With Response No. 197/2026, the Italian Revenue Agency clarified that a pension paid directly by a former foreign employer through a “pay as you go” system may be classified as pension income for the purposes of access to the preferential regime provided for by Article 24-ter of the TUIR.
Once the pension requirement is met, the 7% regime may also be applied to the taxpayer’s other income produced abroad, including, in the case examined, a lump-sum severance payment paid by the Irish company.
Table of contents
- The case
- The 7% regime for holders of foreign pensions
- The “pay as you go” pension
- Treatment of the severance payment
- The clarification of the Italian Revenue Agency
The case
The case concerns an Irish citizen who, after terminating in 2025 his executive employment relationship with an Irish company, transferred his tax residence to Italy and intends to exercise, starting from tax year 2026, the option provided for by Article 24-ter of the TUIR.
Following the termination of the employment relationship, the taxpayer receives from the Irish company two distinct payments: a pension allowance paid under an arrangement known as “pay as you go” and a sum by way of lump-sum severance payment.
The taxpayer therefore asks whether both sums may be subject to the 7% substitute tax provided for holders of foreign pensions who transfer their residence to Italy.
The 7% regime for holders of foreign pensions
Article 24-ter of the TUIR provides for an optional regime for individuals who receive pension income paid by foreign entities and who transfer their tax residence to Italy to one of the municipalities identified by the rule. Where the required conditions are met, the taxpayer may subject income of any category produced abroad to a substitute tax on personal income tax (IRPEF) at a rate of 7%.
Among the main requirements, the individual must receive foreign-source pension income, must not have been tax resident in Italy in the five preceding tax periods, and must transfer his residence from a State with which administrative cooperation agreements with Italy are in force.
The option is exercised in the income tax return for the tax period in which the tax residence is transferred to Italy and is applicable, subject to the conditions laid down by the legislation, for the period of validity of the regime.
The “pay as you go” pension
The particular feature of the case concerns the way in which the pension is paid.
Under the Irish system described in the ruling request, the “pay as you go” arrangement does not provide for the prior establishment of a pension fund or for the payment of contributions into a dedicated investment fund.
Instead, it is the former employer itself that pays the pension allowances directly to the employee once the relevant entitlement has accrued.
The Agency refers to the broad notion of “pensions of any kind and allowances treated as equivalent to them” laid down by Article 49(2)(a) of the TUIR and to the clarifications already provided in Circular No. 21/E of 17 July 2020. For the purposes of access to the regime under Article 24-ter, payments due after the termination of employment that originate in the previous employment relationship may in fact also be of a pension nature.
The fact that the pension is paid directly by the former employer, without the involvement of an independent pension fund, therefore does not prevent it, in the case examined, from being classified as pension income.
Treatment of the severance payment
The Agency also rules favourably on the application of the preferential regime to the lump-sum severance payment paid by the Irish company. It is important, however, to distinguish the two steps.
The “pay as you go” pension allows the taxpayer to satisfy the requirement needed to access the regime under Article 24-ter. Once the option has been validly exercised, the 7% substitute tax may in fact be applied not only to the pension, but to income of any category produced abroad, identified according to the criteria of Article 165(2) of the TUIR.
To establish whether income is produced abroad, the so-called “mirror reading” criterion is applied: the criteria set out in Article 23 of the TUIR for identifying income produced in Italian territory are used in reverse.
In the case examined, the lump-sum severance payment paid by the Irish company may therefore also be included among the foreign income that can be subject to the 7% substitute tax.
The clarification of the Italian Revenue Agency
The Italian Revenue Agency concludes that the taxpayer may benefit from the preferential regime provided for by Article 24-ter of the TUIR, subject to compliance with all the further conditions required by the legislation.
In particular, the allowance paid by the Irish company through the “pay as you go” system may be classified as pension income and satisfies the pension requirement needed to access the regime.
Once the option has been validly exercised, the taxpayer will also be able to apply the 7% substitute tax to other income produced abroad, including the lump-sum severance payment received from the Irish company.
The clarification therefore confirms the breadth of the regime provided for holders of foreign pensions: the presence of a pension benefit that qualifies under Article 49(2)(a) of the TUIR is the access requirement, while the relief may subsequently extend, subject to the conditions laid down, to the taxpayer’s other foreign-source income as well.