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Residency and Tax Residency in Italy

By Gareth Horsfall - Topics: Income Tax, Italy, Residency, Tax, Uncategorised
This article is published on: 24th March 2015

24.03.15

2012 was a turning point in Italian politics and the way that we, as expats, live and could continue to live in Italy.  It was the start of the New Norm (as I like to call it).

It started with the moment when Berlusconi was ousted as Premier and was swiftly followed by the non-elected Mario Monti. What was once accepted as the norm suddenly went under the spotlight. This was seen most dramatically in new tax legislation imposed on domestic and foreign assets and incomes and the sudden drive to track down and prosecute tax offenders.

There was no longer the option to live between two residencies, but the subject became much more matter of fact (see rules below for details)

It made a lot of expats question what their Italian residency meant since residency, by definition, means you are subject to Italian tax law.  For some the additional financial burden was unaffordable.  For the majority it was period of consolidation, understanding their tax reporting liabilities and looking at ways that they could plan more effectively to live in the country in which they wished to remain.

It is at this point that you may need to ask yourself the question:

What are the rules determined by Italian authorities in relation to being a resident or not?

Well, the law is clear, as follows:

An individual is considered resident for tax purposes if, for most of the calendar year (i.e. 183 days) he/she is:

*  registered with the Registry of the Resident Population (Anagrafe)

*  or has his/her residence or his/her domicile in the territory of the Italian state, as defined by Section 43 of the Italian Civil code.

According to Section 43 of the Italian Civil Code:

*  The place of residence is taken to be the place where the individual has habitual abode.
*  The place of domicile is taken to be individual’s principal place of business and interests.

In fact, residency has never been a choice. It has always been a matter of fact and a tax agency would always see it that way. If you spend the majority of time in Italy then you will be deemed tax resident as defined by the rules above.

Obvious problems occur when well-meaning estate agents suggest that you purchase your house in Italy as a resident to pay the lower VAT rate of 2% on the value of the property, versus 9% as a non-resident. But this in itself then determines that a tax return is required.  If you then decide that non residency is preferable there is the question of having to pay back the difference.

The key, as always, is in the planning. 

If you are a holiday home owner then you should rarely take residency if your clear intention is to maintain your principal residence elsewhere.

But if you want to enjoy Italy all year round and pay the lower rate of VAT on the property purchase, benefit from the good health care system, be able to buy a car here (non-residents cannot purchase a car legally in Italy), and benefit from lower utility rates then residence is required and certain legal obligations apply.

As I always say, you will pay more tax by living in Italy versus other Northern European countries and the USA.  How can we expect to pay the same for all this sunshine?!! But a rural life, for example, should see your costs fall and maybe, like me, you are searching for the lifestyle that Italy offers.

Despite all this and having lived in Italy for years, I can tell you that there are tax-reduction and financial planning strategies that can lighten the burden somewhat.  I should know!  I was the naive foreigner who moved to Italy looking for ‘La Dolce Vita’ and didn’t pay much attention to the complicated financial and legal systems here. I failed to plan adequately and have had to pay the tax man for it.   But failure to plan sharpened my senses and I now aim to help others not to fall into the same traps.

Income Tax Rates in Italy

By Gareth Horsfall - Topics: Income Tax, Italy, Residency, Tax, Uncategorised
This article is published on: 23rd March 2015

23.03.15

You may wonder what is so significant about the number 28000 in Italy. Well, I will enlighten you in a moment.

The majority of expats I meet who decide to relocate to Italy are either Northern European or from Anglo Saxon’ countries (certainly those of you reading this E-zine) searching for some hot weather or wishing to sample the Mediterranean lifestyle. Whatever the motivations, it doesn’t really matter! Money-matters are the purpose of this E-zine.

It is often the case (but not always) that countries in the North of Europe and the USA have financial systems which encourage saving in tax-incentivised pensions, in savings or in retirement plans. Equally they often have preferential tax rates to encourage businesses/entrepreneurs to prosper in their early years when revenues are lower. The simple idea being that if you are incentivised to make provision for yourself and/or invest back into your business, then you will be less of a burden on the state in the future. Selling a business can also act as a kind of pseudo retirement plan in itself. This means that you lock a large part of your life savings into schemes/businesses which will provide you with an income later on in life. This would seem to be a sensible strategy for both government and individuals.

