As I walk my son to school in the morning we have
the opportunity to walk through the palazzo of an 'Archivio di Stato' in the
centre of Rome.
It is a real piece of classical architecture with cloister
like columned walkways surrounding a central open space with a tower
adorned with various statues at one end. However, it is not this amazing
building which captures my attention each morning, but a plaque on the wall as
we walk through the columned part. The plaque reads: Alluvione di 1870. The
marker on the wall must be approximately 1 metre 50cm high. To think that
the water reached that level is quite unimaginable. And thinking
about this each day naturally leads me to the subject of floods. My
personal flood is the annual flood of emails into my inbox, at this time of
year, asking for clarification on taxes in Italy.
So this blog is also about laying down some of the details
of those pesky taxes that we all have to pay in Italy. Remember that the
submission of your tax information should be formalised by the end of
May. If you use a commercialista, even earlier, to allow them time to go
through your information, ask questions and report it correctly. The first
payment for the year is due on June 16th.
The content of this blog is, in the main, copied from previous years summaries
with some updates to information where relevant.
So, where do we start?
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.
Fiscal residency is going to become very important post
BREXIT for Britons who reside in Italy. Questions have arisen as to what
fiscal residency means. For a definition you can read my blog post.
Tax on income
If you are in receipt of a pension income and it is being paid from a 'private'
pension or occupational pension provider overseas or you are in receipt of an
overseas state pension then that income has to be declared on your Italian tax
return. If you have paid tax already on that income then 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.
** Government service, civil service and local government
pensions of any kind (e.g. teachers, nurses etc.) are only taxed in the state
in which they originate, and tax is deducted at source in the country of
origin. They are not taxed in Italy unless you become an Italian
citizen **
It is a similar picture for income generated from
employment. This is a slightly more complicated issue that depends on multiple
factors. If you have any questions in this area you can contact me on
gareth.horsfall@spectrum-ifa.com.
Investment income and capital gains
As of 1st January 2018, interest from savings, income from
investments in the form of dividends and other non-earned income payments
stands unchanged and 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 are 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 FIAT).
Property Overseas
Property which is located overseas is taxed in two 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.
Overseas NET property income (after allowable
expenses in the country in which the property is located and taxed) is added to
your other income for the year and taxed at your highest rate of income
tax.
I would like to clarify what I mean by 'net property income'. If we
take the UK as an example, this means that you MUST make a tax declaration
in the UK first. The UK property is a fixed asset in the UK and therefore
must be treated to UK tax law before any declaration in Italy. After
you have deducted allowable expenses in the UK and paid any tax liable in the
UK, the NET property income figure must be submitted in your UK tax return.
Where many properties are generating all of your income this can prove to
be a tax INEFFICIENT income-stream for residents in Italy. It
is better to have a diversified income stream to maximise tax planning
opportunities.
I will also add some comments here in that I often hear from people who
are told by their commercialista that no expenses can be deducted in Italy.
This is correct. What they mean (or what I am interpreting that they
mean) is that you cannot deduct the UK allowable expenses directly through the
Italian tax return. This has to be done first in the UK tax return, in
this example. This is correct process. However, it does not mean that
the expenses cannot be deducted per se. It just means they have to
deducted in the relevant tax return first before reporting the NET result in
Italy.
** Tax credits will be given for any tax paid in another country in order
to avoid double taxation, where a double taxation treaty exists with Italy.
2. The other tax is on the value of the property itself,
which is 0.76% of the value. (IVIE)
Value must be defined in this instance. For EU based
properties, the value is the Italian cadastral equivalent. In the UK that would
be the council tax value NOT the market value. This value is always
expressed as a range of values rather than a specific one. You will find
that the market value will, in most cases, be more than the cadastral
equivalent value.
For properties located in other European countries, for example France, you
will find that they may have a similar 'cadastral' value. Where this value
is calculated in the same way as Italy, a tax credit is offered against any
IVIE tax payable in Italy. The tax credit is not applicable to UK properties as
the tax is due on the occupant of the property and not the owner.
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.
** BREXIT FINANCIAL PLANNING OPPORTUNITY**
After the UK exit from the EU, the cadastral equivalent value
of a property in the UK will revert to the original purchase price, where
evidence can be provided. Given that UK councils are likely to review
their council tax bands in the comings years to fund shortfalls in their
accounts, this could mean less tax to pay in Italy.
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.
The rules regarding whether you need to declare the account can be found on my
blog post 'IF IN DOUBT, DECLARE THE ACCOUNT'
I am of the view that if you have a bank account in the UK with more than €5000
in it and/or a regular income being credited to it, then you should declare the
bank account in Italy regardless of the tax reporting requirements. For
the sake of the tax of €34.20, it is not worth taking the risk.
2. Other financial assets
The charge, IVAFE, is levied on other foreign-owned assets
which covers shares, bonds, funds, portfolio assets, cryptocurrency, gold
deposits, art work 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 suitably 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 reconciling
any income/dividend/distribution payments that have been made and also any
capital gains that have been realised. A reference to the Banca D’Italia exchange
must be made for each transaction on the correct date.
3. Pensions
It is worth noting here that for any UK style private pension or occupational
pension arrangements, where the pension structure is an irrevocable trust, then
the tax treatment is two-fold.
a) any income that you draw from the pension each year is taxable at your
highest rate of income tax in Italy.
b) the fund itself needs to be reported under 'monitoraggio' of
trusts section of the Quadro RW. Failure to do so could result in
fines. Although highly unlikely, you never can be sure.
This is a concise list of the taxes that affect most of you.
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