Italy's Flat Tax in Milan: How the Updated Regime Works for Finance and PE Professionals

Italy's Article 24-bis regime charges a fixed annual flat tax on all foreign-sourced income for up to 15 years. As of 2026, the rate for new applicants is 300,000 EUR per year -- raised from 200,000 EUR by the 2026 Budget Law signed December 30, 2025. Grandfathering is confirmed. The break-even against ordinary Italian rates (43%) is approximately 698,000 EUR in annual foreign income. For a PE partner earning 3 million EUR annually in carry distributions, the effective rate is 10%.

The Core Mechanics

The Article 24-bis regime charges a fixed annual substitute tax on all income produced outside Italy, regardless of amount. This covers dividends from foreign companies, interest from foreign bank accounts, capital gains from foreign securities, carry distributions from foreign-domiciled funds, and rental income from properties outside Italy.

Italian-sourced income -- salary from an Italian employer, Italian rental income, Italian investment income -- is taxed at ordinary Italian progressive rates reaching 43%, regardless of the flat tax election. This distinction matters for finance professionals who take a local Milan salary alongside their fund distributions.

Additional family members can join the regime for 50,000 EUR per person per year under the 2026 rate. The 15-year window starts from the year of election and cannot be extended. It can be revoked voluntarily at any time without penalty. It cannot be combined with the 7% southern Italy programme.

Effective Rates at Different Income Levels (2026 New Applicant Rate)

Grandfathered residents at 100,000 EUR/year see a break-even at 233,000 EUR and a 3.3% effective rate at 3M EUR. Those at 200,000 EUR/year see a break-even at approximately 465,000 EUR.

Does Carry Income from a PE Fund Qualify?

Carry distributions from a foreign-domiciled fund generally qualify as foreign-sourced income covered by the Article 24-bis substitute tax. The specific characterisation depends on the fund structure, the jurisdiction of the fund, the character of the income in the hands of the recipient (ordinary income versus capital gain treatment), and the treaty framework applicable. This must be confirmed with a qualified Italian commercialista with PE fund experience before any election is filed.

Dividends from US portfolio companies, interest from US accounts, and capital gains from US securities also typically qualify. Italian-sourced management fees, salary from an Italian fund management entity, and Italian portfolio company dividends do not qualify and are taxed at ordinary rates.

The Residency Requirement

The regime requires genuine Italian tax residency: anagrafe registration at an Italian address and spending more than 183 days per year in Italy, or having Italy as the demonstrable centre of life and economic interests. The Italian Revenue Agency has materially increased scrutiny of flat-tax elections in recent years. A Milan apartment and a genuine working presence in the city satisfies this. A nominally registered address while spending the majority of the year in London, Geneva, or New York does not, and risks the election being challenged and back-taxes assessed.

For PE professionals managing European funds from Milan, the combination of a genuine working presence and a Milan apartment is typically sufficient. For fund principals who travel extensively, the 183-day threshold requires careful diary management and documentation.

Grandfathering: What Earlier Movers Retain

Italy has confirmed grandfathering in every reform of the Article 24-bis regime. The policy commitment is explicit in the legislative text of both the 2024 reform and the 2026 Budget Law. This matters because it creates a material and permanent advantage for earlier movers that compounds over the 15-year window.

A principal who transferred Italian tax residence in 2022 and elected the regime at 100,000 EUR per year retains that rate for the remainder of their 15-year window -- potentially saving 200,000 EUR per year versus a new 2026 applicant on the same income. Over the remaining years of the window, that is a substantial compounding advantage. For principals considering whether to accelerate a planned Milan relocation, the grandfathering framework creates a meaningful timing incentive.

US Tax Interaction

American citizens remain subject to US federal income tax on worldwide income regardless of Italian residency or flat tax elections. Moving to Milan and electing the Article 24-bis regime does not eliminate or reduce the US tax obligation on the same foreign income.

The 300,000 EUR paid annually to Italy may qualify for the US Foreign Tax Credit on Form 1116, potentially reducing the US tax liability on the same foreign income. However, the interaction between the fixed-charge Italian flat tax and the income-proportional US credit mechanism requires specific professional modelling. The credit basket allocation, excess credit positions, AMT interaction, and the character of specific income streams (particularly carry, which may be long-term capital gain in the US and ordinary income in Italy) are all material considerations.

FBAR (FinCEN Form 114) applies to Italian bank accounts exceeding 10,000 USD in aggregate balance at any point during the year. FATCA (Form 8938) applies to foreign financial assets above specified thresholds. Both exist regardless of Italian flat tax elections.

Frequently Asked Questions