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Tax Reporting in Italy

By Gareth Horsfall - Topics: common reporting standards, Italy, Tax in Italy
This article is published on: 4th June 2021

04.06.21

Excuses that will not fly with the Agenzia delle Entrate

You wouldn’t believe it, but I started venturing out last week. I actually visited some clients and spent time with people, in the flesh, who exist outside my social bubble! It really was quite a bizarre experience because the first thing that hit me was that apart from the fist bumping and/ or deliberate distancing, that the relationship had not changed one iota. It was business as usual, which I found odd at first because after everything we have been going through I assumed that maybe that things would have changed a bit. I am now totally convinced that it will be business as usual once this phase passes!

So I am going to let life take steps to getting back to normal and move onto important financial matters. This article is entitled ‘Excuses that will not fly’ because since tax reporting time is upon us again, I thought I would look at the most common excuses that I have heard over the years when it comes to reporting taxes correctly…and I have heard a few! I also want to cover the Common Reporting Standard again, what it is and why it is very important that you get the tax reporting right every time.

Excuses, excuses
I have to be honest and say that I have heard probably every excuse possible for not having made tax declarations in Italy, and whilst in many cases I do actually feel quite sorry for the person, because it is a genuine mistake mainly due to lack of knowledge, excuses will not fly with the Agenzia delle Entrate (AdE), no matter what your intentions were.

tax reporting Italy

So here are the top excuses that the Agenzia delle Entrate do not care about.

1. I didn’t know I had to.
This has to be at No 1 because it is the most common one I have heard over the years. Needless to say the AdE has no interest in whether you knew you had to do something or not. It is your responsibility to get informed, and failure to take the right advice or do the right thing means you are liable for all back taxes if they catch up with you.

2. I am not a tax resident.
I have written about this many times in the past. If you are registered as resident in Italy, i.e. you have registered at the comune and are registered at the Anagrafe, then you are more than likely, in the eyes of the AdE, going to be considered fiscally tax resident as well. Just because you live in another country for more than 183 days per calendar year and your main work and/or family interest are outside Italy, it does not matter to the tax authorities. You have registered to say you are resident and therefore they can legitimately come after you for taxes.

I was recently contacted by someone who said that she had been registered as resident in Italy since 2007, when she bought a house, but the home had only ever been used as a holiday home (she was informed by the estate agent that if she registered as resident then she would only have to pay 2% VAT on the purchase rather than 9%). However, the registration meant that she was also fiscally tax resident. The tax authorities have recently contacted her to ask for all back taxes in the last 5 years on her worldwide incomes, assets and gains.

The only way to resolve this now is to put a case forward to demonstrate than she was UK tax resident and falls under the double taxation treaty. That will likely mean lawyers and accountants needing to get involved and an extensive negotiation with the AdE and the UK tax authorities. In addition, they can legitimately ask for all the taxes to be paid whilst the situation is resolved.

One simple rule to remember is that if you want to simply own a holiday home and have no intention of becoming a fiscal tax resident in Italy then do NOT, under any circumstances, register as resident at your comune!

**A small note here, just to say that because of Brexit a number of Brits asked me about taking residency, pre 31 December 2020 as a way of getting around the travel restrictions imposed by the EU for non-EU citizens: 90 days in 180 day travel in the Schengen area. The answer is very simply that it is not possible unless you want to be on the radar for taxes as well. It is an all or nothing situation!**

3. I am covered by the double taxation treaty (DTA) between my country and Italy, and therefore considered non-resident.
This is one that I also hear often and stems from a misunderstanding of the DTA. The tie-breaker clause in the DTA states that where two states cannot agree on the residence of an individual then a number of criteria will be applied to determine the residency of the said person.

This might seem cut and dried, but if you register as resident in Italy but maintain your family/work/social and business interests in another country it DOES NOT mean that you automatically fall under your home country rule. In reality Italy, as any other country, could ask you to pay your taxes for your time registered as resident. You would be expected to pay and then deal with the respective tax authorities to reach a ruling as to exactly where your actual residence lay in those years. The important part to note is that, if asked, you would be expected to pay your outstanding taxes and then claim them back! Better to plan your residency carefully before a permanent move or a simple house purchase.

