Here I am again after a recent trip to the UK. I am pretty sure the whole affair of travelling internationally with a family during Covid restrictions has taken 10 years off my life. What a nightmare! The evening before we flew to the UK I spent 5 hours in front of the computer trying to work out which forms were needed, for when, and which Covid tests would be required, and when. We also had to spend approx £150 on Covid tests to travel. I have spoken to many people who have had a similar experience. The whole process was not aided by the fact that we were diverted through Barcelona because the direct flight to London had been cancelled, and even transitioning means that the necessary Covid protocols must be adhered to in the transiting country as well. Despite the administrative and logistical headache of planning all this pre-journey, the actual trip itself went well.
Do I need a different Will as an expat living in Italy?
So, after surviving that experience and deciding not to travel outside Italian borders again until it starts to eventually settle down, I got called to another meeting in Barcelona in December. I will have to go through it all over again!
Anyway, after all that I thought I would write about something which is ordinarily outside my field of expertise in this Ezine: making a will. I haven’t touched on this subject for some time, but recently we have teamed up with another International lawyer called Jessica Zama of Buckles solicitors. She is British/Italian and is well versed in the world of whether to make a will in Italy or not, and not just for Brits. I asked her to write a piece that I could share with you about the importance of making a will in Italy when you have assets in the country, i.e. a property in most cases, which I have copied below.
However, before I get into that I wanted to write about a couple of other things which may come in useful if you need to travel, post-Brexit banking arrangements in the UK and a new Italian website that might come in handy.
I myself used to have travel insurance through a UK firm, pre Covid, pre-Brexit. This firm no longer offers insurance to EU resident individuals due to Brexit so before my trip to the UK I needed to shop around to find a cost effective option. Unfortunately, it was quite difficult to find a solution that wasn’t going to cost the earth. The usual Italian market suspects (Generali, Allianz, Zurich, Unipol) etc were rather more than I wanted to pay. However, on doing some research I stumbled into my favourite comparison website: facile.it It was there that I discovered that they were offering travel insurance packages from a French firm ‘InterMutuelles Assistance’.
One of my colleagues in France informed me that MAIF, MACIF and MATMUT are big French insurers and this firm is a part of the group, so likely to be a solid firm.
The French company is merely using its European license to passport its services into other EU states, in much the way that the UK firm I used to buy travel insurance from used to do. So, I wanted to communicate that there are lower cost more competitive options in the market place. This is by no means the only option and I would urge you to do your own research if you require travel insurance, but if you are interested you can find them under their brand in Italy:
UK banking arrangements
A lot of my clients who are UK account holders with Natwest have now received a letter informing them that likely action to close their account will take place before the end of 2021, as a result of Brexit, and the fact that Italy has been very clear (as early as April 2020. See document HERE) that they do not want non-Italian, non-EU financial firms, advisories, or intermediaries operating on Italian soil or for Italian resident individuals. Italy, along with the Netherlands, seem to have the most strict measures in place, and it would appear that in both cases accounts of clients of Natwest are now being shut down, if they haven’t done so already.
This obviously leads to the question, what can you do for continuation of banking services in GBP? Thankfully in the last few years with the development of the Fintech industry, a myriad of options have arisen. The most popular seems to be Wise (formerly Transferwise) who are offering not just currency exchange services, but different currency accounts through which you can move money. Wise are not a bank, so you may be restricted on exactly what you can do and who can send money to that account, but it does work for some. I myself use Fineco bank in Italy and they provide current account holders with EUR, GBP and USD accounts, to which money can be sent, and then moving money between one and the other does not attract any currency conversion costs. There are also a number of online banks and services offering these options and so you shouldn’t be short of options.
The only problem
There is however one area which may still cause an issue if your UK account is closed down. UK direct debits. I myself have not been contacted yet to close my First Direct account in the UK, but should it happen it would cause a very big problem as I have a number of insurances which I took out years ago in the UK that provide protection for me and my family. However, they only accept payment through direct debit on a UK account. Should my banking services be pulled I may find myself losing my insurance. You may find yourself in a similar situation with UK direct debits. In this situation, there really is not a lot you can do about it, I am afraid.
But moving on from banking arrangements, I want to now lead into the idea of making a will in Italy. It still surprises me how many people have not done so yet. I understand it is one of those ‘to do’ list items, but the truth of the matter is that it shouldn’t be. It should be a priority item. To die, leaving an asset such as a property in Italy, without clear instructions as to how you want this asset to be treated, could create all sorts of complications for your family and/or beneficiaries. I made my will a few years ago now and whilst it probably needs updating again, I know that I have a valid Italian will in place in the event of my death.
So without further ado I am passing to the words of Jessica Zama, who wrote the following piece, and which I hope spurs you into making your own will if you have not already done so.
A very useful Italian website
From the 15th November a new Italian government website has been launched called ‘Anagrafe Nazionale Popolazione Residente’ www.anagrafenazionale.interno.it/servizi-al-cittadino/ (ANPR for short). It allows every Italian resident the ability to download all those certificates which traditionally you had to take an appointment at the comune, to attain. As anyone who has lived in Italy long enough, at some point or another you will need one of the certificates, mentioned below, and since they only have a 6 monthly validity the fact that you can now easily download them online is fantastic. Other services do exist, which I have used myself to avoid queuing at the comune offices, but they do charge a pretty penny for the service. For the moment they are also free of charge through this website, and it is expected that this will be the case until the end of 2022, at which point you may be expected to pay just the ‘bollo’ at the point of download. The certificates include:
- Anagrafico di nascita;
- Anagrafico di matrimonio;
- di Cittadinanza;
- di Esistenza in vita;
- di Residenza;
- di Stato civile;
- di Stato di famiglia;
- di Stato di famiglia e di stato civile;
- di Residenza in convivenza;
- di Stato di famiglia con rapporti di parentela;
- di Stato libero;
- Anagrafico di Unione Civile;
- di Contratto di Convivenza.
To enter in the website you will need a SPID or Carta d’Identità Elettronica.
