherited assets are only taxed if the aggregate value exceeds a certain threshold. The tax rates and tax-free allowance for inherited assets are:

• 4% for spouses if the value exceeds 1,000,000 euros
• 6% for children if the value exceeds 100,000 euros
• 6% for relatives up to the fourth degree without any tax exemption
• 8% for unrelated beneficiaries without a tax exemption

When it comes to tax benefits in Italy, there are a variety of different benefits and tax breaks offered to Italian tax residents. These include:

1. A flat tax regime for new residents; individuals who transfer tax residency to Italy can opt to pay a flat tax of 100,000 euros per year as opposed to a percentage. This lasts up to 15 years and is most suitable for high-income earners.
2. Personal income tax deductibles: dependent family members, mortgage interest, and business expenses can all be deducted if certain conditions are met.

National Insurance

An Israeli resident staying abroad is required to pay reduced National Insurance (Bituach Leumi) contributions, but if tax residency is terminated, there is no obligation to pay National Insurance, and you are not entitled to health or social security benefits in Israel.

Israel and Italy have a social security agreement. In the absence of such an agreement, you may in some cases be subject to social security liability in both jurisdictions. Where an agreement exists, it may allow, subject to conditions and reporting procedures, the avoidance of double contributions and the aggregation of insurance periods for certain entitlements. It is advisable to confirm the applicable rules with the competent authorities and with professional guidance.

Transferring Funds from Israel to Italy

You should review the various options for transferring funds abroad – bank transfers, international credit cards, etc. Each option has its advantages and disadvantages in terms of fees, transfer times, exchange rates, amount limits, and regulations. Pay attention to reporting requirements for authorities and banks, following anti-money laundering laws and international regulations (FATCA, CRS). It is also advisable to open a bank account in Italy in advance.

Under Section 170(a) of the Israeli Income Tax Ordinance, where a payment is made from Israel to a foreign resident and the payment constitutes taxable income in Israel, Israeli withholding tax may apply (subject to Israeli law, applicable tax treaties, and Israel Tax Authority guidance). Transfers that do not constitute taxable income may not be subject to withholding tax; however, banks and other financial institutions may require documentation and confirmations for compliance, anti-money laundering, and tax reporting purposes. It is advisable to plan ahead and confirm requirements with the relevant bank and/or authorities.

Opening a Bank Account in Italy

Opening a bank account in Italy is possible for foreigners, but requirements can vary between banks and depending on whether you are treated as a resident or non-resident. Typically, you will be required to present a valid passport, an Italian tax identification number (Codice Fiscale), and sometimes proof of address in Italy; in many cases, a residence permit may also be required depending on your status. It is recommended to verify requirements with the specific bank in advance.

Returning to Israel

Upon returning to Israel, you should consider the various implications. If you have terminated your tax residency, you may be entitled to benefits as a regular or veteran returning resident (depending on the length of your stay abroad), including tax exemptions on income and capital accumulated abroad.

You should also consider the waiting period for health services (up to 6 months) for renewal of National Insurance rights, and possible benefits from the Ministry of Aliyah and Integration.

In short, relocation to Italy offers many opportunities, but it is a complex process that requires early planning and a thorough understanding of immigration, tax, banking, and insurance considerations. Since the applicable rules are fact-dependent and may change over time, it is recommended to consult qualified professionals (immigration counsel and Israeli and Italian tax advisers) to support early planning and a smooth transition to your new life in Italy.

Nimrod Yaron & Co. specializes in terminating tax residency and providing comprehensive advice for relocation to foreign countries, including Italy. Our team of experts will assist you in optimal tax planning and residency.

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