Compliant Italian Investment Bonds: The tax treatment explained.

In my previous blog post I wrote about offshore investment bonds and the detrimental rates of tax for holding an offshore bond as a resident in Italy.   In this blog post I want to review the investment bond life assurance contract which is considered compliant for Italian tax purposes and fiscally tax efficient for resident of Italy.

There are life assurers that operate in Italy under Italian tax rules.  They will generally be located in Dublin or Luxembourg (so the money is not actually in Italy, per se) but will comply with all Italian tax and legislation surrounding these types of investment products.  Some may subscribe to the withholding tax regime.  In other words they withhold Italian tax at source, which means you don’t have the bother of reporting it each year.  If the product does not subscribe to the witholding tax regime then it simply means that withdrawals must be declared on your end of year tax return on the Quadro RW of the Modello Unico in addition to the value of the product at the 31st Dec each year,  

These are by far and away the most simple and tax effective investment vehicles for Italian tax purposes.  They are 100% compliant under Italian law and benefit from preferential tax treatment.

However, it is worth noting that to comply under Italian law and benefit from the favourable tax treatment, the product itself must meet certain conditions 

(Contracts of this nature may be available in other countries and on the face of it may appear to work for the Italian tax system, but contractual terms dictate whether it meets all the Italian requirements) 

Essentially there are 3 main criteria which the Italian government require to ensure that favourable tax treatment will apply.   (These were upheld as necessary product terms and conditions, in the court case 10333 of 2018.) 

Firstly, named beneficiaries must be in place, to ensure quick and easy passage of benefits on death.   If there are no specific named beneficiaries then testamentary heirs can be opted for but a statement to that effect must be documented with the product provider. 

** Interestingly to note here is that if you have a UK issued investment bond then named beneficiaries must NOT be present on the contract otherwise it may invalidate any UK inheritance tax benefits.  Here we can see a quirk of differing jurisdictional contracts. 

Secondly, depending on the type of contract, specific funds and/or a discretionary fund manager must be in place.   The bond cannot be a self-directed execution only style product.  Products are designed with advice in mind, and so a nominated adviser must be present on the contract.  Although investment parameters can be set and even a portfolio selected with your adviser, in line with your risk profile, the client cannot directly manage the portfolio him/herself.   However, there is a lot of scope within this to invest in, and design a portfolio from a  'significantly' wide range of assets. 

Lastly, a death benefit option must be offered on the product, whether taken or not.   In other words, should you wish to purchase life cover under the contract, the option must be available.     The product itself is considered a life assurance wrapper (although in reality it is an investment portfolio in disguise for most investors) and as such benefits from the preferential tax treatment.  

FOREIGN POLICIES 

Where someone has taken out a contract in another country, eg. UK, France, Spain, then the contract 'may' have a portability option if the product provider has a working presence in the new jurisdiction.  If so, then it might be possible to convert the policy to locally compliant conditions in Italy or elsewhere.  If you have a policy of this nature then we can explore that possibility. 

If you hold assets directly and but would like to know more about how you can benefit from tax savings by holding the same assets in an Investment Bond, you can contact me at gareth.horsfall @spectrum-ifa.com or on +39 333 6492356