Tax matters...

Every year I like to run a summary of the tax laws which mainly affect us and any proposed changes. There will also be some changes for UK home owners, post Brexit, which I will touch on and the proposed changes to the existing tax rates and the potential tax incentives.

The first thing you need to remember, as a fiscally** resident individual of Italy is that you are subject to taxation on your worldwide earned and non-earned income, capital gains and assets (including property). It is your job to make sure that you report these to your commercialista each year to complete your tax return. But before you do it for the first time, a financial planning exercise can come in useful.   

 

** Fiscal residency generally means being registered as a resident at your local comune/municipio.

 

TAX ON INCOMES

 

EMPLOYMENT

 

If you are employed or self employed then there are multiple options available, from partita iva, partita iva regime forfettario, rientro di cervello, amongst others. I won't go into detail here as these really need to be looked at on a case by case basis, but needless to say that there are financial planning opportunities if you are working, or intending to work in Italy. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

 

PENSIONS 

 

Most of my clients are in, or close to retirement and so understanding how your pension will be taxed as a resident in Italy is of paramount importance.

 

PRIVATE PENSIONS AND OCCUPATIONAL PENSIONS

 

If you are in receipt of a pension income and it is being paid from a private pension provider overseas / occupational pension provider or you are in receipt of a state pension / social security, 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 the 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. 

I often hear stories of people who are told by their commercialista that their state pension / social security pension is not taxable in Italy. This is absolutely NOT the case. The UK state pension, as an example, is 100% taxable in Italy as is US social security. It is not excluded from the double taxation treaties and therefore must be declared in Italy. Failure to declare could mean fines and penalties. 

 

GOVERNMENT DERIVED PENSIONS

 

It is a good idea to define what is meant by government paid pensions. The definition according to the Italy/UK double taxation convention 1988 is, paid from:

 

" a political or an administrative subdivision or a local authority"

 

This generally means civil servants of any kind and foreign office employees but would also include teachers, NHS workers, military personnel, police men and women, fire service etc. In these cases, the pension awarded is taxable only in the state in which it originates, and tax is generally deducted at source in that country of origin. 

 

But there are some tax idiosyncrasies to look out for here. On the positive side, this income is not taken into account when calculating the tax on your other income sources in Italy, e.g. rental income, and it is not declared on your tax declaration in Italy.  

 

On the negative side, for those of you who are thinking of becoming citizens of Italy, these pensions are only taxed in the state of origin UNLESS you become a citizen of Italy and then they are taxable in Italy as well. So for anyone thinking about cittadinanza, plan before you leap!

 

INVESTMENT INCOME AND CAPITAL GAINS 

As of 1st January 2017, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged at a flat tax rate of 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 is located) is added to your other income for the year and taxed at your highest marginal rate of income tax. 

 

Where many properties are generating all 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, pensions, investments and property, to maximise tax planning opportunities and allow you to redirect income from the most tax efficient source at any one time. Relying solely on one type of asset for income in retirement is generally not a good idea. 

 

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE) 

 

A) Value must be defined in this instance. For properties based in the EU, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be significantly more than the cadastral equivalent value. 

 

B) In properties located outside the EU the value for tax purposes is defined as the purchase price or value at time of ownership, where this can be evidenced, otherwise the value of the property is defined as the current market value. 

 

 
** BREXIT TAX CHANGE** Once the UK leaves the EU the definition of value of the property will change as per the explanations above. This will affect any UK national living in Italy, who owns property in the UK post Brexit, and depending on your circumstances you could find yourself paying more or less in taxation on the property.

 

DISPOSAL OF UK PROPERTY

 

If you are thinking about moving to Italy and are looking to dispose of second properties in the UK before the move, then you may be entitled to take advantage of a tax break. If you have owned the UK property for more than 5 full tax years then it is no longer deemed a speculative transaction and you will not be capital gains tax liable, as a resident in Italy, on the disposal.  

However, you may also qualify for a tax break in the UK as well, because although non-UK residents are liable to taxation on the disposal of UK property, the purchase price of the property is taken at the point at which the legislation was introduced: 6th April 2015 or later, if applicable. So if you have owned the property for a long time and seen some large capital gains, you could dispose of the property and benefit from a largely reduced tax rate as a result of this cross border financial planning loophole. 

 

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, gold holdings, art, classic cars etc 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 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 payments that have been made and also any capital gains that have been realised. A reference to the Banca D'Italia EUR/GBP or USD exchange must be made for each transaction on the correct date. 

 

 

 

THE FUTURE

New tax laws in Italy

If you have been reading my previous blogs you may have read about tax breaks that are in the pipeline for Italian residents.

 

They have been proposed by Matteo Salvini and his party La Lega. The proposals that are the most interesting from my point of view are the following: 

 

FLAT TAX OF 7% FOR RETIREES MOVING TO ITALY. 

 

This was introduced into the 'Legge di Bilancio 2019'. In short, anyone who moves to Italy and is in receipt of a pension income from abroad, can benefit from a flat tax of 7% on their income  for a period of 5 years after becoming resident, based on the criteria that:

 

a) you must establish residency in one of the following regions,  Sicilia, Calabria, Sardegna, Campania, Basilicata, Abruzzo, Molise e Puglia

 

 

b) the town/village must have less than 20,000 registered inhabitants

c) you must NOT have been resident in Italy in the last 5 full tax years prior to taking the offer. 

d) you can opt out of the regime if you feel it does not fit your circumstances. 

The idea is to re-populate the southern regions of Italy which have been decimated over the last 20 years due to lack of employment opportunities and mass migration to the large Italian cities and Northern Europe. The aim is to try and draw in foreign money and also Italians abroad who may wish to move to Italy in retirement.   

 

CHANGES TO THE INCOME TAX BANDS

 

From calendar year 2020 there are proposals afoot to reduce and simplify the current income tax bands. Currently there are 5 tax bands in Italy:

 

On the first €15000                                      23%
€15001 - 28000                                           27%
€28001 - 55000                                           38%
€50001 - 75000                                           41%
€+75000                                                      43%

 

The initial proposal was to reduce the rate of taxation to 15% on the first €65000 of income and then 20% above. Whilst that has been introduced in 2019 for self employed people on a partita IVA, the proposal on personal income has been scaled back somewhat since the initial proposals, mainly due to concerns over balancing the books. The latest proposal doing the rounds is to reduce the number of income tax bands, but the rates do not move much: 

 

On the first €28000                                 23%
€28001-75000                                         33%
€75000                                                    43%
 

An income of €28000 per annum gross would amount to an annual saving of €520pa.
An income of €50000 per annum gross would amount to €1620pa

 

These are not figures that are going to change many people's lives in a big way, but something is better than nothing. However, all this is hypothetical at the moment as we wait to see the final proposals and implementation of the law.  It is unlikely that we will know more at this point since Salvini is quite likely to force another general election this year in lieu of his gaining popularity and the demise of M5S. Since the flat tax was his proposal, if he becomes PM, then further changes could be in the pipeline. Watch this space!

 

So, all in all I don't see any great game changers for you or me, but who knows. At least we have the sun, sea, mountains, food and 'la dolce vita'.