If you hold assets located in Italy, it’s important to obtain legal advice to draw up a will that covers them, regardless of whether or not you live there.
There are several reasons for doing this. If you have any specific wishes relating to the distribution of your Italian assets following your death then you need to put them in writing, in a will that is considered legally valid in Italy. If you do not have a valid will in place, your Italian estate will pass to the beneficiaries set by Italian law (in most cases the spouse and children).
The validity of your will in Italy is crucial, particularly if it is drafted and/or signed abroad and is to cover all your Italian assets, both present and future. For example, if you were to specify in your Italian will that you wish to leave a specific property in Italy to your wife, but this is then sold during your lifetime, your Italian will would not cover the proceeds of sale held in an Italian bank account.
Your will must also take into consideration the Italian inheritance laws and succession procedures. In Italy certain relatives, such as the spouse and children, have a right to a percentage of the deceased’s estate regardless of the terms of the will. This is known as forced heirship and it must be taken into consideration when drafting a will relating to Italian assets, as it can somewhat limit your testamentary freedom.
However, there may be the possibility to avoid this restriction by electing for the law of your country of nationality to apply to the will and the succession (thereby allowing for more freedom in disposing of your assets) although you would need legal advice on whether this can be applied in your case and how to draft your will so that the Italian forced heirship rules are avoided.
It is also important to consider the wording of the will and the legal terminology used within. A will signed in another country may potentially cover all your worldwide assets, including your Italian assets, but its wording may cause issues regarding the administration of your Italian estate in the future. Therefore, once again it’s important to obtain legal advice on this subject.
When you also have a separate will which covers your assets in another country (even if this will excludes Italian assets), it’s important that your lawyer checks to ensure that there are no conflicts between the two wills which could render one or both invalid and thereby potentially leave your assets exposed in both countries.
Holiday rental owners in Italy
It would seem that governments really do exploit disruptive / destructive events to tighten the tax net on citizens and this has, once again, been used effectively during Covid.
This time it is the turn of the short-term rental market (I assume short-term means anything up to a month in duration)
The Italian government is about to launch a platform to collect relevant information on ALL activity, across Italy, involved in short-term lodgings / holiday lets. The objective being to create a clear map, across the country, of who is involved in this activity.
Everyone who is involved in short-term rental will be required to register with the platform and will be provided with an identification code specifically for their activity. This code will need to be quoted on every advert for a rental where a rental is advertised on a ‘homes 4 rental’ style website, with the local estate agent or on social media. Failure to quote the number will generate a fine of between €500 and €5000 for every advert where the code is not listed. The fine will be doubled for a repeat offence!
Some regions, such as Lombardia, already have this system in place. They operate the Cir (codice identificativo regionale). This information is automatically communicated to the comune in which the short-term rental is located. If a region does not operate the system, owners will now be required to register on the national platform and obtain the identification code this way. The information gathered will be passed back to the respective comuni.
The legislation for the platform is set to pass within the next few weeks and then will go into force 90 days after the publication in the Gazzetta Ufficiale. The specific date to list the identification code will be communicated at this time.
Just one more bureaucratic hurdle
This is clearly another administrative burden that rental property owners are going to have to jump through in the search for income and/or profit from property rental.
The government are trying to weed out the ‘in nero’ rentals that have clogged the market in the years preceding Covid, particularly in the cities. These have changed the landscape of the cities so much that palazzi (much like the one I live and work from in Rome) are now full of apartments catering to foreign holidaymakers, rather than people who live and work in Rome. It is the same story around the world in big cities.
In the Italian government’s favour, a lot of these rentals are undeclared for taxation purposes and try to fly under the radar, but it’s difficult to see how an identification code requirement will flush them out.
Many of the people I know who are involved in this activity are unlikely to be affected as they are conforming to local and national requirements already. However, occasionally I do get contacted by people who have a home in Italy and are renting it out to holidaymakers on overseas holiday rental websites and running all the earnings through a foreign bank account, with the assumption that they do not need to therefore declare anything in Italy. Obviously, this is wrong and my advice, as always, would be to ensure that you are meeting the various fiscal and administrative requirements in Italy.
If you own a property in Italy and generate any income from it, then it must be declared to the Italian authorities first! The Agenzia delle Entrate do regularly troll through holiday rental websites and cross reference against tax returns.
Oh, and if you are in any doubt. ‘I didn’t know’ is never an excuse, so get informed!
I hope you found this article useful. I am still waiting on the latest structural tax changes to be announced shortly. There is lots of press flying around about what and how things will be changed. At time of writing the only thing we know is that the ‘catasto’ on properties is being slightly changed and the partita IVA forfettario regime will be phased out within the next 2 years. For the rest I am still waiting. I will let you know as soon as I do.
In the meantime, if you would like to speak to me about your financial plans for life in Italy, if you would like to simply know if your money will last as long as you and/or if you are concerned about ensuring you will have enough money for all your different life stages and expenses, then do get in touch. I am happy to help. You can contact me on firstname.lastname@example.org or on cell +39 3336492356.
My initial consultations are free and there is no obligation to discuss things further, if you so wish.
Investment bonds in Italy
If you are resident in Italy, or planning to move here, it is important to complete a review of your investments to avoid unnecessary and expensive tax liabilities locally. It is well known that how to handle your finances is one of the major challenges of moving to a new country – the tax and legal systems are different, and on top of this, everything is in a language you might not fully understand. An experienced adviser based in Italy will help to ensure your finances are arranged both tax-efficiently and appropriately for your individual circumstances.
The best time to carry out a review of your investments and to develop a long-term financial plan is before you make the move. This is something many people don’t consider, but acting early allows you to make the most of valuable planning opportunities and to avoid costly mistakes, for example with the timing of a property sale or taking a pension lump sum. But even if you are already here, it is never too late to make sure you are making the most of your money.
