By Gareth Horsfall
This article is published on: 10th July 2023
Cittadinanza v Residenza – which to choose?
I decided to write this article because a number of people have asked me about the tax advantages of becoming an Italian citizen. My aim here is to give some clarification on the financial planning considerations if you are thinking about a permanent stay in Italy.
I opted for Cittadinanza as a result of Brexit. When my EU acquired rights were going to be stripped away from me I needed to make some decisions and for me cittadinanza was the right thing to do (with an Italian wife and child in Italian school, it seemed a no-brainer). Thankfully, as a resident in Italy married to an Italian my cittadinanza seemed to be right of passage rather than any decision that the preffetura took. I was lucky and I also managed to squeeze in before the language test was introduced…phew! (although I could pass that now).
If you are left wondering which option is best for you, I thought I would write this article to help lay out some facts. I hope it helps.
They are 2 very distinct definitions, often confused, but inherently connected from a legal and fiscal point of view.
As ‘stranieri’ living in Italy it is not unusual to get confused by some of the terminology regarding our legal status, and for Brit’s who were resident in Italy pre-Brexit, they now have additional legal implications which they have to deal with. For the rest of the non-EU world, you have probably been experiencing some of these issues that Brits are now facing. for some time, so you could probably tell us a thing or 2 about it.
The Universal Declaration of Human Rights 1948 states that every individual, in every part of the world, has a right to legal citizenship. No individual can be arbitarily stripped of their legal citizenship, nor of the right to change it.
Cittadinanza is simply defined as the condition of an individual belonging to a state with the rights and duties that this relationship entails; among which are political rights, i.e the right to vote and the possibility of holding public office, and the duty of loyalty to the state and the obligation to defend the state, within the limits and methods established by law.
Cittadinanza gives the individual the right to vote, access to public services, diplomatic protection and legal recognition. It can be acquired by birth (ius soli o ius sanguinis), by marriage or naturalisation and every country has it’s own different criteria for obtaining cittadinanza.
Advantages
Cittadinanza has some distinct advantages, such as the right to vote in national elections, unlimited travel with the passport, access to social and health services and protection by the government.
Requirements for application
In the case of Italy, a language test must be passed to level B1, declaration of prior residence in other countries is required, evidence that you don’t have a criminal record in other countries and income requirements etc. In addition, specific requirements may be needed depending on whether you are applying based on birth, marriage, or residency.
Residence is the place that an individual is considered fiscally resident.
Residence determines the obligation to pay taxes in a specific state or jurisidction. Generally speaking it is based on the period of time that one spends in a country but is also determined by other factors such as whether you are registered in a specific country and whether it is your habitual abode i.e the place where you spend most of your time. (Read on for more details on this).
Residence refers to the legal status of an individual in a country and guarantees the right to live and work without citizenship. Residenza, in much the samw way as cittadinanza has a number of advantages, such as the right to access health care the option to work, buy property and make investments in Italy. Residenza can be temporary or permanent and the permesso di soggirono comes in various forms. To obtain residenza an individual must satisfy various documentary requisities, financial criteria and possibly language competency (not necessarily)
Quick note 1. I am frequently asked whether being registered at the Anagrafe constitutes fiscal residency. The answer, in the main is YES. There might be situations for business people, for example, who have interests in Italy and other countries and who require residenza anagrafica but not ‘fiscale’, for their business needs. However, for the majority of people who are coming to live and reside in Italy there will be no doubt that your fiscal residency is in the country if you meet just ‘ONE’ of the criteria below.
(**US citizens can transfer their residency to Italy but will have an obligation to report in the US as well. This creates numerous tax and financial planning issues and so should be planned carefully**)
Quick note 2. Is it possible to be a resident of nowhere because you travel extensively and do not spend more than 183 days a year in any one country? This is absolutely NOT possible! By definition, every individual must have a place of habitual residency whether you spend 183 days a year there or not. You cannot choose your residency status. It is a matter of fact!
Definition of residenza in Italy
You must remember that the definition of residenza in Italy is defined through the income tax code and therefore residenza and taxation are intrinsically connected. An individual is considered subject to taxation and fiscally resident for the majority of a tax period (calendar year) if they meet one or more of the following requirements:
1. You are registered at the anagrafe
2. You spend more than 183 days a year in Italy, i.e it is your habitual abode.
3. You are domiciled in Italy. (Your domicile , by Italian definition, being the place where you have established your main centre of business and/or personal and affairs.
Whilst different concepts they do coincide with each other. As we have already established, cittadinanza determines your citizenship whereas residenza determines that you are fiscally required to pay taxes in Italy. You can be a citizen of Italy but also reside in another country and visa versa. The principle differences however, are as follows:
This is a particularly pertinent question for Brits who lost their EU national status as a result of Brexit but which is also interesting to other nationalities who decide to live in Italy, and who may also want to obtain cittadinanza.
The simple answer is that your fiscal tax status will NOT change as a result of moving from residenza to cittadinanza. However, there are cases, which vary from country to country and therefore you will need to either refer to the double taxation treaty yourself or get a professional to look for you.
In general the main fiscal difference between cittadinanza and residenza is regarding government derived pensions (pensions paid by the state, which you worked for, and are directly linked to the type of employment i.e teachers, military, police, health care professionals from a public setting). If you are receiving a pension from a government derived service then with residenza it will normally be taxed ONLY in the state in which the pension is being paid. However, if you obtain cittadinanza then the same pension could become subject to taxation in Italy as well. Double taxation issues are dealt with in the double taxation treaty, but it may mean you end up paying more taxation in Italy on the same pension than you would be in your home country.
***Government service pensions are NOT social security or state pension payments***
State pensions and social security payments are, in nearly all cases, taxable as a fiscal resident in Italy. (Commercialisti often misunderstand these and assume they are government derived pensions from employment, as described above. They are not!
Knowing when to move can also make the difference between paying taxes in Italy in the year you move and paying them after the next fiscal year.
If you register after July 3rd then under the 183 day rule you will not be considered fiscally tax resident in Italy until the following full calendar year (only Italian sourced income will be taxable from the point of payment). Conversely, if you do register as resident before July 3rd in any year, then you will be considered fiscally resident for the ‘whole’ calendar year.
But don’t make the following mistake that I have seen many times:
If you make a request for residence before July 3rd and let’s say you don’t have all your documentation, so you delay the application until after July 3rd. Once everything is submitted and residenza is granted, it will be back dated to the original request. This might mean you are now considered fiscally resident for the whole tax year. Therefore, benefitting from the July 3rd rule means that you MUST NOT apply for residency before this date!
The period from July 3rd to Dec 31st is a HUGE financial planning opportunity because you potentially have the tax jurisdiction in which you are currently living to take advantage of and replan your finances for a tax efficient life in Italy. One simple move might be to sell some assets to benefit from capital gans tax reliefs that Italy does not have. Pre-planning and discussion is essential. When people contact me about a move to Italy, my first question is what date are you planning on registering, and is it flexible? It gives you time and opportunities, which could make a big financial difference.
Better the money in your pocket than in the Italian tax mans pocket!
By Andrew Lawford
This article is published on: 12th October 2021
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?
What kind of trust is it (regardless of its residency)?
Is the trust set up in a tax haven or does it otherwise enjoy preferential tax treatment?
Gift/inheritance taxes
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?
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.
