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Italy – 300,000 tax disputes, trusts and 7% tax regime

By Andrew Lawford - Topics: Italy, Moving to Italy, Retiring to Italy, Tax in Italy, UK pensions in Italy
This article is published on: 12th October 2021

12.10.21

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.

7% pensioners regime Italy

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.

7% pensioners regime Italy

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

Gift/inheritance taxes

  • 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.

Moving to Italy and the average cost of living

By Gareth Horsfall - Topics: Italy, Moving to Italy
This article is published on: 12th July 2021

12.07.21

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.

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    Are you moving to Italy?

    By Andrew Lawford - Topics: Italy, Moving to Italy
    This article is published on: 16th June 2021

    16.06.21

    I hope you are enjoying the summer weather and the return to comparative normality – long may it last!

    I wanted to let you know about a new podcast episode that has just been released. It is entitled “Brexit (and more…)”, so will be of particular interest to UK nationals residing or considering taking residency in Italy, but it also explores quite a few topics that will be more generally applicable.

    As it’s quite a long episode, I thought it would be helpful to give you an index of topics covered and the approximate minute markers so that you can easily locate the sections that are of interest to you.

    • 1:28 – Working with a UK financial adviser as an Italian resident
    • 8:55 – Equivalency in financial services between UK and EU
    • 12:57 – Taxation of EU-domiciled managed funds vs UK-domiciled managed funds post-Brexit for Italian residents
    • 15:50 – Tax declarations in Italy for directly-held foreign financial investments
    • 18:15 – The €51,645.69 question – holding foreign currencies as an Italian resident
    • 21:38 – ISAs – what they mean in Italy
    • 23:42 – Quadro RW – why you need to declare the mere existence of your foreign assets (as well the income that derives from them). Common Reporting Standards and why you should assume that information is being exchanged automatically with the Italian tax authorities
    • 25:20 – The taxation of UK real estate as an Italian resident (rental income and wealth tax (from 28:20))
    • 33:00 – Thinking about real estate investments once you move to Italy
    • 35:15 – Capital gains tax on foreign property (with particular comment on the situation for UK property owners who are non-resident in the UK)
    • 38:15 – Tax-efficient investment wrappers – what they can do and how they need to be set up. Some comment on inheritance taxes in Italy
    • 43:44 – The 7% pensioners’ tax regime
    • 50:10 – Italy vs Italia – and why you should persevere if you want to move here
    Italian financial adviser

    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.