There are many ways of saving and investing as an Italian tax resident, including with banks, in directly held portfolios, in collective investments, and in trust and pension structures. Taxation in Italy is complex, and you will need an accountant to help you with tax returns. One structure that is highly tax efficient, which simplifies annual tax declarations and is also widely used across Europe, is the investment bond.
The 10 benefits of investment bonds in Italy
There are several advantages to using life insurance investment bonds for Italian residents:
- Tax deferral during the accumulation phase – unlike a directly held portfolio which attracts ongoing capital gains tax and income tax, investment growth within a bond is not taxable (income and gains are able to accumulate on a ‘gross roll up’ basis)
- Low effective tax rates when withdrawing funds from the policy – when withdrawing funds from an investment bond, the withdrawal is split into two components: the initial capital, and the growth element. Tax of 26% is due only on the growth element of the withdrawal, so effective tax rates are low.
- Gains are calculated net of all costs – directly held investments in Italy are always less efficient than a life insurance bond.
- Availability of asset management services otherwise inaccessible to Italian residents – there is a wide range of investment options, including EU authorised funds, discretionary portfolios and index trackers, all available in the currency of your choice.
- Your money is outside the Italian financial system – investments are held securely in Ireland or Luxembourg.
- Simplification of reporting and ongoing tax administration – there is only a single asset to declare in your tax return whatever the number of investments within the bond, as opposed to the complicated declarations necessary for directly-held foreign assets.
- Reduction in VAT – asset management services in Italy generally attract VAT at 22%, but using a life insurance bond results either in a substantial reduction to, or an exemption from, VAT.
- Inheritance tax savings – beneficiaries named in a life insurance bond receive the proceeds free from Italian inheritance tax.
- Portability – the investment bond structure is widely recognised in other jurisdictions, so you do not necessarily have to encash your investment if you relocate. However, care is necessary to take into account the differences between tax laws, so take advice prior to moving jurisdictions.
- Time apportionment relief on return to the UK – if you decide to return to the UK, investment bonds are particularly attractive as time apportionment relief under UK tax rules state that only investment growth generated whilst resident in the UK is taxable.
Whilst the ideal time to review your finances is before you move, we can also help if you are already resident in Italy. Contact one of our advisers (free of charge and without obligation) for an introductory discussion and an outline of how we can help.
We are undeniably in full swing after the Italian summer. Almost everything seems to be operating on a normal basis again, although ‘normal’ is always subjective depending on where you live in Italy. Roma doesn’t really qualify for normal, even on it’s best days!
Just how much people are getting back to normal again after Covid has amazed me. The memory of lockdown and ‘esercito’ trucks rolling out of Bergamo seems to have disappeared into the small corners of our minds. It might just be a self-protective mechanism, or maybe, like me, you are just happy to be able to go about your life in a relatively normal way again.
Normal for me is also talking to and seeing clients in person regularly, of which the latter has been somewhat missing for the last 18 months. I was reminded of this on a telephone conversation with a client the other day who said, ‘I haven’t seen you for a while Gareth’. It was said in such an innocent way, almost forgetting the last 18 months of various travel restrictions. A completely inoffensive remark and it made me realise that I haven’t seen many of my clients for quite some time now and that I really must get back on the road again. So that is my plan over the winter and coming months. I feel starved of client contact, something which I really cherish, and so I will be getting out there very soon.
Anyway, I don’t want to go on too much about my work plans as I have something much more interesting to write about…financial markets. Well, interesting for me at least!
As I am sure you are acutely aware there are millions of in-depth, factual and accurate analyses of the current global economy and the response of financial markets to Covid. I don’t wish to get into that (If you would like a recent world market roundup then just email me and I can send one through easily enough). What I do want to talk a little about is how we respond to financial market volatility (i.e. the rising and falling valuation of your portfolio) as the Covid recovery continues.
“When a long-term trend loses its momentum, short-term volatility tends to rise.
It is easy to see why that should be so: the trend-following crowd is disoriented”.
The Covid recovery is likely to mean a prolonged period of uncertainty for economies and companies. The initial market momentum after Covid and subsequent recovery is stalling a little at the moment. This is not a long term structural problem, as most indicators point to a return to ‘normality’ (there goes that word again! What is normal anymore?), that being travel, consumption, leisure etc, within a year or so. But the global recovery is not taking place uniformly. Herein lies the problem. Some emerging markets for example are still suffering from high Covid infection and death rates and battling the pandemic. Supply issues mean that many raw materials in our Western economies are scarce and we are seeing price rises as a result, and while this continues it means that there are more risks for companies and individuals. This inevitably means more volatility in our investment portfolios than we have seen in the last two years, which have largely been positive.
My usual advice when we enter periods of volatility is ‘Don’t constantly monitor your investments’ – that well worn recommendation that doesn’t really help anyone’s anxiety. The fact that we now have 24/7 access to information can be a curse when it comes to your investments.
The value of your investment can go down as well as up
I understand nervousness around investments. Is my money going to be there when I most need it? Is it safe from fraud? Will I recoup those losses or are they lost forever? I invest my own money and like anyone I like to see numbers in black rather than red. But I also understand that it’s a matter of patience, time and calm, rather than frustration, anxiety and rash decisions, that will see you through any period of volatility. It should be noted at this point that most of you who are reading this newsletter will have invested through the Covid crash, which was markedly more worrying than the current pull back in prices. So, when looking at our portfolios it is always good to have perspective. You may remember from 2020 that crashes happen quite suddenly and dramatically in response to a very specific trigger, whereas pull backs in stock market prices are often talked about for weeks or months and hypothesised on for what seems like ages before anything actually happens.
Success in investments is not about whether you climb that wall of worry or not (we all worry about our money) but whether you make rash decisions based on factors which are outside your control.
Are you a person who is more susceptible to making rash investment decisions?
You might be interested to hear that the University of the Massachusetts Institute of Technology (MIT) have conducted some interesting research on personality types and decision making.
They wrote a paper in August this year, entitled ‘When do investors freak out? Machine learning predictions of panic selling’ and discovered that the investors who tend to ‘freak out’ with greater frequency fall into one or several of the categories below:
- Over the age of 45
- Have more dependents
- Self-identify as having excellent investment experience or knowledge.
