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 Gareth Horsfall
This article is published on: 22nd March 2023
2023 is the year that I turn 49 years old. Where do the years go? 50 next year and strangely enough I don’t feel as anxious about it as I thought I would. I actually feel quite good about it, and I have made some personal commitments to spend more time in nature and exercise regularly, but not excessively (I suffered glandular fever a few years ago and so can’t workout as hard as I used to).
It was on one of those walks in nature recently that I actually thought that it’s about that time when our commercialisti start asking us to send our financial information for tax calculation and payment. (unless you are one of those people who is well prepared and has done it already).
Of course, we always have to supply a full list of our incomes and assets (Italian and foreign), bank accounts and properties and taxable assets. However, I am not sure about you, but my commercialista doesn’t really give me much information on the corresponding list of deductions and detractions available to offset/reduce some of our tax bill, so I thought I would write this article to provide you with a full list for the financial year 2022. [A reminder to always check your tax return, once filed by your commercialista, to ensure that errors haven’t been made, especially on the foreign assets section Quadro RW . See my article on this for more information Declaring taxes in Italy
Some of these may be relevant to you, others not, but at least you have the list which you can refer to and always share with others, if you think it might help. There are distinct categories ranging from family expenses to renovation/property expenses as well. Also remember that in ALL cases now, to claim an expense you MUST have paid by electronic/traceable means i.e. bonifico (bank transfer) or carta di credito and you MUST have a corresponding scontrino fiscale in the case of things like farmacia expenses. For larger purchases a fattura (invoice) is required. Without the necessary document you will not be able to claim back the tax relief.
So, without further ado, here is the list:
These attract a detraction of 19% of the full value of the expense.
These all attract a 19% detraction:
the full cost of donations to:
Restructuring and renovation costs
For the tax year 2022, the following deductions are available:
Where you have an income up to €120,000 pa the expenses, as described in this article, will be fully allowed. Where your income is over €120,000pa then the detractions will be reduced according to a formula based on your total income.
And that’s it! Everything that you can detract from your income in 2022 to try and reduce your tax bill in Italy. If that doesn’t make a difference, then you may need to have a look at your overall finances to try and plan in different ways.
It should be noted that the Meloni government is currently debating how they can follow through on their election promise to simplify the tax system by reducing the tax bands from 4 to 3, in the coming year, and then hopefully moving to a 2 tax band system. If they manage to pass this then they will likely reduce/remove the system of detractions/deductions by lowering the bottom rate of tax, or maybe introduce a starting rate tax allowance for everyone (unlikely, in my opinion. The talk is that an allowance may be offered to workers [not self-employed] and pensionati) However, they are in first stage negotiations and it may be some time before things come to pass.
The other thing they are currently discussing is simplification of the taxation of investment income and gains. Presently income and gains from certain types of investments cannot be offset against losses from the same investment. A system they called ‘redditi di capitale’ e ‘redditi diversi’. There is talk to remove this, what I consider a rather odd system, and have the same system as everywhere else, income, gains and losses from investment income treated in the same way.
Anyone who has a missing contribution record for UK National Insurance contributions in the UK between April 2006 and April 2016 will still have the opportunity to make up these contributions until the 31st July 2023, which will still give you the chance to increase your state pension entitlement from the UK. The previous deadline was the 5th April 2023.
The reasoning behind this decision from the UK government is that from April 2023 anyone retiring will need to have a national insurance contribution record of 35 years to receive the maximum state pension. Between 2006 and 2016 different maximum contribution periods may have applied and therefore the UK government is giving you the opportunity to maximise your contributions until July 2023. After this time, it will only be possible to repay the missing previous 6 years contributions in your national insurance record. If you want to know more, you can look at the www.gov.uk website.
Bear in mind that the state pension office will likely be overwhelmed with requests at this time, so if you need to make a request for back payments then you may need to do so immediately, otherwise they may not be able to respond to you in time.
If you are unsure of your National Insurance contribution record then you can check it online at www.gov.uk/check-state-pension. You will need your UK national insurance number handy.
