This is my guide to what your commercialista does with all that information you give them each year, what problems it causes them and you, and finally what you can do to simplify your life as a foreigner living in Italy with assets held abroad.
Hopefully this blog can explain some of the 'how' that comes from the tax declaration each year and 'what' solutions are available.
One of the main questions I am asked on a regular basis is 'what are my obligations in terms of declaring foreign income and assets in Italy?
Of course, your commercialista may be doing it for you, but what exactly are they reporting, or should they be reporting? With the help of Andrew Lawford at SEB Life International, I managed to go through the instructions on how to fill in an Italian tax return (interesting reading I can tell you).
What I want to look at in this article is how financial assets, (excluding property) i.e funds, managed portfolios at the bank or with an asset management group, ETF's, shares, Bonds, Money market accounts etc should be declared properly in Italy.
Tax treatment of diversified financial assets.
The first, and most obvious point is that foreign investment income is taxed in Italy due to the principle of worldwide taxation. The basis of the Italian tax system. Once you have established residency in Italy, you must declare all of your income, wherever in the world it was produced.
Dividends and interest
Typically, an investment portfolio will produce periodic income in the form of dividends and interest, especially if you are looking to live from the income stream generated from the very same portfolio.
These need to be declared by converting any foreign currency amounts into euros at the exchange rates designated by the Banca d’Italia for the day the dividend or interest was paid!
The amounts received, duly converted into euros, are taxed at a rate of 20% (up to 30th June 2014) or 26% (from 1st July 2014 onwards).
The relevant section in the Modello Unico is the RM.
***You should declare the net amount received (after withholding taxes) and pay the 20/26% income tax on that. The amount which should be taxed is commonly called the “netto frontiera”.***
Capital Gains
Capital Gains are taxed at the same rates as dividends and interest income (see above), but with the complication that the amount of the capital gain must include the variation in foreign currency over the holding period.
So, what does that mean? As an example, if a fund was purchased on 1st March 2010 and sold on 15th November 2014, it will be necessary to have both the purchase and sale prices (information you will need to provide to your commercialista) and to convert these into euros at the exchange rates for those days (as established by the Banca d’Italia).
This gets relatively complicated when you have a portfolio of assets that is managed by you, the bank or an asset manager and multiple trades have taken place over the year. Checking annual statements to find purchase costs for every trade can become quite onerous. In addition there may have been corporate actions, such as share splits, demergers, capital returns, etc, which compound the issue.
Where partial sales and purchases have occurred, the LIFO (Last-In-First-Out) principal needs to be applied.
It is also the case that when you become a resident in Italy you cannot simply use the value of the investments on the day when you arrive and become tax resident, but you must use the historical cost from when the asset was bought for the purposes of capital gains tax. (This actually makes a lot fo sense if you think about it, because it would mean disposing of any histotrcal tax liability when moving countries and alot more people would move if it were possible).
The relevant section in the Modello Unico is the RT
Foreign Asset Declarations and IVAFE
The fun really starts in the Italian tax return when the Quadro RW is contemplated. This section has more to do with a monitoring requirement than it does to do with taxes, although the changes brought in for the 2013 tax year mean that the Quadro RW is also used for calculating the foreign assets tax (IVAFE), which is currently due to the amount of 0.20% on the year end market value (with a difference for bank accounts, which are generally taxed at a flat rate of 34.20 euros).
The Quadro RW requires the Italian resident with foreign assets to declare their value each year; this doesn’t sound too bad, as you would think that you would only have to list your assets at year end as per the statements provided by your bank or broker. However, the Quadro RW actually requires you to declare for what portion of the tax year you have held each asset and then to apply the foreign assets tax on that basis.
e.g. calculate the number of days the asset was held for in the year and then pay 0.20% on a pro rata basis. Once again this becomes onerous when multiple trades may have taken place in a portfolio, during the year.
And unfortunately an end of year tax statement will not provide you with the information needed to accurately complete the tax return. You would need to go back through a years worth of trading statements to identify book cost and when they were traded.
What is the solution to this annual headache?
Very simply, its the humble Italian compliant Investment Bond. It allows you to do everything you want to do without the fuss. All the tax is worked out for you, your asset manager can make as many trades as he needs without immediate liability to tax and there is no need to track movements of money in the portfolio or declare when dividends and interest were paid. In addition, when monies are withdrawn from the Bond and a tax liability is incurred then the tax is paid at source on you behalf.
There isn't even a need to declare the portfolio, trades, interest payments or anything else to your commercialista each year.
Life couldn't be simpler
If you have found collating your tax information a little 'heavy' this year, or you think you may not have been submitting the right information based on what you have read above, and you would like to make financial life in Italy a bit easier then you can contact me on gareth.horsfall@spectrum-ifa.com or cell: 3336492356.
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