- (It does bear mentioning that I fall into every category! – scary thought.)
In addition to the above, they identified other characteristics in panic sellers. Only 0.1% of investors panic sell at any point in time. However, when there are large market movements, they occur up to three times more.
Interestingly, 30.9% of panic sellers never return to reinvest in risky assets. However, of those that do, nearly 59% re-enter the market within six months.
The really sad fact is that the median investor earns a zero to negative annual average return after the panic selling. This is the most worrying statistic of all. The evidence is therefore clear: panic selling leads to losses.
But regardless of the figures and the logic coolheadedness just can’t complete with human irrationality, and the same mistakes happen again and again, even if logic dictates it should be the other way around. In one way, that’s why I am here. To help you navigate that mind swamp!
I am reminded of a few clients who contacted me around the time of the Covid market crash and said that this was a new world event, a new norm and that things would never be the same again. I encouraged them to ride the wave, and they are today sitting in a much better financial position then they were before. I had no way of knowing what would happen in financial markets, and I can tell you I did worry myself, but I do understand human nature after working in this business for over 20 years.
I do know that whatever event creates a crash, the only truth is that when markets fall there is an opportunity to buy more of the same at reduced prices! Capitalism is not going to fall, just yet!
Italy – 300,000 tax disputes, trusts and 7% tax regime
First, let’s start with some good news. It was recently announced that the number of outstanding tax disputes winding their tortuous way through the Italian courts had dipped below 300,000 for the first time. If it doesn’t sound like much to be proud of, consider that back in 1996 it was almost 10 times that number! It just goes to show how much things have already improved, and yet much still remains to be done if we compare this statistic with a similar-sized country like the UK, where there are fewer than 30,000 outstanding disputes. Considering that almost 50% of the disputes in the courts relate to amounts lower than €3,000, it should be easy to find ways to tidy the system up (Mr Draghi, we are awaiting your reforms with bated breath!).
Now let’s look at a couple of recent clarifications/consultations from the Agenzia delle Entrate (Agenzia) – I try to keep people updated on issues that may be of interest to them, with the goal being that of not ending up in the legion of 300,000 referred to in the paragraph above.
A recent ruling (interpello) from the Agenzia has offered some further clarity on the 7% tax regime. Technically, a ruling only applies to the individual who asked for it, but they are obviously indicative of the Agenzia’s thinking on the topic at hand. In this particular example, we have a US resident who is transferring residency to an eligible town in southern Italy (for more basic details on the regime, first have a look at this article). Their pension is in the form of withdrawals from a US IRA account under a SEPP regime (Substantial Equal Periodic Payments) which allows the individual to make periodic withdrawals from the account prior to their ordinary retirement age (which in this case would be 59 years old). After a long introductory disquisition on the subject, the Agenzia has clearly stated that this kind of pension is eligible, the main reason being that it derives from the working activities of the individual in question.
A couple of other points that are also clear from the ruling: 1) there is no minimum age requirement for the 7% regime and; 2) even one-off payments received upon the termination of a work contract could qualify, as long as these derive from pension funds accumulated for that specific purpose during the individual’s working life.
If you find yourself in a grey area, applying for a ruling is a great way to get clarity on your personal situation and is money well spent when considering the alternative of being audited at some point after you have opted into the regime.
Trust consultation document
Anyone who has listened to one of my early podcasts on the subject will know that trusts are a thorny issue for Italian residents – they are formally recognised, thanks to the fact that Italy ratified The Hague Trust Convention, which came into force in 1992 – but from there it has been a constant source of trouble, mainly relating to how they should be taxed. Anyone who has any kind of link with a trust should make sure that they get a working idea of its potential consequences from the Italian point of view. I say “potential”, because there isn’t a great deal of clarity on the subject. The only thing for sure is that the Agenzia is taking a greater interest in these structures – hence the recent publication of a consultation document that seeks to give a cohesive vision of trusts in the Italian context.
You can expect some changes before it becomes definitive, but I am summing up its main points in a series of questions you should be asking yourself (and your advisers) if you have any kind of connection to a trust.
Is the trust itself Italian resident?
- The fact that a trust has been set up outside of Italy doesn’t mean that the Agenzia cannot consider it to be an Italian resident (the same is also true of company structures)
- The consultation document indicates that the basic criteria upon which a trust will be considered resident in Italy are the location of its registered office, its centre of administration, or its principal activities
- There is a simple presumption of Italian residency for any trust that has at least one settlor and one beneficiary resident in Italy
- A presumption of Italian residency also exists when an Italian resident individual transfers assets to a trust set up in a non-white list country
- An Italian-resident trust is taxed at IRES rates (Italian corporate taxation) regardless of when distributions are actually made to the beneficiaries
What kind of trust is it (regardless of its residency)?
- The consultation document discusses two types of trust: “opaco” and “trasparente”, with the distinction essentially being whether or not the beneficiaries have the right to receive distributions from the trust (trasparente), or are only amongst those for whom it is a possibility, but not a right (opaco). In simpler terms, we might call the “opaco” a discretionary trust and the “trasparente” a naked, or transparent trust
- If you are the beneficiary of a naked trust, essentially you will be taxed on a “look-through” basis, as if the trust didn’t exist. This will involve the potentially difficult process of reconciling the trust’s reporting to the Italian reporting requirements for individuals
- If you are the beneficiary of a discretionary trust, you are likely to be taxed at financial income tax rates (26%) on any distributions
Is the trust set up in a tax haven or does it otherwise enjoy preferential tax treatment?