By Gareth Horsfall
This article is published on: 17th March 2023
Tax time in Italy – when our commercialisti wake up from their winter ‘letargo’ (aka – well-earned down) and start asking us to send our financial information for tax payment, if you haven’t done it already of course.
On top of the information regarding our taxable assets and income there is the list of allowable deductions /detractions to assist in lowering your tax bill.
In this article, I review that list for fiscal tax year 2022.
SPESE FAMIGLIARI – family expenses. These attract a detraction of 19% of the value of the expense.
SPESE PER LE CASE –
SPESE MEDICHE – medical expenses. These all attract a 19% detraction:
LIBERE DONAZIONI – the full cost of donations to:
BONUS EDILIZIE – restructuring and renovation costs
For the tax year 2022, the following detractions are available:
(** the superbonus has been suspended by the Meloni government because they found a hole of €38 billion in the public finances due to fraudulent activity related to the Superbonus. It is unknown when and if any applications made in 2022 will be reimbursed).
Where you have an income up to €120,000 pa the expenses, as described in this article, will be fully allowed. Where you income is over €120,000pa then the detractions will be reduced according to a formula based on your total income.
And that’s it. Everything that you can detract from your income in 2022 to try and reduce your tax bill in Italy. If that doesn’t make a difference, then you may need to have a look at your overall finances to try and plan in different ways.
It should also be noted that the Meloni government is currently debating how they can simplify this whole system by reducing the tax bands from four to three in the coming year, and then hopefully moving to a two tax band system. If they manage to pass this, then they will likely reduce/remove this system of detractions/deductions by lowering the bottom rate of tax, or maybe introducing a starting rate tax allowance for everyone (unlikely). However, they are in first stage negotiations and it may be some time before things come to pass.
By Gareth Horsfall
This article is published on: 9th November 2022
I had a nasty surprise the other day and I just had to tell you about it. I got one of those dreaded pec (posta elettronica certificata) emails with the title ‘Agenzia delle Entrate – riscossione‘. They put the living fear into me and for obvious reasons. This time it was nothing significant, but still an issue relating to something my old commercialista did, or didn’t do, back in 2012, 2015 and 2017. My new commercialista has launched an investigation and hopefully we can park that particular communication in a draw somewhere, but I suspect I will end up having something to pay.
Why you should ask for a copy of your Unico!
With my horrible experience in mind, I decided to write this article where I want to just briefly touch on why you should really be asking for a copy of your Unico from your commercialista or whoever declares your taxes.
If you are unsure what an Unico is, it is merely a copy of your declared tax return pages that have been submitted to the Agenzia delle Entrate.
And will normally be about 20/30ish pages long, depending on how complex your financial affairs are.
You also want to request a copy with the receipt on the back pages, as this is confirmation that it has been lodged with the tax authorities.
That page should have a header as follows:
Now, you may ask why I am telling you this?
In the last few years, I have widened my services to my clients to incorporate a check on their declared financial affairs in Italy, to ensure that everything is being reported correctly. I decided to do this because it had become apparent that some errors had been made by various commercialisti and the odd client had been incurring higher taxes than necessary, as a result.
Checking your tax return may seem a complicated procedure, and you may be reluctant to do so, but actually, for most of the International English-speaking community living in Italy the entries in the tax return should be relatively simple. Apart from any declaration of income, which you would find under section Quadro RN or RT for investment income, you can also check on things like your accrued medical expenses under Quadro RP.
[An interesting point about the medical expenses section is that this year my commercialista contacted me about my receipts for farmacia expenses for 2021. However, he didn’t just asked me for the scontrini, but actually sent me a screenshot from the Agenzia delle Entrate website detailing all my farmacia spending for the whole year, where I had given my tessera sanitaria, which I found quite unsettling!]
The main sections that I would suggest that you check over are Quadro RW and RT. These are where overseas assets, incomes and capital gains have to be declared. These include properties, portfolios, bank accounts and other overseas assets, such as art or vintage cars, for example. These are the sections where I find the most errors. It might be that the market value of a property has been reported instead of a purchase value or local authority value or they have misunderstood the nature of a pension and declared it as an investment portfolio.
