☏ +34 93 665 85 96  |  ✑ info@spectrum-ifa.com
Viewing posts categorised under: Tax advice

Rental Income from properties overseas and how to declare it in Italy

By Gareth Horsfall - Topics: Italy, Property, Residency, tax advice, taxation of rental property, UK property
This article is published on: 25th January 2014

25.01.14

One of the questions I am asked regularly is how income from property held overseas is taxed in Italy. Is it exempt from Italian tax because tax has been paid on it overseas first and is it subject to the same taxes as Italian rental income?

I would like to dispel any myth and confirm that you do have to pay Italian tax on the profit from any rental income on properties held overseas as a resident in Italy. (if it was really ever in doubt. Out of interest the arrangement is reciprocal, and any if you were resident in another country with rental property in Italy then it need to be declared as well).

The best way to organise your rental income
The law for Italian tax residents states clearly that the net profit (after expenses) from property overseas, must be declared in the Italian end of year tax return. The net profit is then assessed as income, added to the rest of your income for the year and tax paid at your highest rate of income tax (that could be as high as 43%).

Let’s not forget the IVIE tax as well which is 0.76% of the property council/cadastrale/rateable income (whatever you choose to call it) value of the property.

If tax has been applied in the country of origin, it is the law in Italy to declare the funds here as well and so annual declarations need to be made.

As an aside, it is relevant to note that in 2012 I received a deluge of enquiries from people who had been contacted by the Guardia di Finanza who had obtained information from HMRC (UK tax authorities) about people who have/had rental properties in the UK, were legitimately declaring tax in the UK, but who had failed to then declare that income in Italy. In some cases they were fined substantial amounts for merely this simple mistake.

However, all is not lost because there is a way to limit your Italian tax liabilties. If the property income is declared in the country of origin and all the costs are deducted from the income, still within the country of origin, then ONLY the net profit needs to be declared in Italy. In some cases it might also be necessary to declare the rental income in the country of origin even when that country no longer requires you to, for example the UK. If you have rental income under the basic allowance of approx the first GBP 10500 of income and therefore the UK no longer requires a declaration, it may still be wise to insist on making a declaration because the UK allow for multiple expense offsets for tax purposes. By following this process you are showing the Italian authorities your expense declarations and therefore it is acceptable for Italian tax purposes.

You may in some cases be able to reduce your net profit to zero.

To clarify, any rental income from properties held overseas must be declared in Italy, for Italian tax residents. This is the NET income (after expenses). And this net figure is added to your other income to determine at which rate of income tax it is assessed in Italy.

Depending on why you are investing in property overseas the advantages/disadvantages can work in 2 ways: .

  1. If you have high expenses for the property then it can work in your favour as a capital appreciation investment. (assuming the value of the property goes up). Less income means less tax.
  2. The downside of this arrangement is that someone with low expenses and high net income (maybe living from the income in retirement) will be assesed at their income tax rates in Italy (IRPEF) which could go as high as 43%

If you are concerned about your tax situation in Italy and would like an initial meeting to assess your liability then we are here to help. In addition, there might be other more tax efficient and less costly ways to produce income and grow your money. If you are interested in exploring these then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell 333 6492356

Top Tax Tips for Expats in Italy

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

04.03.13

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

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

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

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

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

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

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

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

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

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

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