- If a discretionary trust is set up in a tax haven, or otherwise happens to enjoy a preferential tax regime, the trust’s income is automatically attributed to its Italian beneficiaries, regardless of whether the trust has actually made a distribution. You could end up paying tax on amounts you haven’t actually received
- This point follows the similar regime for companies set up in tax havens or enjoying low tax regimes
- People often set trusts up as vehicles for estate planning. One main source of doubt over the years has been the moment at which Italian gift or inheritance taxes fall due. The doubt has been created by the fact that the Italian Supreme Court (Cassazione) has oscillated between two competing interpretations
- The first interpretation is that taxes are due at the moment the trust is set up, and should be paid at appropriate rates considering the relationship between the settlor and the ultimate beneficiary. This approach was favoured by those who wanted to pay the taxes now under the relatively low Italian IHT regime, in the anticipation of higher taxes in the future
- The second interpretation is that taxes are due at the moment of final distribution to the beneficiary concerned
- Interestingly, both approaches have been applied in the Italian courts, but it seems that the second interpretation is destined to become the definitive one. This puts people who have already applied the first interpretation in something of an awkward position
Will I be subject to foreign assets declarations (IVAFE/IVIE) as a result of being considered “titolare effettivo” (beneficial owner) of the trust’s assets?
- This is quite a complicated point and is intertwined with the fact that recent reforms have made Italian resident trusts subject to foreign asset declaration rules
- In some circumstances, even the beneficiaries of foreign discretionary trusts may have to declare the assets held by the trust due to the rules relating to beneficial ownership
- The penalties for non declaration are such that, if you find yourself in a grey area, you should probably make the declaration (which is a fairly difficult thing to do properly)
Don’t underestimate the level of sophistication that the Agenzia is reaching with its interpretations of trust instruments – they can and will dig into the nature of a trust in order to understand exactly how it works and increasingly they have the expertise to do so. If you do have a connection to a trust or are thinking about setting one up, now might be a good idea to have a chat and review your situation. There are a limited number of circumstances in which they might make sense (for example in terms of protecting vulnerable individuals), but in most other cases we find that there are easier and more “Italian-friendly” ways of reaching the goals people have with their trusts.
If any of the above has raised doubts or queries, I’m always happy to hear from people by e-mail, or even just drop me a WhatsApp message and we’ll organise a time to speak.
Tax & Pensions in Italy
Well, another summer has passed and contrary to my previous article 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 contribution 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.
Qualifying Recognised Overseas
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.
Superbonus 110% – discussions on the beach
There is a lot of discussion going around at the moment about the Superbonus 110% that the Italian government is offering to bring your property into the eco-friendly age. I won’t go into details because it’s so complex that I am totally lost with the whole affair. However, I did happen to have some discussions on the beach this summer with an Italian gentleman of 73 years of age. He is a practising architect in Milan and has built buildings all over Italy. I struck up a conversation on the subject of the 110% Superbonus and how his company was coping with the bureaucracy. I was a bit taken aback by his answer that they had made a decision not get involved, at all.
His view was that the process of attaining permissions and subsequent documenting of the process is so incredibly complex and time consuming that the professionals involved in the process are forced to increase their fees substantially just to cover the cost of work and /or monitoring and reporting. He also explained that because ultimate responsibility for the Superbonus 110% will fall on the shoulders of the professional following the process, that their insurance risk against the Agenzia delle Entrate poking around in the future, and finding faults in the documentation is so high that they would have to increase their fees substantially to compensate for that risk.
This architect said that he had been talking to other firms in Milan who were charging significant fees, and that in total, between architects, geometre, and builders, costs could spiral to 40% of the amount claimed for the work.
Now, I am no expert on this particular area and I am sure that there are some of you reading this who will be able to pull this logic apart, but my point is that if you are looking at significant renovation work through the use of the Superbonus 110%, then make sure you check the small print and the costs. Remember that in addition to the costs of following the work, building material prices have sky rocketed due to Covid and continue to rise. What is claimed from the Agenzia delle Entrate may be less than the cost of work if these costs continue to rise.
Ultimately, it is the client who pays the fees and so my advice is just check that the NET amounts claimed from the Agenzia delle Entrate will cover the cost of your work and you are not going to be left with half finished properties.
And on that happy note, I will leave it for this E-zine. Life is slowly returning to normal after the long hot summer and it will shortly be time to be putting on those thick woolly socks again and wrapping up tight for the winter. In the meantime, if anything in this E-zine has piqued your interest, or you would just like to review your financial plans for life in Italy then please do get in touch on email@example.com or send me a message/call on +39 333 649 2356
Reflecting on estate planning
Could the oldest woman in the world have been a fraud?
Not many people will recognise the name Jeanne Calment, but she is the main character of this article and her story invites reflection, regardless of the truth of the various claims made about her.
First, let’s see who Jeanne Calment (probably) was: she was born in Arles, in the south of France, in 1875 and died in 1997 at the age of 122 years, 164 days: this happens to be the oldest age, as far as we know, of any human being ever to have lived. This is clearly remarkable – having been born at a time when the average life expectancy of a French woman was 45 years, she managed to outlive not only her own generation, but also a number of successive ones. It is worth noting that average life expectancy has been influenced greatly by the high rate of infant mortality in the past: in 1875 roughly 18% of babies in France died before their 1st birthdays – today it is less than 0.03% – so once you made it through your first year, your prospects were much better.
Of course, becoming really really old is the sort of thing that might get you into the Guinness Book of World Records, and may provoke a certain amount of interest from medical researchers concentrating on life extension, but how much else of interest can there be in the topic? Well, according to Norris McWhirter, one of the founders of the Guinness World Records (and as reported in the article linked below): “No single subject is more obscured by vanity, deceit, falsehood, and deliberate fraud than the extremes of human longevity.”
It turns out that the case of Jeanne Calment is complicated by the possibility of her not being who she said she was. The accusation of fraud is based upon the idea that she actually died in 1934, the year in which Jeanne’s daughter Yvonne is supposed to have passed away. Jeanne’s family, so it is argued, decided to declare that the daughter had died, with Yvonne then playing the role of her mother Jeanne for the rest of her life. Yvonne was born in 1898, making her death at 99 years old in 1997, if the accusation is true, somewhat less remarkable.
