Tax on Pensions

 

Tax on Pensions Well, another summer has passed and contrary to my previous blog I have decided not to become a communist, not that I think there was ever any chance of it happening anyway. Being a financial adviser pretty much excluded me from the start. Anyway, as the hot days roll on here in Rome and the fresher ones will start soon, I was thinking how I could get started on some more serious topics of finances for residents in Italy. One thing I have come up against this summer on a number of occasions has been the subject of personal private pensions, and how they are treated for taxation, so I thought it might be a good idea to explore the different types of personal pensions which are in existence in the EU, which type Italy uses and what we can learn to help us understand the taxation of such a financial product in Italy.  EET, ETT, or TTE? This subject can get complex, but every so often it's good to delve in and try to make some sense of it. The main problem is that throughout the world, and even between European states, different models of taxation are applied to the different models of personal private pensions that exist. Italy has adopted one of these models, which in itself is no problem, but when we, as foreigners, move to Italy we may find that our existing private pension plans don't fit into the same model as the Italian one. In most cases our commercialista has the 'enviable' job of choosing how to apply the Italian way to our scheme.  It's a bit like trying to fit a square peg into a round hole.  So what are the main models? As the title of this paragraph alluded to, there are three main models used which go under the monikers: EET, ETT and TTE.    What do these stand for?  The initials mean the following:  EET:   Exempt, exempt, taxation. (The majority of EU member states adopt this approach, including the UK) ETT:   Exempt, taxation, taxation. (Italy, Sweden and Denmark adopt this model) TEE:  Taxation, taxation, exempt. (This used by Hungary and Luxembourg) **The US also falls in the EET system** As you might have guessed, the 'exempt' and 'taxation' tags refer to the point at which taxation is applied to the monies in your private personal pension. So, the first tag refers to the point at which the contribution is made into the pension fund (monthly or lump sum payments are treated equally), the second tag refers to the money when it is invested and accumulating within the pension (capital gains and income generated from the invested funds) and the third is the point at which one goes into retirement and starts to receive payments from it (the actual pension payment). Clear as mud? Let's continue...  The EET model The UK, US and many other EU member states apply the EET model (exempt, exempt, taxation), and it is my favourite model! I think it is the easiest to understand and the fairest model. I also expect that this model may also be adopted (or phased in) by Italy as part of Mario Draghi's big tax shake up, for which we are still waiting for details (end October is the latest news). Fundamentally, a model which allows someone to accumulate funds in a tax efficient environment throughout their working life and then be taxed at normal tax rates when they eventually come to take that money back, would seem to be the easiest and fairest way to allow individuals to accumulate as quickly and efficiently as possible. It also incentivises people to want to make more contributions into these types of savings plans for their future.  The ETT model However, our beloved country of residence, Italy, adopts the ETT (exempt, taxation, taxation) model. Interestingly, the other two countries which adopt this model in Europe are Sweden and Denmark. I don't think I need to point out the significant difference between the social security systems of Denmark and Sweden versus Italy, but it merely highlights the fact that Italy remains a higher taxing EU state. That being said, I love Italy, as I know a lot of you do, and it deserves much more than an critical look at its taxation system. The fact that the fund is taxed in addition to the pension payments on retirement means that their model doesn't complement sufficiently the lower benefit payments on offer from the state through the contributi scheme, previdenza complementare' and is not a great attraction for savers for retirement. However, you need not take my word for it. Between Italian workers,  private individuals and public scheme employees, only 25% contribute to a separate private pension scheme to top up their existing benefits from the state. That figure is well below the EU average!   That low number might be due to the fact that between the low tax benefit (a maximum deduction against tax of only €5164.57 per annum), the rates of tax applied to the fund itself (between 20% and 26% depending on which fund you hold your private pension with), the restrictive ranges of investment options and the higher charges, then it comes as no surprise that not enough people are choosing to top up their pension with a private arrangement, but are more likely to buy property or find other ways of supplementing their retirement income, assuming they have surplus income after the state has taken their contributi for the state related pension.   