4. My commercialista told me not to declare it.
This is another well-worn example of getting informed before you decide a course of action. The simple rule with the commercialista is that whatever they ‘advise’ must be written down either in an email or on headed paper and signed. The excuse that they told you not to do it, which you later find out not to be correct, will not pass AdE inspection. In addition, if it isn’t written down then you have no come back against the commercialista if they have advised you incorrectly. All commercilisati have to hold professional insurance in the case of them giving bad advise, but no evidence, no claim!

Commercialisti are in general good at what they do, but you may find that your local firm is more knowledgeable about running a local agriturismo business than how to advise ‘stranieri’ with their overseas tax declaration. I now speak and intermediate with my clients’ commercialisti to ensure a) they know what products they are dealing with and b) how they should be declared. Most commercialisti are willing and want to learn and very frequently tell me something I was not aware of either.

One quick rule: If your commercialista tells you that you don’t have to declare something then go and find another one. Everything needs to be declared in Italy!

5. I pay tax already on my house in the country where it is located. Why I should pay the Italians as well?
I can’t recount how many times I have heard this one and whilst I understand the feelings around paying taxes in one state and then having to declare them again in Italy, these are the rules. Property is a fixed asset, and by fixed I mean physically fixed to the ground (unless it’s a caravan!) and therefore you must, by law, declare the asset and income from it in the country where it is located, first. Once you have been through that process you then need to declare it in Italy in the same way. If there is a double taxation treaty between Italy and the country in which the property is located, and it covers property specifically, then you should be able to claim a tax credit for any tax paid. You will therefore end up only paying tax in Italy at Italian rates.

I often hear people tell me that their commercialista has said that they cannot deduct expenses in Italy. This is correct. If your property is located in the UK, for example, then you cannot deduct any UK generated expenses ‘directly’ in your Italian tax return. However, this misses the point that they can still be deducted. You can and should still apply allowable expenses in the UK (in this example). In Italy, you report the UK income generated after UK allowable expenses.

6. I don’t want to declare that for tax in Italy, it was a gift.
This is one I don’t hear so often but it comes up every now and again. You may have received a gift from someone or received an inheritance as part of the distribution from an estate and obviously taxes may need to have been paid in the state where the estate is administered. Once you receive the money then it needs to be declared in Italy in whatever form you choose to hold it, annually. The gift/inheritance will not be taxed again as Italy respects the fact that taxes have already been paid on the gift/inheritance. Therefore, not declaring the monies you receive doesn’t make any sense and would be merely seen as a deliberate attempt to hide money from the tax authorities.

7. My ‘stranieri’ friends have been living in Italy for years and none of them pay tax in Italy.
These excuses are not in any particular order because if they were then this one would be nearer the top of the list. It’s a common one and makes me sigh with despair every time I hear it. It is also my favourite!

The chances are that your friends are not doing what they should be doing and it is only a matter of time before they get picked up by the tax authorities. I know there are plenty of people who are living in Italy, and have been for many years, without having made any declaration to the Italian state. I don’t think I need to say that this is 100% illegal and is advice that should not be followed!

For EU nationals, taking the risk of hiding under the EU Freedom of movement directive seems to be an option that some are happy to take. They remain resident in their home country but live in Italy all year round. Admittedly, I think they would be hard to find, but then they are not registered in the Italian system, are unable to buy a car or claim on the state for medical or other benefits.

Those people who are registered as resident, but also failing to declare themselves as fiscally tax resident in Italy are in a much more precarious situation and given the recent example, (as highlighted above in excuse No 2), then it is not a position that I would want to be putting myself into.

For non-EU nationals, then it is cut and dried. If you obtain a Permesso di Soggiorno to remain in Italy for over 6 months a year, then you are fiscally tax resident. If you fail to declare your taxes in Italy, and are subsequently contacted by the Agenzia delle Entrate, then you can’t say that you weren’t warned.

