Italy goes BOOM!

For Italian politics it looks like it will be the continuation of an interesting battle with the EU, games with the world financial markets and internal cat fighting between the various factions. 

I have to admit that I haven't a clue what to think about it at the moment other than business as usual. Certainly, the biggest problem the Government faces is how to find the money to fulfil their election promises without exploding the public debt, even more, and facing the wrath of the International bond markets and the EU. In short...watch this space. 

For the meantime, let's get back to some more interesting matters which might affect us directly. 

During the summer I am often contacted and asked many questions about taxation, especially when everyone has their mind focused at tax payment time. This year was no different. As usual a few things came up and there were a couple of recurring themes which I thought I would touch on in this blog I hope you enjoy the content.  

Taxation on Government derived pensions

Government derived pensions = For example:

Armed Forces Pension Scheme

Teachers Pension Scheme

NHS Pension Secheme

Government derived pensions can be the pot of gold at the end of the rainbow for many 'stranieri' retiring in Italy. You may have one, but there are a lot of other people that don’t. So why, from a taxation point of view, can they generally be more favourable than other types of pensions and the state pension?

Simply put, when you are deriving a retirement income from a Government derived pension, whilst a resident in Italy, the income from the pension itself is not generally subject to taxation in Italy.  The income is generally only subject to taxation in the country from which the pension is derived.

The little known fact which is also interesting from a tax perspective is that this pension, in Italy, is not taken into account when calculating the respective tax rate on your other earned income (property rental, income from employment, private and state pensions). So, you could have a pension of €30,000 from a Government derived pension scheme in your country of origin and a similar income from other private sources and the additional income would fall in your lowest rates of income tax in Italy rather than being added to the Government derived pension income. (Tax might be payable on the Government derived pension in its country of origin.)

If you have a Government derived pension and are thinking of, or currently living in Italy, then you have, in most cases, the double taxation benefit of not paying tax on it in Italy and it not being included in your Italian tax return to calculate tax on your own income sources. BINGO!

That dreaded 4th year

It is becoming more and more evident that Italy is now using the information being awarded to it through OECD Common Reporting Standard and other sharing of financial information agreements.

I myself have been requested to provide information twice this year (thankfully it was all 'in regola' anyway) and I am now aware of a number of people who have received letters from the Agenzia delle Entrate asking them to clarify their position regarding amounts that have not been declared.

In the majority of these instances the letter refers to a specific amount of undeclared income and/or investments, rather than a generic request to declare suspected undeclared income. 

Notably most people are receiving these notices in the 4th year after the event. I say notably, because once 5 full tax years have passed then the event itself would be outside the statute of limitations and therefore not be liable for further investigation unless a request to the courts had been lodged.

My word of warning is if you are resident in Italy and have, in the last 5 years, not declared income, gains, investments or property OR only declared your finances in the last 5 years but you have been resident for longer than this in Italy, then be aware of the 4th year letter. 

It all appears far too coincidental for my liking. 

"You can't deduct your foreign rental property expenses in your Italian tax return"   If I had a euro for every time I have heard this being said by well meaning commercialisti then I am sure I would be a millionaire by now.   If you are renting out a property in another country, but resident in Italy, then it is correct that you cannot detract your foreign rental property expenses directly in your Italian tax return.  However, this statement, although correct, tells only half the story.   What is often failed to be told is that the expenses can and should be deducted, where applicable, in the country in which the property is located.   In all cases, property is considered a fixed asset i.e. if you leave the country you cannot pack it up and take it with you.  Therefore, it is subject to the rule of law in which the property is located before the application of tax law in another country.   This means that any rental income should be subjected to the appropriate tax declaration procedure, FIRST, in the country in which it is situated.   Only once it has been fully declared, any allowable expenses deducted and any taxes paid, is the NET result reported in Italy.  Any tax paid in the country in which the property is located is claimed back through a double taxation credit in your Italian tax return.   So, the statement 'you can't deduct your foreign rental property expenses in your Italian tax return', whilst correct, is only one chapter in a much longer story.