There is, however, one advantage. The monies when received as an income payment in retirement attract a tax rate of 15% and can fall to 9% if you have contributed for 35 years to a previdenza complementare. This additional benefit stills fails to be attractive enough for people to save in this way for their future, probably because the benefit is too far in the future for many people to even consider when they have more pressing financial needs today, which brings us back to the point that the incentive for people to save today needs to correspond to a benefit received today i.e. a tax break on contributions, or no tax on the invested fund.   So what does this mean for the taxation of your non-Italian pension  As you might imagine it's not as simple as saying that a personal pension that you own from one country will be considered the same, for tax purposes, as an Italian private pension (previdenza complementare).  The complexity lies in the fact that because Italy cannot analyse every different type of pension in the world, it is impossible for them  to legislate for each one as well. Therefore, we have to use some logical thinking, but even that may be interpreted differently by the tax authorities in Italy.  At this point you might want to take a moment's silence for your commercialista whose job it is to make that interpretation and on whose shoulders, ultimately, that decision lands. Although it is unfair to say that they don't have any information to hand, because one client, whose commercialista was clearly on the ball, alerted her to an 'Istanza di Interpello' dated 27th May 2020, (click HERE, basically it is an opinion provided by the Agenzia delle Entrate on a specific case presented by a specific individual). This interpello went some way to explaining the thinking of the Agenzia behind the taxation of pensions which fall into the EET model (exempt, exempt, taxation). The 'opinion' was based on a UK pension. Taxation on accumulation or not? What it all seems to boil down to is how the pension is taxed during the accumulation phase. Italy taxes the fund during this phase but gives a preferential tax rate when the monies are drawdown. A UK pension, for example, is not taxed during the accumulation phase, but then drawdowns are taxed at regular income tax rates. So, going back to the logical thinking approach, if someone moves to Italy with a UK pension, it doesn't make sense that they would benefit from tax efficient growth in the fund AND be provided with a preferential tax rate on drawdown. That would constitute a double tax benefit, which I doubt the tax authorities would approve of.  It doesn't matter what you or I think! The interesting point here is that even with all this information and supposition, the reality is that your commercialista can still choose to apply any method of taxation that falls in any of the different models because the legislation doesn't exist to do otherwise. Therefore, the best you can do is to take a guess.    Attention, however, because the Interpello from 27th May 2020 gives a pretty good outline into the thinking of the Agenzia regarding the EET model, in that when payments are taken they should be taxed at income tax rates, not the 15% preferential tax rate. If you are advised to, or you choose to apply the 15% preferential tax model, there is always the chance that the Ageniza could come looking at some point in the future. It's highly unlikely given the circumstances, (in my opinion), but not beyond imagination.   Given the complexity around pensions it comes as no surprise that it is often easier to bury one's head in the sand rather than checking exactly what you have and how it should be declared. If you have any doubts then you can always contact me for a free no-obligation analysis of your situation. It is a part of the overall service package that I provide to clients and others looking to regularise their pensions arrangements in Italy. For clients, I also liaise with their commercialista directly to clarify their current choices and determine if anything should be done differently.  Staying on the subject of pensions For anyone who is intending on living away from the UK permanently, we have over recent years been helping clients review existing UK private pension arrangements to determine whether a QROPS transfer may be appropriate. This is a type of overseas pension, which operates like a UK private pension plan, is always domiciled in Europe for EU resident individuals and is operated under an EU framework of compliance and oversight.    Since the UK's exit from the EU we have been wondering whether the UK would stop the possibility to move pension monies from the UK into the EU to slow money flows out of the country, out of spite or any other number of reasons relating to the future relationship with the EU. To date this has not happened, but could be announced in any UK budget. (the next budget has been announced for the 27th October 2021). There are potential tax consequences of having a UK pension plan which is now no longer 'harmonised' with EU legislation and there could be adverse tax consequences in the future. In addition, moving pensions to QROPS is considered removing a tie to the UK for anyone looking to remove UK domicile for inheritance tax purposes. Therefore, if you have a private personal pension arrangement that you are waiting to receive benefits from and /or drawing down from, I can offer a free analysis of the benefits of transferring it away from the UK.   Should you be interested in a no obligation pension review then you can contact me on gareth.horsfall@spectrum-ifa.com or call/message me on 3336492356.

