Talent Return Regimes and the New Substitute Taxes on Salary Increases

With Circular No. 3/E of 24 June 2026, the Italian Revenue Agency clarified that the preferential tax regime provided for inbound workers, governed by Art. 5 of Legislative Decree No. 209/2023, as well as the special regime reserved for professors and researchers under Art. 44 of Decree-Law No. 78/2010, cannot be combined with the new substitute taxes introduced by the 2026 Budget Law on salary increases and on specific increases and allowances granted to employees.

The administrative guidance intervenes to clarify certain interpretative doubts that arose following the publication of the previous Circular No. 2/E of 24 February 2026 and defines the proper coordination between the new substitute taxation regimes and the tax benefits provided for workers who transfer their tax residence to Italy.

1. The new substitute taxes introduced by the 2026 Budget Law

The 2026 Budget Law introduced two temporary tax relief measures for private-sector employees.

The first consists in the application of a substitute tax for personal income tax (IRPEF) and the related surcharges, equal to 5%, on salary increases paid during 2026, in implementation of renewals of national collective bargaining agreements signed in the years 2024, 2025 and 2026. The benefit applies, unless expressly waived by the employee, to employees who in 2025 received employment income not exceeding EUR 33,000.

The second measure provides, again for the 2026 tax period only, for the application of a 15% substitute tax on increases and allowances paid for night work, work on public holidays, work performed on weekly rest days and shift work, up to an annual limit of EUR 1,500, for workers with employment income not exceeding EUR 40,000 in 2025.

Circular No. 3/E of 24 June 2026 also provides numerous operational clarifications on the scope of application of the two tax relief measures, specifying, among other things, that they also apply to increases in monthly allowances connected with the duties performed (such as, for example, cash-handling allowances), contractual increases relating to previous years but paid in 2026, absorbable individual salary supplements, as well as increases relating to holidays, holiday bonuses and abolished public holidays.

With regard to the 15% substitute tax, the treatment of Sunday work increases, night-time or public holiday overtime, on-call allowances and the overnight stay allowance provided for by the Credit Sector National Collective Bargaining Agreement is also clarified.

Circular No. 3/E of 24 June 2026 further specifies that both tax relief measures require the application of a national collective bargaining agreement and do not apply where the employment relationship is governed exclusively by individual or company-level agreements.

2. The relationship with the inbound workers regime

The main clarification provided by the Circular concerns the coordination between the new substitute taxes and the preferential tax regime for inbound workers.

The previous Circular No. 2/E of 24 February 2026 had stated that, in the case of workers benefiting from the inbound workers regime or the special regime for professors and researchers, the substitute tax applied to the “taxable portion only” of the salary increases.

This wording had raised the doubt that the taxable base of the substitute tax should first be reduced by applying the taxable percentages provided for under the preferential regimes – equal, respectively, to 50% or 40% for inbound workers and 10% for professors and researchers.

Circular No. 3/E of 24 June 2026 expressly excludes this interpretation.

3. The basis for the solution adopted

In reaching this conclusion, the Italian Revenue Agency refers to its established interpretative position, already expressed in Circular No. 17/E of 23 May 2017, subsequently confirmed by Circular No. 33/E of 28 December 2020 and, with specific reference to the new inbound workers regime introduced by Legislative Decree No. 209/2023, by Resolution No. 40/E of 23 July 2024.

According to this position, the preferential regimes for inbound workers and for professors and researchers apply exclusively to income from Italian sources, determined according to the ordinary rules of the Consolidated Income Tax Act (TUIR), which contributes to the formation of the taxpayer’s total income.

Amounts subject to substitute tax, on the other hand, constitute income excluded from the formation of total income for IRPEF purposes. It is precisely this circumstance that prevents the application of the reductions in the taxable base provided for under the preferential regimes.

It follows that salary increases subject to the 5% substitute tax, as well as the increases and allowances subject to the 15% substitute tax, must be taxed in full under the relevant substitute tax regime, without applying the reduction in the taxable base provided for inbound workers or professors and researchers.

4. The possibility of opting for ordinary taxation

Circular No. 3/E of 24 June 2026 confirms, however, that the worker may expressly waive the application of the substitute tax.

In that case, the salary increases, increases and allowances are subject to ordinary IRPEF taxation, contribute to the formation of total income and may therefore benefit from the reduction in the taxable base provided for under the inbound workers regime or the special regime for professors and researchers, provided that all the requirements laid down by the legislation are met.

The Italian Revenue Agency expressly specifies that this possibility applies both with reference to the 5% substitute tax on salary increases and with reference to the 15% substitute tax on increases and allowances for night work, work on public holidays, work on weekly rest days and shift work.

5. Concluding remarks

With Circular No. 3/E of 24 June 2026, the Italian Revenue Agency definitively resolves an important interpretative issue, clarifying that the new substitute taxation regimes introduced by the 2026 Budget Law and the preferential tax regimes for inbound workers and for professors and researchers operate on different tax bases and cannot be applied jointly.

The principle established is based on the very nature of the preferential regimes for the return of qualified workers, which apply exclusively to income that contributes to the formation of total income, whereas amounts subject to substitute tax remain excluded.

However, the worker retains the option to waive the substitute tax regime and subject those amounts to ordinary taxation, so as to benefit, where more advantageous, from the tax relief provided under the inbound workers regime or the regime reserved for professors and researchers.

The choice between the two methods of taxation must therefore be assessed on a case-by-case basis, taking into account the taxpayer’s overall income position and the tax benefit that can actually be obtained.

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