What could possibly have motivated the family’s decision to switch places between mother and daughter? Look no further than those two certainties of life – death and taxes – for the answer. It is clearly quite difficult to cheat death, but as the Calment family was well-to-do, saving an estimated 250,000 francs in inheritance taxes (something close to €1M in today’s money) can’t have seemed like a bad idea. If this is true, then full marks for creativity – we are certainly well beyond the bounds of your average tax evasion scheme! The story gets even better, though, with the decision of Jeanne (or Yvonne?) to sell the life estate of her apartment to her notary in 1969, at the age of 94. The agreement allowed Jeanne to remain in the property and obliged the notary to make regular payments to her until receiving full title upon her death. This sort of agreement, also reasonably common in Italy (the nuda proprietà), is essentially a bet by the buyer on how long the life tenant is going to live for. In this case, Jeanne not only outlived the notary but enjoyed continued payments from his heirs as well, ultimately receiving more than twice the value of the property she sold. Talk about a bad bet!
Reflecting on estate planning
What does the above have to teach us? Either that people will go to extreme lengths to save on their taxes, or that they like to dream up good stories on the topic. Certainly we should reflect on estate planning and wonder what might be coming down the line in terms of inheritance taxes in the reforms that will be forthcoming from the Draghi government over the coming months. Currently, assets passing from parent to child are taxed very lightly in Italy compared with other European countries, with a rate of 4% applied on the excess value over €1M per heir. The rates increase to a maximum of 8% with a zero threshold for an heir with no family connection to the deceased, so even in the current worst case scenario taxes are relatively low.* It is worth noting that gifts and inheritances are treated in the same way under Italian law, so it is possible to make a gift up to the threshold limit today without incurring taxes; subsequent amounts inherited would then be subject to the taxes applicable at that time, but a gift now would be made under the current rules that may well become less advantageous in the future. There are various other mechanisms available for efficient estate planning in Italy, the main one being life insurance wrappers: the amounts received by the beneficiary of a life insurance policy are not technically part of the deceased estate, as long as the policy itself is set up in the correct way.
The above constitutes a simple comment on estate planning in the Italian context, but every situation is different and I often engage with clients’ legal counsel to help make sure that the overall plan will work well in the various interested jurisdictions. If you are thinking about reviewing your estate planning in Italy or are considering moving here from abroad, it is never too early to start the discussion – feel free to send me an e-mail and we can organise a time to talk.
Where does this leave us in the case of Jeanne Calment? If you want to read the whole article, which is long but fascinating, the link is here. I won’t spoil the outcome, but I think the journalist’s ultimate conclusion is the right one. I do hope, however, that they never do the DNA testing suggested: the world is better with a bit of mystery every now and again.
* Inheritance taxes may also be due in other jurisdictions depending on the location of your assets and links to other countries.
Investing in China
Is communism the way forward?
Whilst on holiday, peering out over turquoise bays, ones mind starts to wander and what better route to take than pondering whether communism really has some postive aspects which we, in the capitalist world, would do very well to replicate.
I think my mind has had the space to wander into this rather philosophical space because there has been little to discuss on the Italian tax front (one of my favourite topics). We are waiting for the big announcement on exactly how Mario Draghi intends to overhaul the tax system in Italy and that decision is ‘supposedly’ being announced shortly (but will likely take longer than expected, as is always the case in Italy!). As soon as I know anything I will let you know.
So to continue my thought wanderings I thought we should talk about China.
But before I get into the detail, I want to write about a conversation I had with some clients (who shall remain nameless), who took a long trip along the old Silk Road some years ago. They had been amazed at the development they had seen along the old route, and that it had mainly been funded by China. They also travelled in China itself and commented on the magnificence of its technological and infrastructure progress. These clients, who I would say could easily be classified as socialists and defenders of free speech, said that given what they had seen and the speed at which China can just ‘get on and do things without arguing about it’ does make you wonder ‘if there is some merit to their form of communism’.
And with that thought in mind, this E-zine will explore some of those aspects of Chinese governance. This E-zine was inspired by a blog post I recently read from an asset manager called David Coombes at Rathbones Asset Management (a collaborative partner to The Spectrum IFA Group). His blog puts some recent issues surrounding China’s political decisions in a new and interesting light.
So what is happening in China?
Late 2020, Chinese regulators stepped in and forced Ant Group, a digital payments spin-off from ecommerce giant Alibaba, to abandon its stock market listing on the Shanghai exchange. More recently ride-sharing app Didi Chuxing was pulled from Chinese app stores days after it brushed aside regulatory concerns about data security to list on the stockmarket in New York. In addition, the Chinese authorities have levied a record $2.8 billion fine on Alibaba for anti-trust violations, and regulators are investigating food delivery app Meituan and internet and gaming conglomerate Tencent for the same issues.
Not only are they attacking the tech industry but the government, in an overnight decision, seemingly abolished ‘for-profit’ education in core subjects for kids up to 15 years old, sending an entire private education industry into complete chaos.
Many investors are concerned about a wider crackdown across multiple industries.
The way of the Dragon!
Before we become too shocked by how the Western media portray decisions by the Chinese government, it is a good idea to look at the problems from a Chinese perspective rather than only through our Western lens. China, in much the same way as the West, is struggling with the tremendous power that Chinese online giants now wield over various sections of society. They have created a kind of ‘winner-takes-all’ online marketplace in technology and data. Equally Chinese families are now have to pay increasingly large fees to send their children to school to get even a half decent education.
Does all this sound too familiar?
If so, let me ask you a few questions:
* Do you think that big tech firms( Amazon, Google, Facebook, Apple etc) play a much too important role in our lives and do you think they should be more heavily regulated in the way they keep and use our data?
* Do you think that big tech firms should pay more tax?
* Do you know anyone with kids who is paying a fortune for private education? From supplementary English, sports or music lessons and /or having to pay a small fortune in nursery costs to secure a place in a good nursery school for their kids?
