It's tax time of the year again!

This time of year is always a difficult one for me as I am faced with the horrendous task of having to sort through all my business expenses, fatture etc for the previous tax year.  I have a natural tendency to avoid doing this as it takes me a full day to thoroughly complete the task.  My commercialista has been asking for these papers since the end of January and I only managed to get them in one week ago. 

 Anyway, don't take a leaf out of my book.  My reluctance comes from the worry of what the tax effect will be in June, but I know it must be done. Thankfully I have now completed the task although whilst writing I now realise I have forgotten to provide another piece of documentation. 

So, with my tax affairs sorted for another year I thought it was about time I reviewed some of them that might be relevant for you.  It really is a reference for those of you who have income/assets/realised capital gains in other countries and might be wondering what tax rates are applied to which assets, and how.  It may also act as a guide for you if you are thinking about, or in the process of, doing something about your Italian tax return. 

So, where do we start?
Firstly, I will start by confirming that as a fiscally resident individual in Italy you are subject to taxation on your worldwide assets and income (with some exceptions), and realised capital gains. This means you are required to declare your assets and income and realised capital gains wherever they might be located or generated in the world.
TAX ON INCOME
If you are in receipt of a pension income and it is being paid from a private pension provider overseas or a state pension, then that income has to be declared on your Italian tax return.  Please note, this excludes Government service, civil service and local government pensions of any kind (eg. Teachers, Nurses etc.) as in these cases tax is generally deducted at source in the country of origin and there is no further requirement to report the income in Italy. A tax credit will be given for the tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.
It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on many factors and, therefore, I shall not dwell on it here. If you have any questions in this area you can contact me on the details at the bottom of this page.
INVESTMENT INCOME AND CAPITAL GAINS
This is one area where Italy excels above other countries in my opinion, in that its system of calculation is very simple. As of 1st July 2014, interest from savings, income from investments in the form of dividends and other income payments are taxed at a flat 26%. Realised capital gains are also taxed at the same rate of 26%.
(Interest from Italian Government Bonds and Government Bonds from 'white list' countries is still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or Unicredit)
PROPERTY OVERSEAS
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.
1. The income from property overseas.
Unlike rental property located in Italy which is taxed at the approximate rate of 23%, depending on what kind of rental you operate and your other income sources.  Overseas net property income (after allowable expenses)  is added to your other income for the year and taxed at your highest rate of income tax.
There is one advantage to this, in that if the expenses in the country of origin are higher, then the net income, after deductible expenses in the country of origin, will be lower and therefore less income needs to be reported on your Italian tax return.  Less income = less tax. 

If, on the other hand, your expenses are lower and your net income higher, then you are likely to have to pay more tax in Italy and that may also take you into a another tax bracket, depending on your other sources of income. 
This can prove to be a tax INEFFICIENT income-stream for those hoping to live in Italy by relying on income from property overseas.  However, property overseas often serves more than just the purpose of being an income stream but also a security in your country of origin and maybe family usage. 
2. The other tax is on the value of the property itself, which is 0.76% of the value.   (IVIE)

However, value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK (the area I am most familiar with), that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be more than the cadastral equivalent value.

In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.

TAXES ON ASSETS

1. Banks accounts and deposits

A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD's etc. The charge is the equivalent of the 'imposta da bollo' which is applied to all Italian deposit accounts each year.

2. Other financial assets

Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year. 

Also remember that if you have a portfolio of managed assets that are NOT held in an a suitable compliant Italian Investment bond, then all the separate funds/shares/assets are considered "individual" and MUST be reported individually on your tax return each year. That also includes also reconciling any income payments that have been made and also  any capital gains that have been realised.  These must also be reconciled pro-rata according to when they were paid during the tax year and also if the monies are in a different currency to the Euro, then a reference to the Banca D'Italia EUR/GBP or USD exchange must be made for each transaction on the correct date.

So there you have it.  A very small but concise list that tends to affect most of the people I meet. My experience over the years has been that, in most cases, you may be paying more than you need to. However, there are a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.

If you haven't discussed these with anyone then feel free to get in touch to discover whether any of those opportunities are open to you.  You can contact me on gareth.horsfall@spectrum-ifa.com or I can be reached on cell: 333 6492356. There are no fees for consultations.

This guide is only meant to be a broad outline of the taxes that affect most expats. It is not a full tax list and does not take into account personal circumstances. It is intended to be a guideline to help you make the right decisions.