The problem we have is that when you move to Italy, there are few incentives to prepare for your future in the same way. In fact, the Government takes control of the majority of your life savings (either through INPS or other mandatory pension contributions) under which you have little or no control. In addition, there are few non-taxable income allowances which have the effect of reducing disposable income for individuals and reducing capital available for reinvestment just when a business needs it the most (more on tax rates in a moment).

My interpretation of this mechanism (I am sure there are much more complex political and social issues at hand here but I am merely trying to simplify elements of the system which affect you and I) is that by locking future savings into Government controlled systems, ie. INPS, the Government can charge income tax on these monies as “earned income” in the future and hence the Government provides itself with a guaranteed income stream on which it can calculate future spending plans (dubiously…. one might add)!

Which brings me on to income tax rates in Italy and the significance of 28000…

For expats in Italy, income tax is mainly applied to the following incomes:

  • Gross income from employment
  • Gross Pension income in Italy and from overseas
  • Net rental income from overseas property
  • 72% of dividends from Ltd. Company ownership

Now, in my experience, a lot of expats living in Italy have a property in their home country which they are renting out, have income from pensions or employment in their country of origin and, in some cases (but not many), are taking dividends from a Limited company which they may own abroad.

The financial planning issue here is that when all of these are added together they can often start to breach the higher levels of income tax (IRPEF) in Italy. The rates being as follow:

EUR 0 – 15,000      23%
EUR 15,001 – 28,000      27%
EUR 28,001 – 55,000      38%

And so on…

And here lies the significance of 28000 in Italy.

The average income tax rate on income below €28,000 per annum GROSS is approximately 25%.  This would seem reasonable but there are no non-taxable income tax allowances and so therefore tax starts from Euro Number 1. Once you start to breach the 28,000 EUR GROSS band and enter the more punishing 38% income tax band (if you add on regional taxes and others), then you are realistically into 40-42% on income over EUR 28,000 p.a.

So what is the solution? 

Well, once again it all comes down to the planning.

The first and most obvious solution is to spread your income. Where possible, spread your income as a couple – for example, putting houses into joint names and spreading the income tax burden. By spreading the income you are moving a part of it into a partner’s tax bracket. If one of you has a lower taxable income than the other, then it makes sense to utilise some of the lower earning partner’s income tax bands.

Also, think about how you might be able to release money from pensions. As a resident in the UK, you can withdraw 25% of a pension plan tax free. It makes sense to do that before you move. That same withdrawal as a tax resident in Italy would be considered taxable income and added to your other incomes in that year.

In the UK (from April 2015) and in the USA you may be able to cash in some or all of your retirement plan. This particular scenario might be more complicated if there is a tax charge involved, but if you are serious about planning to reduce tax liabilities in Italy, then taking a lower tax charge in your home country before you move might be better than being subject to higher ongoing income tax rates in Italy (This would need serious consideration before a decision were made, but it could be a possibility).

And lastly, move as much of your money to unearned income sources, ie. income from directly held investments/savings. In this way you are subject to a flat tax of only 26% on the capital gains and/or the income from those investments.

As a general rule if you can split a couples’ income, generate income from investments (not from retirement plans), and some from property rental you can bring your overall tax rate down to approximately 26-30%. A level which I think is more acceptable to most (a lot depends on your income requirements as well).

Of course, I have simplified the situation here and everyone’s circumstances are different, but the methodology is the same. How can you take advantage of the lowest tax rates possible by restructuring and spreading your finances to make them more effective in Italy?

Which brings me nicely back to my initial point:  The magic number is EUR28,000.

Italy does not, presently, seem to incentivise its residents to invest in long term retirement savings plans (in fact, in the Legge di Stabilita 2015 they are discussing taxing them even more!) and so a move to Italy breaks with Anglo Saxon/Northern European mentality, when thinking about how to plan for the future. Some of the best laid long-term plans can be scuppered when those decisions include a move to another country with a financial system based on totally different principles and systems.