The Common Reporting Standard

 

I want to go over some old ground, which will show why getting your declaration right in Italy is becoming more and more important.  I remember well, during the spring back in 2014/15 when I was contacted by a large number of people who had recently been contacted by the Agenzia delle Entrate (AdE) for unreported assets in their Italian tax return, or in a high number of cases, failure to even submit an Italian tax return for income/assets that they held overseas.    This is now happening again but with more rigour!   This is all coming about because of The Common Reporting Standard and Automatic Exchange of Information (AEOI).   These are international agreements that were developed by the 34 member states of the Organization for Economic Cooperation and Development (of which Italy was one) via its permanent “Global Tax Forum”. AEOI was designed to help combat cross-border tax evasion by individuals who were not reporting and paying applicable taxes on assets held through non-domestic financial institutions, whether these assets are held in the name of the individual or through certain offshore entities such as companies, trusts, foundations, partnerships and similar. It is primarily focused on individuals and “passive” income (i.e. dividends, interest, capital gains, etc.). It came into force in 2017 but information was backdated to the 1st January 2016.    How does Italy know if I have assets abroad? Have you been contacted in the last few years to provide your TIN. (Tax Identification Number) to your overseas bank and/or financial institution? I have, on numerous occasions! If you a resident in Italy this number is your codice fiscale in the UK it would be your National Insurance number and in the US, your social security number, to name a few.  It is now a legal requirement to provide your TIN number on any financial contracts that you adhere to, be it banks accounts, investment portfolios, insurance policies, or other financial instruments. I have a small investment account with Hargreaves Lansdown in the UK and was recently contacted by them to update my codice fiscale. Through an error in their systems they had failed to pick up on the fact that I had given it some years ago, but they were refusing to allow me access to my account if I did not provide it again. It got resolved, but it shows you how seriously this is now being taken when financial institutions will block access to your accounts if you don't provide them with the information needed to share information with the correct tax authorities.    What information will they share about me?  Under the Common Reporting Standard the financial information reported includes the name, address and tax identification number (where applicable) of the asset owner; the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets. The financial institutions that need to report include banks, custodians, financial institutions, investment entities such as investment funds, certain insurance companies, trusts and foundations. The tax authority will receive much more information than ever before and even simple bank account balances showing money coming in and out can raise red flags and the AdE can choose to investigate where the source of the money came from.  Is this new?  Exchange of financial information across Europe has been going on for a long time now and can be traced back to the introduction of the European Savings Tax Directive 2005. The Common Reporting Standard is an enhancement of this. I remember that in 2012 when I was contacted by a number of UK rental property owners who had been legitimately declaring their UK property income in the UK for tax purposes. However, as residents in Italy they had not declared anything because they didn't know they had to. A clear exchange of information took place and the Guardia di Finanza did a significant number of visits to these people to fine them.  ***This is also happening again this year! We are seeing the AdE issuing letters for unreported income going back as far as 2015/2016***    ***The Covid crisis has sharpened the eyes of the tax authorities as they are now searching desperately for more tax revenue lost through the pandemic. We have seen AdE activity rise since the start of the year and even seemingly small mistakes on tax returns or undeclared assets are being investigated***   Low hanging fruit! Remember that with the kind of information that the tax authorities are receiving from one another, we really are the lowest hanging fruit to pick from. Easy pickings! So, my advice is always the same. The past cannot be corrected but you can change your future. Hiding and hoping the problem will go away is not an option. The only solution is to get your financial situation 'in regola'.    What will I pay? How you declare your money and how much you will pay to regularise your situation is a question that can only be answered by a commercialista, but it does make sense to have a look at your whole financial situation beforehand to see what damage limitation you can do by planning efficiently as a tax resident in Italy.    "Never look back unless you are planning to go that way" If you would like to talk to me about this blog or anything else then you can drop me a line on gareth.horsfall@spectrum-ifa.com or call me on 3336492356        SIGN UP TO MY EZINE.  If you received my Ezine from family members, friends, or it was forwarded to you then feel free to sign up yourself.  Just click HERE

Non-EUR based cash deposits: the 7 day tax rule

 Non-EUR based cash deposits: the 7 day tax rule

Inspiration for this blog came from a client (they often do) who fell into one of those sneaky little finance laws in Italy that not many know about, nor really pay much attention to, including the Agenzia delle Entrate (AdE) so it would seem. However, laws are laws and as I have written many times before, the rollout of the Common Reporting Standard in 2016: the international accord to share financial and tax information between different countries is appearing more and more on my radar. I now get a steady stream of people who say they have received a letter from the AdE asking them to declare their financial position regarding assets/monies held abroad. 

In the case of the subject of this blog, this is not a law which has, as yet, been specifically identified by the AdE, but one might argue it is only a matter of time. 