I think that finishes the list of excuses. Clearly it is not a definitive list. I am sure there are more but these are the most frequent that I hear. I hope that they provide you with some direction if you are wondering about what or how to declare in Italy. I have a very simple mantra which I stick to which may also help you:

IF IN DOUBT DECLARE THE ACCOUNT!

common reporting standard

The Common Reporting Standard

In this next part I want to go over some old ground, but which will put what I have written above into context and show why getting your declaration right in Italy is becoming more and more important.

I remember well, during the spring back in 2014/15 when I was contacted by a large number of people who had recently been contacted by the Agenzia delle Entrate (AdE) for unreported assets in their Italian tax return, or in a high number of cases, failure to even submit an Italian tax return for income/assets that they held overseas.

This is now happening again but with more rigour!

This is all coming about because of The Common Reporting Standard and Automatic Exchange of Information (AEOI).

These are international agreements that were developed by the 34 member states of the Organization for Economic Cooperation and Development (of which Italy was one) via its permanent “Global Tax Forum”. AEOI was designed to help combat cross-border tax evasion by individuals who were not reporting and paying applicable taxes on assets held through non-domestic financial institutions, whether these assets are held in the name of the individual or through certain offshore entities such as companies, trusts, foundations, partnerships and similar. It is primarily focused on individuals and “passive” income (i.e. dividends, interest, capital gains, etc.). It came into force in 2017 but information was backdated to the 1st January 2016.

How does Italy know if I have assets abroad?
Have you been contacted in the last few years to provide your TIN. (Tax Identification Number) to your overseas bank and/or financial institution? I have, on numerous occasions! If you a resident in Italy this number is your codice fiscale in the UK it would be your National Insurance number and in the US, your social security number, to name a few.

It is now a legal requirement to provide your TIN number on any financial contracts that you adhere to, be it banks accounts, investment portfolios, insurance policies, or other financial instruments. I have a small investment account with Hargreaves Lansdown in the UK and was recently contacted by them to update my codice fiscale. Through an error in their systems they had failed to pick up on the fact that I had given it some years ago, but they were refusing to allow me access to my account if I did not provide it again. It got resolved, but it shows you how seriously this is now being taken when financial institutions will block access to your accounts if you don’t provide them with the information needed to share information with the correct tax authorities.

data privacy

What information will they share about me?
Under the Common Reporting Standard the financial information reported includes the name, address and tax identification number (where applicable) of the asset owner; the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets. The financial institutions that need to report include banks, custodians, financial institutions, investment entities such as investment funds, certain insurance companies, trusts and foundations.

The tax authority will receive much more information than ever before and even simple bank account balances showing money coming in and out can raise red flags and the AdE can choose to investigate where the source of the money came from.

Is this new?
Exchange of financial information across Europe has been going on for a long time now and can be traced back to the introduction of the European Savings Tax Directive 2005. The Common Reporting Standard is an enhancement of this.

I remember that in 2012 when I was contacted by a number of UK rental property owners who had been legitimately declaring their UK property income in the UK for tax purposes. However, as residents in Italy they had not declared anything because they didn’t know they had to. A clear exchange of information took place and the Guardia di Finanza did a significant number of visits to these people to fine them.

***This is also happening again this year! We are seeing the AdE issuing letters for unreported income going back as far as 2015/2016***

***The Covid crisis has sharpened the eyes of the tax authorities as they are now searching desperately for more tax revenue lost through the pandemic. We have seen AdE activity rise since the start of the year and even seemingly small mistakes on tax returns or undeclared assets are being investigated***

Low hanging fruit!
Remember that with the kind of information that the tax authorities are receiving from one another, we really are the lowest hanging fruit to pick from. Easy pickings! So, my advice is always the same. The past cannot be corrected but you can change your future. Hiding and hoping the problem will go away is not an option. The only solution is to get your financial situation ‘in regola’.