I don’t know many people these days who can easily defend the growing, and rather worrying power of the tech companies in and on our societies. I, personally, am concerned about the use of data, the power of their lobbying and their continued ‘legal’ tax avoidance (Amazon paid an effective tax rate of 1.2% in 2020 when their marketplace exploded with Covid stay at home policies, which drove even more people to online shopping!). Yet, in many ways we are slave to these beasts. I couldn’t run a business without them, and they do make life much easier.
The Chinese authorities felt that competition in education was putting too much pressure on children and creating a financial drain on parents that is possibly slowing the birth rate and affecting property prices. This was putting children of less wealthy parents at a huge disadvantage. Sounds oh so familiar! Some ‘3 year old’ Chinese children were receiving extra tuition to prep for entry exams to get a place in kindergarten. The Chinese government says this was having a negative impact on the social cohesion of the country. As a father, I think I have to agree!
China does what the West keeps talking about
Could it be that China have looked at the Western model and decided it would like to introduce more regulation to benefit families and the populous, instead of corporations? Given they are named the ‘Central People’s Government’ one might be forgiven for thinking that they are looking at putting people first and corporate expansion second. Wouldn’t it be nice if our own governments could do the same?
Do you prefer democracy or dictatorship?
The truth of the matter is that Chinese leaders don’t pull any punches when they want to implement new policy. They don’t need to put it to a public vote; they can do it overnight. This means that businesses, small and large, suffer hugely as a result. I would be very worried as a father, contributor to the family purse and businessman if the Italian government had the power to introduce legislation which effectively put me out of business overnight.
So, what do I prefer: democracy or dictatorship? In all honesty, I think I am a middle-ground man. I don’t think either work well. I think I would probably choose to compare socialism versus capitalism as economic models and once again, I don’t think either work well in the extreme. I think that we live in an advanced capitalist society in the West which should be reigned in through more regulation in these new and influential sectors. What is perpetually annoying is that I work in financial services which is one of the most heavily regulated businesses and yet we have the big tech firms, the new world of ‘influencers’ and the online world which is largely unregulated and can operate in whichever way it pleases. Maybe China has got it right and they are trying to create a more socially cohesive society.
So should you still invest in China?
You could actually think of the Chinese Government intervention as ethically responsible politics. It is focussing on inequality and trying to improve society as a whole. If you look at it through that lens, then Chinese investment starts to look quite appealing.
That being said, it would be foolish to say that this doesn’t come with some inherent underlying risks. Which industries / sectors might they attack next? And what about corruption, unquestionable power, individual rights etc? That is why it is important that when allocating a part of your portfolio to China, you must be precise – you can’t just buy a Chinese market tracker and expect explosive returns. It is a large market, but one that is still maturing. Company governance is going to have to improve from here or authorities won’t just fine you, they will close you down (or your whole industry!).
So whatever Western media might have us believe, it might just be that this inequality / social-pact shake-up is a sign that China might be a better place to invest over the next decade. And whilst we always advise caution when investing, in line with your own risk profile and using well established, competent asset managers, I would expect to see some allocation to China in almost everyone’s portfolio.
And on that note, it just leaves me to wish you a Buon ferragosto and I hope you manage to stay cool in the ‘Lucifero’ African anticyclone currently covering the country. Keep your anguria close at hand! As I write this E-zine, I notice that the hottest ever recorded temperature in Europe has been set in Siciliy at 48.8 degrees Celcius! PHEW!
As always, if you have any questions about this E-zine, or would like to contact me about your financial and/or tax planning needs in Italy, then feel free to get in touch on firstname.lastname@example.org or on cell +39 333 649 2356.
The cryptocurrency revolution
Hodling and the cryptocurrency revolution
Are you hodling? No, that’s not a typo – it is millennial-speak for what you do if you are a true believer in the cryptocurrency revolution. Look it up. I wouldn’t describe myself as old, but I’m certainly old enough not to be automatically in tune with what motivates millennials. However, you can hardly open a newspaper these days without some notable individual passing comment on cryptocurrencies, and they even seem to be going mainstream now that bitcoin has been made legal tender in El Salvador – you can buy residency there for 3 bitcoin. It seemed therefore like a good moment to try and get at least a vague understanding of what cryptocurrencies are, as I suspect that many of the readers of this newsletter will be as confused as I am on the topic, so let’s see what we can discover. I will be focussing particularly on bitcoin, as the main example of a cryptocurrency, but do be aware that bitcoin is only the most prominent out of the estimated 10,000+ cryptos out there.
Everything you don’t know about money, combined with everything you don’t know about technology
This was a tongue-in-cheek definition of cryptocurrencies that I heard not so long ago from an asset manager, but it kept coming back to me every time I saw cryptos mentioned in the press.
Once upon a time, “money” essentially meant some amount of precious metal, generally in the form of a coin which was easily recognisable. Then we evolved to a situation in which we used banknotes to represent an underlying amount of precious metal, and finally we arrived at where we are today, where any link with precious metals has been definitively severed in favour of fractional reserve banking and “fiat” currency controlled by sovereign states – the “fiat” is Latin, meaning “let it be done”, and is the essential expression of our concept of legal tender: something is money not because it has any intrinsic value, but because the law says it is. These fiat currencies rely on trust in the good economic management of the issuing countries, and we can all think of notable examples of where bad management has left fiat currencies broken. I have a 100 trillion dollar note issued by the Reserve Bank of Zimbabwe in my office as a reminder of the importance of sound currencies.
Not many of us could properly explain a fiat currency system and the interactions between bank deposits, bank lending and central bank reserves and, as a result, many find it tempting to say that even major currencies like the US dollar and the euro have little intrinsic value due to the fact that their supply is essentially unlimited. To a certain extent, cryptocurrencies were born out of a lack of trust in fiat currencies (even the “good” ones) and the desire to make money something more regulated (not in the sense of having more government oversight, but rather of wanting precise rules and limitations on the amounts of currency in circulation). In order to be worth something, so the reasoning goes, the supply must be limited and it must be difficult to create – hence the parallels that are sometimes drawn between cryptocurrencies and precious metals.
