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Investment income taxation in Italy

By Andrew Lawford - Topics: Investment income taxation in Italy, Investments, Italy, Tax, Tax in Italy
This article is published on: 5th November 2020

05.11.20

This should be easy, shouldn’t it? Everything gets taxed at 26% – dividends, interest and capital gains. However, for anyone who has delved into the world of Italian fiscal matters, it should be obvious that the words “easy”, “taxation” and “Italy” do not belong in the same sentence.

Let’s try and examine how it all works
Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Assets held in Italy:
Let’s start by looking at the situation for those assets held in Italy (i.e. in an account at an Italian financial institution):

For directly-held, unmanaged investments at an Italian bank or financial intermediary, the 26% rate will apply to income flows (e.g. dividends and coupons) at the time they are received and to capital gains at the time they are realised. This system is known as regime amministrato and it is generally the default position that most people will find themselves in when they open an account in Italy, unless they opt for a discretionary asset management service (see below). Under this system, the bank or other intermediary involved makes withholding payments on the client’s behalf and no further tax is due.

You can opt out of this system and elect to make your own declarations and tax payments (regime dichiarativo), however this is likely to be a sensible option only for someone who has assets spread over a number of different banks, as it is the only way to off-set gains realised in one bank with losses realised in another. The cost of doing this is that you will have to take responsibility for the correct declaration of all your investment income, which is no easy task. It will necessitate a lot of work on your part, as well as the need to find a local tax accountant willing and able to handle this aspect of your tax return.

If you decide to use a financial adviser to help with the choice of your investments in the above context, it is worth noting that any explicit cost of the service will attract Italian VAT at 22% (and if you are not paying an explicit cost, then you should look closely at the assets you are being advised to purchase – expensive, commission-paying funds are still very much alive in the Italian market). It is not possible to deduct the advise cost from your gross results before taxation is withheld.

The weird world of fund taxation:
One of the more perverse aspects of financial income taxation in Italy is the treatment of fund investments (basically any collective investment scheme, including ETFs). These will produce what is known as reddito di capitale when they generate dividends or are sold at a profit, but a reddito diverso when sold at a loss. What this means in practical terms is that in a portfolio containing only funds, you cannot off-set losses against gains. If you do accumulate losses through selling losing investments, you will need to generate gains that can be classified as redditi diversi in order to off-set the losses. This will likely involve investments in individual stocks and bonds, which may lead to an odd portfolio construction driven by tax considerations – generally not a good basis upon which to choose one’s investments.

Let’s turn now to directly-held, managed investments held with an Italian institution. In this case, taxation of 26% will be levied annually on any positive variation in the overall account value, with no distinction being made between the various sources of the income (this is known as the regime gestito). If the account suffers an overall decrease in value in the course of a given year, this loss can be carried forward and off-set against gains recorded over the following four years. Whilst this is a relatively simple arrangement from a tax perspective, it remains inefficient in the sense that it taxes you on unrealised returns (although at least the return is taxed net of fees).

It is worth noting that the asset management fees charged on this type of service attract Italian VAT at 22%, so an agreed cost of 1% per annum becomes a 1.22% cost for the client. Italian institutions will also generally favour investments in their “in house” managed funds, even when better (and cheaper) investments are available.

Assets held outside of Italy:
There is nothing to prevent you from holding assets outside of Italy, but you do need to go into such a situation with your eyes open. You will find yourself essentially in the same situation as the person who opts for the regime dichiarativo which I described above, together with the added aggravation of having to comply with the foreign asset declaration requirements (Quadro RW), which mean that you have to declare not only the income you derive from your financial assets, but also their value and any changes in their composition from year to year. If you’d like to have an idea of the complexity of making these declarations, get in touch with me and I will send you the instruction booklet for the 2020 Italian tax return (Fascicolo 2, the section which deals mostly with financial income and asset declarations, runs to 62 pages this year, and no, it is not available in English). You cannot opt to have a foreign, directly-held, discretionary managed account taxed as per the regime gestito above, because this is only possible for accounts held with Italian financial institutions. This means that any account will have to be broken down into its constituent elements and the tax calculated appropriately. Please also note that accounts which enjoy preferential tax treatment in a foreign jurisdiction will generally not carry any such benefits for an Italian resident.

Italian-compliant tax wrappers:
There is a solution which allows you to maintain foreign assets whilst removing 99% of the hassle described above. This involves using an Italian-compliant life insurance wrapper, issued from an EU jurisdiction. There are a number of other important benefits that accrue to this type of solution for an Italian resident, the two main ones being deferral of taxation until withdrawals are made (or death benefits paid) and total exemption from Italian inheritance taxes. I am reluctant to present comparative numbers in an article of this sort, but it should be clear that if the investments and costs are the same under the various scenarios examined, tax deferral will lead to a higher final investment value, and so should always be the preferred solution.

tax in italy

My goal with this article hasn’t been to make your head spin (although I can understand that this might have been its effect), but instead to make it clear that even apparently simple rules can hide a web of complexity which will ultimately lead to an inefficient outcome for the unwary investor. My goal is to cut through the complexity and make your life as simple as possible, whilst giving you access to quality underlying investments. Yes, it can be done, even in Italy.