 

 

€51645,69
or
1 million lira
 

The figure quoted above is important in relation to how much money you hold in deposits in foreign currencies (cumulatively) at any one time.     

There is a part of the Italian tax law (L’art.67, comma 1-ter del Tuir) relating to the application of capital gains taxes and capital losses, which would appear to be little understood by most. 

The law states that where you hold over €51645,69, (1million lira equivalent) cumulatively, in foreign currency accounts (non EUR) for a 'period of over 7 days', then when you transfer any of that money into EUR (or another currency), the amount exchanged is automatically subject to the calculation of capital gains tax (or losses) in Italy, because the transaction of changing money from one currency to another itself, is assumed, after 7 days of the money being held in deposit, to be a speculative transaction as the result of a 'trading operation' instead of merely a conversion of currency for any other means. 
 

How do I calculate my gains?
This is where it gets a bit complicated as you might imagine and is not quite as simple as the image above would make you believe.   

Without wishing to go into too much detail in this E-zine, you take the amount of euros (or other currency) that you end up with in your account 'after exchange', but then need to refer to a EUR cost of those monies at the time at which you originally received that foreign currency. You convert that sum into EUR using the Banca D'Italia exchange rate on the specific date or dates when they landed in your account, depending on whether you received the funds in one go or if they were accumulated over time.   

As you might imagine this could be hellishly complicated if you have been receiving monies in from various sources over a period of time. However, reference would have to be made to each deposit in non-EUR currency, and a EUR equivalent calculated on the day when it was deposited in the account. In the case where deposits are not documented, for whatever reason, then the Agenzia delle Entrate will refer to the worst monthly conversion rate to EUR for that said currency, in the tax period in which the liability arises (i.e. calendar year). This could work in your favour in some cases, and create additional tax liabilities in others, so care needs to be taken.  

Finally, if you do not convert all the funds in your foreign currency account into EUR then the 'last in first out' principle applies. This means you must refer to the latest deposit/s in any of your foreign currency accounts, which equate to the sum which you have exchanged to EUR or other currency, and use the Euro conversion value on the date that those funds arrived in your account.   

Sound complicated?  

It is!
 

The client I referred to at the start of this email was pulled up by her bank because the bank itself, Fineco, is Italian, and therefore where they see or suspect a specific activity they must warn the client that they need to take remedial action (in this specific tax case it is the declaration on the Modello 770).

In truth, a lot of you are using various currency exchange services, the most recent being Wise (ex-Transferwise). They are not an Italian institution and therefore are not obligated to tell you about this law, should it apply to you. The onus is on you to ensure that you make your tax declarations correctly and timely. However, without working knowledge of laws such as this one, then it is unlikely that you are going to do what you are supposed to do unless advised by someone like myself, or your commercialista highlights the fact to you.  

I hold more than €51645,69 in non-Euro deposits - what do I do now?

Before we start worrying about any capital gains tax or losses, there is the usual requirement to ensure that any foreign currency accounts are declared in your tax return every year and you pay the €34.20 'bollo' per account. 

In addition, we have this extra requirement that if you do hold 'more than' €51645,69 in foreign currency deposits in any one calendar year, you are a resident in Italy, and have held the funds on cash deposit for more than 7 days, and exchange some of that deposited money into another currency (euro or any other) then you have an obligation to calculate any potential profit/loss as a result of the exchange. 

To avoid this law the simple answer is to bring the euro value of your foreign currency deposits under this €51645,69 and ensure they stay under every year.  

If you are potentially in this situation then it might simply mean looking at your overall financial planning and whether you a) need to keep high deposits and b) seeing if you can find alternatives, such as money market accounts or low risk investments, whilst meeting any shorter term cash requirements that you may have.  

If you are unsure of your options or the way forward as a result of this law, then you can contact me to discuss your options on gareth.horsfall@spectrum-ifa.com or on cell +39 333 649 2356

 

Italian banks - should we be worried?

Italian banks - should we be worried?    In this month's blog, I promised I would take a slightly closer look at Italian banks and at what our risks are as deposit holders in banks, which, in all probability, are going to be a risk in the near future as the Italian economy slides further into contraction and a likely deflationary spiral.