A lump of gold sitting in a vault somewhere has value simply because we think it has value; up until the time that you find a practical use for that gold, its value is dictated by that vague idea that come (almost) what may, at least it will always be there. Not an amazingly intelligent argument, it must be said, but better than many things that finance has come up with over the years. The basic reason for abandoning the link between money and precious metals was that the supply of commodities like gold or silver were subject to vagaries that had little to do with the overall economic situation, so bullion failed to keep up with our economic growth.
As far as bitcoin is concerned, it is very clear that scarcity is central to its functioning given that it has been set up to have a maximum number of 21 million units. As of today, there are roughly 18.7 million bitcoins that have been created, but the number effectively available for transactions is much lower, due to the fact that many people hodl, and also due to the fact that a large number of coins have been lost (I have read estimates of 20% of the total in existence). You see, if you have a bitcoin, you better make sure you keep hold of the codes that allow you to access it, because there is no “lost password” function if you don’t. Losing the codes is the digital equivalent of throwing your gold bars into the Mariana Trench; they don’t cease to exist, but you will find it all but impossible to recover them. It is worth noting that whilst the scarcity value of bitcoin may be beyond doubt, the fact there are so many other cryptocurrencies around should give pause for thought about the scarcity of the category as a whole.
The creation of bitcoin is one of the things that I struggle with the most – it is commonly called “mining”, in an evident attempt to draw a parallel with precious metals, even though the mining in the case of cryptocurrencies is entirely digital. Essentially, they are discovered by computers contributing to the distributed ledger that monitors all bitcoin transactions. The only explanation of bitcoin mining that has made some sense to me so far is to consider it in terms of a triple-entry accounting system: There are two parties who record a transaction and this is then sealed into bitcoin transaction records by a third party that verifies it through its mining activities (and receives a reward for doing so). Mining, in the world of bitcoin, is technically called a “proof of work” and allows a participant in the network to be rewarded by participating in the distributed ledger and crunching the enormously complicated numbers that guarantee the transactions that have been recorded. This ledger, also known as the blockchain, belongs to everyone and no-one, rather like the internet itself, and it exists in order to eliminate the risk of someone being able to spend the same bitcoin twice. No, I don’t really understand it either.
It is also said that bitcoins and their transactions are “immutable” – I suppose to the same extent that precious metals are immutable. But does this really make any sense? Aside from the apparent lack of ability to hack the blockchain today, can we really be confident that in a thousand (or a million!) years bitcoin will still be unhackable and attractive to a sufficiently large community of people? Perhaps this is more of a philosophical question than anything else, but us humans do get wrapped up in the idea that the big issues of today are the big issues for all time. I suspect our distant descendants, assuming the human race is lucky enough to survive, will become interested in many things beyond bitcoin or cryptocurrencies in general. In this context, the best parallel to draw is with technological innovation: today, not many people are interested in steam engines or dirigible balloons, once important technological developments, and the same may be true for bitcoin in a few decades. For bitcoin to enjoy any value at all, it is dependent on the bitcoin community continuing to support it through time. It would be highly unwise to think that nothing will ever come to supplant it, because human experience with other technologies suggests that better things are always on the horizon. The same cannot be said for precious metals, which may wax and wane in terms of community interest, but do not depend on community interest for their existence. My gold bar will still be there in a thousand years if it is kept safe, regardless of what people might think about it. What might happen to it over the course of a million years is a question I find rather difficult to ponder, but it’s probably fine for the next few thousand.
In all of this, the real evolution may be arriving shortly, and it is not to be found amongst the many new variations on the bitcoin theme that have come into existence. Many have looked upon cryptocurrencies as a way of thumbing one’s nose at traditional financial structures – no more central banks and traditional bank accounts for me please! Yet the governments of this world are not going to give up the privilege of being able to issue national currency without a fight, and it could be that they will try to beat the cryptos at their own game. Some cryptos, known as “stablecoins” are backed by a given fiat currency, but it has been suggested that the most appropriate issuers of such coins are the central banks themselves. One idea is that each of us could end up, as of right, with our own account at the central bank of the nation we live in. If this were to happen, then bank runs would no longer be an issue and commercial banks would have to reinvent their business models, at least in part. Presumably physical cash would become a thing of the past. This is not speculation on my part – the ECB is publicly discussing the benefits of digital coins and the Bank for International Settlements – the central banks’ central bank – has even commented that this is “a concept whose time has come.” The full BIS report is available here for anyone who is interested.
Much has also been said about the potential of the blockchain – essentially the network that runs bitcoin – to revolutionise everything from banking to contracts. We’ll just have to wait and see how all of that shakes out, but it is clear that there are numerous technologies being developed and brought to bear on finance and commerce and it’s by no means clear that blockchain technology is the only answer. In any case, even if the blockchain network is valuable, this says nothing about whether any given cryptocurrency that relies on it has value.
As I suppose must be obvious by now, my research for this article hasn’t convinced me that cryptocurrencies are a good place to speculate (please let’s not use the term “investment” in this context!) – and certainly I see no reason why investment in this sort of asset should supplant traditional assets in an investment portfolio. As boring as it may sound, what really counts in investment is not jumping on that latest bandwagon, but planning one’s affairs properly whilst having a disciplined approach and a long-term view.
As a final point, for any Italian residents, please also be aware that bitcoin investments and gains deriving therefrom are subject to declarations and taxation in Italy – you may think your cryptos are 100% anonymous, but I wouldn’t be betting on it.
Moving to Italy and the average cost of living
You have made your tax calculations for life in Italy, but have you included everything?
In this video Gareth talks about the costs of living in Italy and how it varies depending on where in Italy you want to live.
He also explains that whilst it is almost impossible to calculate until you are living here, it has the same effect as a tax reduction and should be taken into account when making your decision about life in Il bel paese.
If you are interested in moving to Italy or perhaps already live here,
but need to discuss some financial areas of concern,
please use the form below to contact me.