What will I pay?
How you declare your money and how much you will pay to regularise your situation is a question that can only be answered by a commercialista, but it does make sense to have a look at your whole financial situation beforehand to see what damage limitation you can do by planning efficiently as a tax resident in Italy.

“Never look back unless you are planning to go that way”

Do you have investments in the UK?

By Andrew Lawford - Topics: Investments, Italy, Tax in Italy
This article is published on: 4th February 2021

04.02.21

Time for a closer look at foreign portfolios

In one of my articles last year I looked into the complexity of the taxation regime for the various types of investment income that can arise for an Italian resident. I would suggest that you read that article, or at least its section on funds, as background before continuing. In this article we are going to look in greater depth at the taxation of funds, or collective investment schemes (from now on I’ll refer to these simply as “collectives”). While this may seem a somewhat dry topic, it will be of particular concern to those who have investments in the UK, given that their tax treatment will be changing now that Brexit has come to pass. Equally, though, many people will have investments in collectives that they made in their countries of origin that do not pass muster in Italy, and these will bring less than desirable consequences from a taxation perspective.

Ufficio Complicazione Affari Semplici

Let’s first make it clear that there is nothing in Italian law that makes it illegal for an Italian resident to own certain kinds of foreign asset, but as many people find out when navigating the Italian system, the fact that you are allowed to do something doesn’t automatically mean that it will be easy. In fact, Italy has a mythical government office known as the Ufficio Complicazione Affari Semplici (the Office of Complicating Simple Matters – it even has its own Facebook page) which, if it actually existed, might well be one of the most efficient government entities in the country (I am joking, of course, but it does sometimes feel that way)!

tax in italy

Anyway, back to the main point of this article: there is an important distinction made in Italian tax law between EU domicile as against non-EU domicile for collectives.* In order to enjoy the basic 26% rate of taxation for financial income, collectives must either respect the UCITS regulations (i.e. be authorised under the EU law for collective investment undertakings), or, if non-UCITS, they must be domiciled in the EU or EEA, registered for distribution in Italy and managed by an EU licensed asset manager. These requirements will exclude almost all non-EU domiciled collectives, with UK collectives the most recent addition to the list (as from 1st January 2021). So what happens when you have invested in a collective that isn’t covered by EU rules? Any income generated will be taxed at your marginal income tax rates, which is likely to be penalising for all except those with limited incomes (the lowest income tax band is 23% in Italy).

Much has been made in the press of the fact that financial services were excluded from the Brexit agreement. Below is what this looks like in practice (the following is an excerpt from a letter sent by the fund manager Janus Henderson to investors in their UK domiciled funds):

“With effect from 1 January 2021, UK domiciled investment funds that had previously operated under the Undertakings for the Collective Investment in Transferable Securities (UCITS) regulations will cease to be classed as UCITS and will instead become “UK UCITS”. From the same date, UK domiciled Non-UCITS Retail Schemes (NURS) will cease to be classed as EU Alternative Investment Funds (AIFs) and instead will be classed as third country AIFs. Any UK domiciled Janus Henderson funds that were registered for marketing purposes in any EU 27 countries will no longer be registered and marketing of the funds will therefore cease. For the avoidance of doubt our “UK UCITS” and NURS will not be registered for marketing in the EU as third country AIFs.”

Also on the list for unfavourable tax treatment you will find any non-UCITS ETFs, which would include all of those listed in the US (remember that ETFs are simply collectives that trade on a stock exchange). It will also include holdings in Investment Trusts listed in the UK. To be fair, UK Investment Trusts have always been in an unusual situation – something I found out first hand a number of years ago after holding an Investment Trust through an Italian bank. I was amazed at the paperwork that arrived at year end relating to this holding, the income from which I was obliged to put in my tax return (to be taxed at marginal rates). At the time there was also a complicated distinction made between the variation of the fund’s NAV compared with the variation of the price of the shares that I had bought and sold – although I believe that particular distortion has now been resolved for listed funds like ETFs (every now and again something slips past the Office of Complicating Simple Matters).