The future of Sterling v Euro

In this blog I want to look at what has happened to sterling since Brexit and the outlook. In 2015, when the world seemed a lot more secure, GBP v EUR was trading over 1.40 and life seemed good. Anyone holding GBP based assets and incomes would find that their money went a long way. Today it is trading at 1.17.  

A LITTLE BIT OF BREXIT

I try to avoid the subject of Brexit on my blog, mainly because by the time I have written anything it has all changed 5 minutes afterwards. However, on this occasion I have some news that I want to share.   

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. 

Hands off my pension!

Hands off my pension!   As promised, I thought I would follow up with my last Ezine on the complicated issue of trusts, with a less complicated issue of the tax treatment of pensions / retirement funds in Italy.

TRUST IN ME!

Trust in me!  Quite recently I was watching the Disney movie Jungle Book with my son. I am sure that you remember the film. You may also remember the snake in the film, named Kaa, who tries on a couple of attempts to eat the 'man cub - Mowgli'. If you happen to watch the film again you will see that he sings a song to hypnotise Mowgli, that song is called 'Trust in Me'.

RICHARD BURTON AND HMRC

The actor Richard Burton who was born in Wales had lived in America for 27 years and died in 1984 at his Alpine retreat near Geneva, where he was buried.

How to be Compliant...

What an interesting couple of weeks. Organising a protest in Firenze to fight for the protection of citizens’ rights in the EU, being interviewed across multiple news channels around the world and being joined by about 100 people who turned up on the day and got an equal amount of press attention. And now, to slip back into normal life again and a work/life pattern. It all seems a little surreal. 

My Italian Citizenship Application

Well, for those of you who have been asking me for a long time whether I would apply for Italian citizenship, I can now tell you that I have made the application. (The photo above is not a photo of my passport, that is a long way off yet).

What's next for GBP versus EUR

 

Whatever you think about Brexit and the effects it is having and the effects it will have I can't think of a more sudden and bigger impact on most people’s lives than the depreciation of Sterling.

Time Bomb!

It could be said that uncertainty is the nemesis of good long term financial planning and living in today's world you could be forgiven for throwing your hat in and tucking yourself away for a few years: Hard Brexit, Soft Brexit, Donald Trump, Italian Constitutional Referendum, German and French elections, the rise of nationalism, and the list goes on. 

Some alternative BREXIT thoughts and why Italy could be next.

The last couple of weeks entertainment have taught me that there are decades when nothing  happens in the world and weeks where decades happen. I have bounced from anger to frustration and back again. and am still trying to understand the logic for the BREXIT vote. I am slowly getting to that place and thought I might share some alternative, and thought provoking views.

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. 

Working with the right partners.....

At The Spectrum IFA group we put a lot of effort into making sure that we work with the right collaborative companies.  That means FX currency exchange firms(our preferred is Currencies Direct), accountants for expats in Italy (Studio Del Gaizo Picchioni), lawyers for expats in Italy (Studio Legale Internazionale Gaglione) and asset managers.

Our preferred asset managers are Rathbones UK and Tilney Best Invest.  They manage the majority of our clients money and they do a great job.  Our mandate for them, on behalf of our clients, is quite simple.  'Caution: Safety first, returns second'.

It is on that note that we like to see when they are making the right decisions to better their businesses and it is on that note that we are proud to announce that Tilney Best Invest are acquiring Ingenious Asset Management, a London based discretionary investment manager with over £1.8 billion worth of assets under management.

On completion Tilney Best Invest will be responsible for £11.2 billion worth of assets.

Size is important in this day and age.  It means security. We want to know that the firms that we partner with are secure for our clients and that they have a philosophy that closely matches ours.  To that end they must work within our strict rules regarding How we work at The Spectrum IFA Group.  (click to learn more). 

If you are not getting the best from your investments in these volatile markets then get in touch on gareth.horsfall@spectrum-ifa.com or call me on +39 3336492356

The war on cash is just getting started

You may have always been of the opinion that holding money, in cash, in your bank has been safe.  But not anymore!

Italian banks and the European Bank Stress Tests.

If you were not already aware the October 2014 Stress Tests on banks across Europe identified 9 Italian banks (Only 9 I hear you say!) that were 'seriously' under financed, to the tune of €9.4 billion. 

UK Pension Changes - Budget 2014

The following summary of the UK Pension Budget changes, spring 2014 has been put together by The Spectrum IFA Group to assist you in understanding how the latest UK government changes to pension legislation may affect you.