Buying Property in Italy

By Andrew Lawford - Topics: Italy
This article is published on: 15th October 2020

15.10.20

If you’re reading this, you may well already own a property in Italy – in which case, you’ll know the ropes already.

But for anyone wanting to get serious about hunting for property in Italy, my latest podcast should be of interest. We cover not only the ins and outs of property transactions, but also look at how best to approach the task of finding your Italian home.

As usual, we conduct interviews with experts who offer their unique perspectives to help you to disentangle an otherwise confusing (and potentially insidious) process.

Please click on the above links to listen

Tax break for pensioners moving to Italy

By Andrew Lawford - Topics: Italy, Moving to Italy, Pensions, UK Pensions
This article is published on: 14th August 2020

14.08.20

Anyone like the sound of living in Italy and paying only 7% tax?

Generally speaking, if you are contemplating the move to Italy you will be thinking about many things, but saving on your tax probably isn’t one of them. So let me give you a nice surprise: if you are in the happy situation of being a pensioner considering moving to Italy, 7% tax on your income is possible, subject to a few rules, for the first 10 years of your residency in the bel paese.

This all came about in 2019’s budget and had the aim of encouraging people to move to underpopulated areas of Italy. Initially, the rules were that you had to take up residency in a town with fewer than 20,000 inhabitants in one of the following regions: Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia or Sicily. Subsequently, the criteria were extended to include towns in the regions of Lazio, Le Marche and Umbria that had suffered earthquake damage and which have fewer than 3,000 inhabitants.

Of course, being Italy, something had to be difficult in all of this, and indeed the law makes reference not to a list of towns but instead tells you to look at ISTAT data (ISTAT is the Italian statistical institute) for the population levels on 1st January in the year prior to when you first exercise the option.

Spectrum IFA Survey

Given the difficulty in finding out exactly which towns would be covered by this rule, I delved into the ISTAT data and also dug out the relevant references to earthquake-struck towns with fewer than 3,000 inhabitants in the other regions mentioned above. I have put all of this in an Excel file which gives a list of towns eligible for the

pensioners’ tax break in Italy divided by region and then further by province, so that you have a rough geographical guide as to the areas you could consider moving to Italy.

As I was sifting through the ISTAT data it suddenly dawned on me that if the cut-off is 20,000 inhabitants, then almost the whole of Southern Italy is eligible for this 7% regime, and you can include in that some truly delightful places such as Vieste in the Gargano (Puglia), or even the island of Pantelleria. This is possible because Italy is divided up into municipal areas that sometimes have more feline than human inhabitants. Obviously, if you are looking for raucous nightlife then you are likely to be disappointed by what is on offer, but if, on the other hand, you like the idea of not having too many people around, then you could do worse than the town of Castelverrino in Molise (population 102) or Carapelle Calvisio in Abruzzo (population 85). Perhaps one day you could even become mayor.

Flat Tax Regime

This new flat-tax regime comes amid a move by a number of European countries to attract pensioners to their shores. Portugal offered a period of exemption on income tax for foreigners (the benefits of which they are now reducing) and Greece has recently announced the intention to offer a 7% flat tax on foreign-source income for pensioners (I wonder where they got that idea from?), which is also promised for 10 years. There is some discussion about the fact that the EU is not generally well-disposed towards these preferential tax regimes, which could lead to them being phased out in a relatively short period of time – so for those looking to make the most of them, time could truly be of the essence.

tax in italy

The great thing is that the 7% rule applies not only to your pension income, but can be applied across the board to any foreign-source income and there is also a substantial reduction in the complexity of the tax declarations that must be made. There are further tax-planning opportunities in all of this, because much will depend on whether you are planning on being a short-term or long-term resident of Italy.

As always, the devil is in the detail as far as tax and residency planning is concerned, and the year of transition when you first establish residency in Italy is key to setting yourself up in the most efficient manner.

So if the above sounds interesting, please get in touch and I would be happy to send you the list of eligible towns and discuss how the rules of the regime apply to your situation.

Central Banks in Italy

By Andrew Lawford - Topics: Banking, Central Banks, Italy
This article is published on: 29th April 2020

29.04.20

Dear All

There is but one topic of conversation in these strange times, and as the crisis unfolds I decided it was worthwhile looking at how the Italian government is responding and considering where we might be heading.

I have decided to produce a pre-recorded webinar in order to provide you with some useful information on the support available to businesses and have even tried to bring a modicum of humour into the arcane world of central banks and economic policies.

Please see the link below for my latest (in truth, my first) webinar.