USA Federal Bank

What about the US?
Any American readers should be particularly concerned, because they cannot hold EU collectives due to the arcane nature of US taxation, which makes compliance difficult even for non-resident US citizens.

You are unwise to hold EU collectives from a US point of view, and unwise to hold US collectives from an Italian point of view. So what to do? Do not despair: much will depend on your individual situation, but we can often help to improve substantially the overall tax efficiency and declaration burden relating to your portfolio.

The bottom line is that you should never assume that what works well in one country will work well in another, and especially not one like Italy that has government offices specialised in complicating matters!

If you would like to discuss your own situation then please get in touch. Our aim is to simplify complicated matters as much as possible whilst making sure that your assets are well managed, with a view to the long term. In this context, avoiding unnecessary tax exposure remains a key element of most successful investment strategies. With proper guidance in the process of portfolio construction, it is entirely possible both to enhance investment returns and reduce administrative complexity.

* Normally you can tell where a collective is domiciled by looking at the first two digits of its ISIN code (ISIN stands for International Securities Identification Number, a 12 digit alphanumeric code which almost all financial instruments have): IT will identify an Italian security, GB a UK security, LU a Luxembourg security and so on.

Understanding Italian tax legislation

By Gareth Horsfall - Topics: Italy, Tax in Italy
This article is published on: 22nd January 2021

22.01.21

I normally like to start a new E-zine or article with a story or some kind of recent experience to try and provide context to what I am about to write. However, because of my lack of travels, I am lacking stories at the moment. In fact, I am now starting to believe that there is a government conspiracy to bore me to death, or they are in collaboration with Netflix to lobotomize me with endless series and films. Lockdown phase 2 is proving somewhat monotonous!

So, with the fact that there isn’t really much to tell you other than work related matters, then we might as well crack on, because the truth is that as a result of Brexit a number of financial things have changed. A lot of my clients are now non-EU citizens (i.e. Brits), and so a better understanding of Italian tax legislation is essential. We have done some extensive digging in this regard and our investigations have sprung up some unwelcome news for some.

The information we found was buried so deep in Italian tax law text that it took us (in reality my colleague Andrew Lawford ended up discovering it through sheer determination and persistence) quite some time to dig it up. So make sure you read the whole E-zine as something might be relevant to you.

I should add that the financial services industry is still trying to work itself out and we should remember that there is no deal for financial services as part of the Brexit trade agreement. A lot of hope is being placed on a potential trade agreement being reached on financial services by the spring, as professed by Rishi Sunak, but I have my doubts.

UK Banks closed

SO, WHAT ARE THE CONCERNS?
Let’s start with the one that got the most press leading up to Brexit. The automatic closure of UK bank accounts for EU residents.

There is not much to say here, other than the main culprits seem to be Barclays, Lloyds, Nationwide, Royal Bank of Scotland and Halifax. To date, my experience with clients is that the closure letters are a bit of a scattergun approach. Not everyone I know with an account in these banks is being approached to close it.

I am asked a lot about the possibility of using a UK address of a relative or friend and whether this would alert the bank to you living in the EU or not? The likelihood is that it will for 2 reasons. The first is that under the Common Reporting Standard (International sharing of tax and financial information) banks only need to ‘suspect’ that you are resident in another country. This might be determined from activity on your account, or other financial information that they may receive from foreign tax authorities. The second reason is that ultimately you should be asked to prove the address you provide. A simple check on the land registry can avert them to the fact that you are not the registered owner of the property. A standard requirement is to request a copy of a utility bill showing your name and address on it or some kind of official tax authority document. If you are unable to prove these, then the chances are that the banks will catch up with you sooner or later.