If you plan on waiting for tax reductions or the EU to force changes, you could be waiting a long time. Planning your way around the system/s seems to be the optimum choice rather than waiting for the Government to do anything about it for you.

If you are already a resident in Italy and want to plan more effectively or are considering moving and wondering how you might plan things before you arrive, you can contact me directly on Tel: +39 333 649 2356, or please use the form below.

Top Tax Tips for Expats in Italy

By Gareth Horsfall - Topics: Income Tax, Italy, Tax, tax advice, tax tips, Uncategorised
This article is published on: 4th March 2013

04.03.13

Here are my top tax tips for living or moving to Italy.

1.  Beware of the DIY approach.
Always discuss your tax situation with an experienced and knowledgeable commercialista.  Taxes in Italy are not that much different to other countries around Europe and you might be surprised at just how littel you have to pay.  The DIY’ers rarely find the tax breaks and end up paying more than they need to.

2.  A Tax Residence of choice does not work.
Just because you are spending 3 months of the year in the UK does not mean you automatically qualify for UK residency when in fact you are actually spending more of your time in Italy.  The double tax treaty will not cover you in this case.

3.  Don’t think you can hide. 
If you an Italian tax resident (i.e you spend more than 183 day here a year), then the Guardia di Finanza can find you.   There is always a paper trial, utility bills, mobile phone records, airline tickets, credit card and bank statements, as well as visual evidence from neighbours, gardeners, cleaners etc.  It is much better to be ‘in regola’ and know that the knock on the door is highly unlikely.

4.  Beware the UK 90 day rule.
Quite a few people I meet try to claim UK residency because they go back to the UK for at least 90 days a year out of the last 3 years.  This is not a law and is ignored by the courts.   The Italian tax authorities would swiftly brush this aside as an excuse if they were trying to determine tax residency in Italy or not.

5.  Don’t rely on a double taxation treaty to protect you. 
A double taxation treaty is merely a statement saying that you cannot be a tax resident of 2 countries at the same time.    So, you have to be resident in at least one country in any one year.    The Italian’s will quite quickly assume that you are Italian tax resident if there are any signs of regular/permanent establishment in the country.

6.  Be very wary of trying to be non resident anywhere. 
If you are claiming to be a non tax resident anywhere then you could misunderstand the rules of the countries that you are living in.   It is possible but most countries will deem you to be tax resident even if you spend less than 6 months of the year in the country.  They just find it hard to accept that you can be non resident anywhere.

7.  Don’t forget to register your presence. 
Some people move to Italy and then decide not to report that they are living there and try and live under the radar.  It is illegal to NOT complete tax returns and and a criminal offence in Italy.  Even if you are paying tax on pensions in other countries, have assets overseas or income from other sources, the tax code in Italy states that as a tax resident you are liable to taxation on your worldwide income and assets.   However you might get some Double tax treaty relief’s from Italy for paying taxes in another country already.

8.  Tax favoured investments in one country do not necessarily apply in Italy. 
The classic example is the UK Individual Savings Account. (ISA).  It is not recognised as a tax free account in Italy and is therefore taxed on income and capital gains.   You might need to re-examine all your old investments and replace then with tax efficient investment for Italy (namely the Life assurance Investment Bond).

9.   Watch out for tax free lump sums from pensions
The UK pension system allows a 25% lump sum pension payment on retirement.   In Italy that lump sum is taxable and therefore it might be advisable to take it before you leave for the country.  You might also consider moving the pension fund to a QROPS ( Qualified Recognised Overseas pension Scheme).  This means you can put the pension outside the UK tax system, avoid having to buy an annuity and potentially avoid the 55% charge on the fund at death.

10.  Don’t be worried about tax planning in Italy. 
Life in Italy is great.  Taxes are not that different to those in other European countries.   If you plan early enough and do things properly you will not pay that much more than if you were a UK resident.   I often tell clients that for a few hundred euros more, it really is not worth taking the risk.