The debt situation in Italy

By Andrew Lawford - Topics: Italy
This article is published on: 25th March 2020

25.03.20

I’m not entirely sure if I’m writing my first Spectrum article at what amounts to an auspicious or inauspicious time. Certainly I didn’t imagine that I would be writing it in my current circumstances, which essentially amount to being under house arrest. Many of the people reading this will be in similar circumstances to me, and those of you who aren’t risk becoming so over the coming weeks.

Generally on these occasions we feel the need to say such things as, “I hope you are all safe and well”, but I think this goes without saying. All of us have some friend or family member who is in the high risk category, so what I will say is: for those of you at high risk, be careful. For the rest of us, let’s be aware that things could be worse for us personally and keep a lookout for people who may need some help.

It would have been nice to have started out by writing something positive about Italy, but the current situation brings into sharp focus the vulnerability of the Italian economy to external shocks. The debt situation in Italy propagates a fragility that becomes disturbingly apparent at times like these. Put simply, when you are up to eyeballs in debt in normal times and a crisis hits, you don’t have any flexibility to withstand the shock.

Since I moved to Italy in 2004, this has been the
evolution of the debt situation:

I find it astounding that Italy has managed to accumulate almost 1 trillion euros of extra debt over the last 16 years, a period in which GDP has increased less than half that amount. Each and every initiative to realign the government accounts has failed miserably, as evidenced by the graph below (source: www.mazzieroresearch.com):

What this graph shows is the annual budget forecasts (and updates, when announced) for the evolution of the Debt/GDP ratio over the years following the forecast (these are the dotted lines), compared with what has actually happened (the solid red line). The bold blue dotted line is the current forecast, but it’s fairly clear that the current crisis will lead to a drastic change in this.

How much of a change is an interesting question…
Let’s consider that the latest declarations from the president of the Confindustria business lobby group, Vincenzo Boccia, estimate that roughly 70% of Italian productive activity is closing, so something like 100 billion euros a month of lost GDP for the duration of the current period of “lockdown”. All of this leads to the certainty that tax receipts will drop off a cliff, either because no tax is due (or some kind of “holiday” is given), or because companies and individuals simply don’t have the money to pay. This is happening at a time when the government will be called upon to increase spending, both to respond to the direct costs of dealing with the healthcare emergency and to give some support to businesses and workers (through cassa integrazione (temporary support for idle employees) or support payments).

So if we assume a drop of 70% in tax receipts and an increase of 20% in government expenditure compared with 2019 levels, you get an annual deficit for 2020 of 550 billion euros (in 2019 the deficit was 67 billion). So we are possibly faced with a 40 billion euro hole to fill each month compared to Italy’s normal situation. Almost 700 euros per capita, per month. If the whole year continues this way, we end up with a Debt/GDP ratio of around 165%, and this is on the generous assumption that GDP rebounds immediately to 2019 levels.

Given the above, it is not surprising to hear renewed suggestions that the EU should start issuing European bonds. Over the years, since the financial crisis of 2007/08, the weaker countries of the EU have sometimes tried to suggest that true European bonds should be issued by the Union, which would have the effect of explicitly making the more virtuous members (especially Germany) jointly and severally liable for debts of more profligate members such as the PIIGS countries.

This time, it is being suggested that these bonds carry the alluring although somewhat morbid title of a “Coronabond”. Good luck getting that one past the Germans, even if the proposal is only to issue such bonds as a temporary measure to generate support for those economies most heavily affected by the current crisis. Most politicians understand instinctively what economist and Nobel prize winner, Milton Friedman, once said: there is “nothing so permanent as a temporary government programme”. Once you’ve issued your first European Bond, how will you be able to say no next time?

So what does this terrible situation mean from a financial perspective for your average Italian resident with some savings and investments? Given that most of us have a bit more time on our hands than usual, it might be an idea to have a proper look at your situation and ask some of the following questions, although you must only do so without panicking and without jumping to hasty conclusions:

  • How are my investments holding up compared with the risk expectations that I had at the time the investment was made? If, as is probable, there are some unrealised losses in my portfolio, am I comfortable that the current situation isn’t putting my overall financial situation at risk?
  • Where and how do I hold my assets? If they are all deposited in one bank or in one country, is it worth looking at diversifying my country risk? Banks are generally only considered as strong as the country they are based in (and they generally hold piles of government debt), so credit-rating agencies will not give a higher rating to a financial institution than that given to the sovereign nation it is based in.
  • If I have been a cautious investor up until now or have hoarded cash, should I look at increasing risk given the falling values in the market?
  • If I have invested aggressively and am now sitting on losses, how are my nerves holding up and am I framing any discussion on the subject in the right way?

If any of the above questions resonate with you, then now might be the time to have a chat with me. At the minimum, it can be reassuring to discuss any situation in which you find yourself unsure of the consequences. My colleagues and I can help to bring focus to the important issues and cut through the noise generated by the crisis. Peace of mind can only come through analysis and understanding. Hope is not a strategy and neither is reacting on gut feelings or emotions generally.