So, what are the alternatives? I have recommended Fineco as a good Italian bank alternative (for transparency purposes, I have been an account holder for approx 10 years) but I believe that more of you than ever are finding it easy to open and use Transferwise as a transitionary online solution. But it’s NOT a bank, so beware! There are online banks as well, such as N26 and the online offshoots of the regular Italian banks. There are certainly lots of options available although finding a non-UK alternative that will allow UK direct debit payments is pretty much impossible.

taxation on overseas rental property for Italian residents

UK PROPERTY OWNERSHIP
I have written previously about this and the increased wealth tax that will now be charged on UK property ownership for Italian residents.

To recap, in a pre-Brexit world a UK property owned by an Italian resident would have had a wealth tax charged against it each year, in Italy. The value for calculating this charge was 0.76% of the council tax value of the property. This is considerably lower than the market value in most cases. However, now that the UK has left the EU the method for calculating that wealth tax changes.

Properties that are located outside the EU are subject to the same charge, 0.76%, but in this case the valuation basis moves to the purchase/acquisition value of the property, where provable, and the market value otherwise. For most people I am finding that this is quite a difference, and for anyone who has bought in the last 10 years or so, this means a mostly, higher annual wealth tax charge. To date, I have only come across one person who retired to Italy and had retained the family property in the UK for many years, and could benefit from a very low purchase value for calculation purposes, hence a net tax benefit as a result of the tax change post Brexit. Most are going to find that their cost of holding UK property will increase as a result of the UK leaving the EU.

tax-italy-guide

TAX BREAK…
For anyone inclined to sell their UK property then we shouldn’t forget that there is the possible ‘sale-of-home’ tax break as an Italian resident. If you have owned the home for more than 5 full tax years then Italy does not consider a property sale speculative (even a property located overseas) and so no capital gains tax is charged in Italy. You may have tax applied in the country in which the property is situated, in which case you would need to check the local tax laws. In the case of the UK, a property sale as a non-UK tax resident means capital gains tax would be charged on the property, but only from the date at which the legislation was introduced: 6th April 2015. What this means is that any gains made up to that point can effectively be written off, and the cost value for the purposes of calculating the capital gain would be the value as at the 6th April 2015 or later, depending on when you bought the property. A handy tax break for anyone who has held property in the UK for more than 5 years.

UK IFA

UK IFAs
Now, we come onto the more technical points and an area which I see evolving over the coming year/years: UK IFAs (Independent Financial Advisers).

Even when the UK was inside the EU it was not uncommon for me to come across people who had existing relationships with UK based IFAs who advised them on their finances, in the same way that I do for my clients living in Italy. But, even inside the EU most firms were not licensed to work with clients who were living in an EU state (it was easy enough to check on the Financial Conduct Authority website in the UK), and even in the few limited cases where they had the licence they did not have any experience of the Italian tax and financial system, so their advice was mainly useless and normally bad for the client. However, many continued to operate regardless, protected (loosely) by being a member of the EU.

Fast forward to a post Brexit world and the fog has cleared. If you are working with a UK based IFA, and living in Italy, then you should not be receiving any advice from them. They will not have the necessary authorities or licences to operate in the EU, and as such, you as a client are not protected for any advice that they give you. This has been very clearly highlighted in a Banca D’Italia document which was released at the end of last year.

If you do work with any UK based financial professional it would be in your interests to contact them and ask if they have an EU based entity to ensure they can continue to work with you. In much the same way as the banks are pulling out of the EU (the ones that have no intention to develop or maintain their existing EU business), IFA firms (small or large) should also be doing the same.

I have to admit, that I have benefited from this because a number of UK firms with Italian resident clients have already contacted me about passing on their clients because they are no longer able to work with them. I expect this to continue as more firms understand their legal liability of working with clients in an un-licensed capacity.

If you are in this situation please speak with the firm and/or send me a message and I can help you to look into it in more detail.

investment talk

ASSET MANAGERS
This is a category, very similar to UK based IFAs. These are firms which generally manage sizeable portfolios for clients and have a direct relationship with the end client. To date there are mixed messages coming out of this sector. Some asset managers are aiming to pass EU based clients to EU based firms, like ourselves, others are clinging onto various legal loop holes to retain business. If you have a portfolio managed by a UK based asset manager directly, then the best you can do is to contact them and ask them what their post Brexit plans are. We expect that over time the EU will develop a more protectionist and hardline stance on working with non EU based firms.T his will ensure that they can more readily protect their EU residents and citizens and also win business from the UK.

