It has been a whirlwind few weeks for me after appearing at the House of Commons UK Exiting the EU committee in January. Since then I have given a speech in Castiglione del Lago to over 80 UK Nationals who wanted to hear about the proceedings and also been involved with a number of initiatives that have been going on in Italy and around Europe.
However, despite all the campaign and lobbying groups that I am honoured to be involved with, I am often brought back down to earth when I have to sort out my yearly business and personal incomes and expenses, at the desperate appeal of my commercialista. It reminds me that life goes on, regardless.
So, with my tax administrative affairs now in the hands of my commercialista for another year, I thought it was about time I summarised them for you. It really is a reference tool 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?
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 will likely become more important with the BREXIT negotiations and ensuring your tax returns are recorded could also have an impact.
TAX ON INCOME
If you are in receipt of a pension income and it is being paid from a private pension provider overseas or you are in receipt of a 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 (eg. Teachers, Nurses etc.) are taxed in the state in which they originate, and tax is generally deducted at source in the country of origin. **
It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on many factors. If you have any questions in this area you can contact me on email@example.com
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 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 FIAT.
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.
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.
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 to maximise tax planning opportunities in 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. 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.
** 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.
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. A reference to the Banca D’Italia EUR/GBP or USD exchange must be made for each transaction on the correct date.
ARE YOU PAYING MORE THAN YOU NEED TO BE?
This is a concise list of the taxes that affect most of you. My experience over the years has been, that in most cases, you may be paying more than you need to. There are a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.
The impending likelihood of BREXIT will change some of the ways taxes are reported and processed and it will throw up some planning opportunities as well. I am researching these things as time goes on and will report them to you.