Where UK asset managers are used inside Italian tax compliant accounts, in the way that we mostly structure assets for our clients, then you do not have to worry as the provider of the account will be keeping abreast of legislation as it changes.

***For all my clients, please be aware that we are on top of any changes in this regard and you do NOT need to contact your asset manager as a result of the content in this E-zine. If anything changes we will notify you as soon as we become aware. We also have contingency plans in place should any changes need to be made***

italy tax

TAX ON UK DOMICILED ASSETS
This is probably the most revealing piece of information that we have discovered, and whilst it is new for UK residents, it has always been the tax case for other non-EU Italian residents e.g. US citizens. And very important information it is as well for the holders

of UK domiciled non-property assets (excluding bank accounts).

We are not sure if most commercialisti are aware of what we discovered and so we encourage you to have a discussion with yours if you think you might be affected!

Essentially, if you hold non-EU approved investment funds in a portfolio with a bank or an asset manager, then these same assets must meet 3 simple rules for the flat 26% tax treatment for investment income and capital gains to be applied, in Italy.

1. The fund or collective investment must be established in a member state of the EU or EEA
2. It must be sold in Italy under the relevant distributions guidelines from the regulator CONSOB
3. And if you are working with someone who manages your money they need to be subject to EU authorisations in the country in which they operate from

And the important point to note is that any investment fund must be covered under all 3 criteria and not just one!

What is the consequence if your collective investments don’t meet these criteria?
Very simply all your investment income and capital gains are added up and taxed at your highest rate of income tax! They are added to all your other income for the year and taxed accordingly. For someone who is earning up to €15000pa (pensions, rental income and/or employment income) then this would be advantageous, but for any figure above then your tax rate will be higher than the 26% currently charged on the same asset.

How can you check if you have a non-EU domiciled collective investment asset?
Very simply, all securities are allocated an International Securities Number (ISIN code). You will need to check that yours starts with an EU approved code, such as IE, LU, FR, IT etc. For any UK citizen living in Italy holding securities/funds or assets, whose code starts with the letters GB, then it might be time to take another look at your financial planning as a resident to try and mitigate any future tax charges on these assets.

And that’s it for this E-zine! There are quite a few financial planning considerations to be taken into account here and so I will elaborate on them in future E-zines, but if you have any doubts as to whether any of these topics may apply to you, or want some help looking into anything, then I would suggest you get in touch using the form below.

Investment income taxation in Italy

By Andrew Lawford - Topics: Investment income taxation in Italy, Investments, Italy, Tax, Tax in Italy
This article is published on: 5th November 2020

05.11.20

This should be easy, shouldn’t it? Everything gets taxed at 26% – dividends, interest and capital gains. However, for anyone who has delved into the world of Italian fiscal matters, it should be obvious that the words “easy”, “taxation” and “Italy” do not belong in the same sentence.

Let’s try and examine how it all works
Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Assets held in Italy:
Let’s start by looking at the situation for those assets held in Italy (i.e. in an account at an Italian financial institution):

For directly-held, unmanaged investments at an Italian bank or financial intermediary, the 26% rate will apply to income flows (e.g. dividends and coupons) at the time they are received and to capital gains at the time they are realised. This system is known as regime amministrato and it is generally the default position that most people will find themselves in when they open an account in Italy, unless they opt for a discretionary asset management service (see below). Under this system, the bank or other intermediary involved makes withholding payments on the client’s behalf and no further tax is due.

You can opt out of this system and elect to make your own declarations and tax payments (regime dichiarativo), however this is likely to be a sensible option only for someone who has assets spread over a number of different banks, as it is the only way to off-set gains realised in one bank with losses realised in another. The cost of doing this is that you will have to take responsibility for the correct declaration of all your investment income, which is no easy task. It will necessitate a lot of work on your part, as well as the need to find a local tax accountant willing and able to handle this aspect of your tax return.

If you decide to use a financial adviser to help with the choice of your investments in the above context, it is worth noting that any explicit cost of the service will attract Italian VAT at 22% (and if you are not paying an explicit cost, then you should look closely at the assets you are being advised to purchase – expensive, commission-paying funds are still very much alive in the Italian market). It is not possible to deduct the advise cost from your gross results before taxation is withheld.

The weird world of fund taxation:
One of the more perverse aspects of financial income taxation in Italy is the treatment of fund investments (basically any collective investment scheme, including ETFs). These will produce what is known as reddito di capitale when they generate dividends or are sold at a profit, but a reddito diverso when sold at a loss. What this means in practical terms is that in a portfolio containing only funds, you cannot off-set losses against gains. If you do accumulate losses through selling losing investments, you will need to generate gains that can be classified as redditi diversi in order to off-set the losses. This will likely involve investments in individual stocks and bonds, which may lead to an odd portfolio construction driven by tax considerations – generally not a good basis upon which to choose one’s investments.

Let’s turn now to directly-held, managed investments held with an Italian institution. In this case, taxation of 26% will be levied annually on any positive variation in the overall account value, with no distinction being made between the various sources of the income (this is known as the regime gestito). If the account suffers an overall decrease in value in the course of a given year, this loss can be carried forward and off-set against gains recorded over the following four years. Whilst this is a relatively simple arrangement from a tax perspective, it remains inefficient in the sense that it taxes you on unrealised returns (although at least the return is taxed net of fees).

It is worth noting that the asset management fees charged on this type of service attract Italian VAT at 22%, so an agreed cost of 1% per annum becomes a 1.22% cost for the client. Italian institutions will also generally favour investments in their “in house” managed funds, even when better (and cheaper) investments are available.

Assets held outside of Italy:
There is nothing to prevent you from holding assets outside of Italy, but you do need to go into such a situation with your eyes open. You will find yourself essentially in the same situation as the person who opts for the regime dichiarativo which I described above, together with the added aggravation of having to comply with the foreign asset declaration requirements (Quadro RW), which mean that you have to declare not only the income you derive from your financial assets, but also their value and any changes in their composition from year to year. If you’d like to have an idea of the complexity of making these declarations, get in touch with me and I will send you the instruction booklet for the 2020 Italian tax return (Fascicolo 2, the section which deals mostly with financial income and asset declarations, runs to 62 pages this year, and no, it is not available in English). You cannot opt to have a foreign, directly-held, discretionary managed account taxed as per the regime gestito above, because this is only possible for accounts held with Italian financial institutions. This means that any account will have to be broken down into its constituent elements and the tax calculated appropriately. Please also note that accounts which enjoy preferential tax treatment in a foreign jurisdiction will generally not carry any such benefits for an Italian resident.

Italian-compliant tax wrappers:
There is a solution which allows you to maintain foreign assets whilst removing 99% of the hassle described above. This involves using an Italian-compliant life insurance wrapper, issued from an EU jurisdiction. There are a number of other important benefits that accrue to this type of solution for an Italian resident, the two main ones being deferral of taxation until withdrawals are made (or death benefits paid) and total exemption from Italian inheritance taxes. I am reluctant to present comparative numbers in an article of this sort, but it should be clear that if the investments and costs are the same under the various scenarios examined, tax deferral will lead to a higher final investment value, and so should always be the preferred solution.

tax in italy

My goal with this article hasn’t been to make your head spin (although I can understand that this might have been its effect), but instead to make it clear that even apparently simple rules can hide a web of complexity which will ultimately lead to an inefficient outcome for the unwary investor. My goal is to cut through the complexity and make your life as simple as possible, whilst giving you access to quality underlying investments. Yes, it can be done, even in Italy.