Also, remember when checking these figures that they must be converted into EUR from the foreign currencies in which you may have an asset. To do this you need the exchange rate for your respective currency. The Agenzia delle Entrate publishes those conversion rates and where valuations have been provided for the 31st December, for example, then you would need to use the declared rates from the Agenzia delle Entrate for that month. The link below takes you to the AdE provvedimento for Dec 2021 that provides exchange rates on all world currencies.
In more recent years, where I have started working with commercialisti more closely for my clients, I have managed to iron out these problems and, in most cases, a good commercialista will be happy to learn the nature of an overseas asset and ensure it is declared correctly. However, there are still instances where mistakes can be made.
In brief, I would advise you to request a copy of your Unico for the last financial year. A good commercialista shouldn’t be worried about providing you with a copy. There shouldn’t be anything to hide if they have done it all correctly. You can also download this directly from the Agenzia delle Entrate (AdE) website. If you have not already done so, you can request access details to register with the AdE from a local office, and then create your access point. If you have a SPID (Sistema Pubblico di identità Digitale) you can access the website using this means, which is much easier. You want to find section Cassetto Fiscale > Dichiarazioni Fiscali.
Do a check of your declared financial position! There is unlikely to be anything wrong in most cases, but you may just be the one who is paying more than you need to because of an incorrect code or misplaced figure. Do not leave the exclusive responsibility of your finances in the hands of your commercialista or fiscalista and if you are unsure of how to interpret the data in there then you can always ask for my help by contacting me on: gareth.horsfall@spectrum-ifa.com or call/whatsapp on +39 3336492356
Bonus and Superbonus Edilizia
I have been asked a number of times recently about whether I think the new Italian government will stop the current range of bonuses for doing work on your property and/or upgrading your white ‘elettrodomestici‘ goods. Well, I had written a long article explaining the hypothetical new arrangements that could be announced to begin in 2023, only to be usurped by the Italian government which have now announced how things will change for 2023, as I explain below.
My thinking has always been that they are likely start to phase the bonuses out rather than cull them altogether. But, I can’t see a long-term sustainable economic plan for the country with continued ‘Bonus Edilizia‘ at the current levels, particularly the 110% bonus.
Under the legislation brought in by Draghi the 110% Bonus would have been in place for the whole of 2023, after which it would fall to 70% in 2024 and 65% in 2025. For ‘ville‘ and properties which are classified as ‘unifamiliare‘ the bonus would only be available until the end of 2022. But this is Draghi legislation. He has now gone and the new administration want to put their stamp on things, hence the revised measures coming into force from Jan 2023.
So, the new measures announced last week are as follows:
1. The superbonus will be reduced from 110% to 90% from the 1st Jan 2023 for all condomini (buildings with more than one property).
For ‘unifamiliare‘ properties, i.e villa’s or standalone houses, the same percentage will be offered, as long as it is used on the ‘prima casa‘. However, a new measure for ‘unifamiliare‘ properties has been added. They will now also assess the ‘reddito familigiare‘ of the occupants of the property and reduce any bonus accordingly. The maximum income and formula for the reduction in bonus have yet to be announced.
Possible reductions/removals
No mention has been made as to whether the superbonus will still be available or reduced significantly for ‘seconde case‘. The proposals for the ‘seconde case‘ could range from anywhere between 50% to 65% or a complete removal altogether.
The other notable plan is that the Agenzia delle Entrate have been given more powers to ramp up the controls and investigations for bonuses. More paperwork requirements are expected to be demanded to ensure that the monies for the work end up in the hands of the people actually doing the work, at a fair price and not artificially hiked to exploit the bonus regime.
As for all the other bonuses for electric white goods, etc. It looks like they will be here to stay for the coming year/s, at the very least. (Ecobonus, Sismabonus, Bonus mobili e elettrodomestici, Bonus Verde, Bonus idrico, Bonus acqua potabile, Bonus Facciate, Bonus ristrutturazione, Bonus restauro, Bonus prima casa under 36, Bonus affitti giovani under 31)
The final details have not yet been ironed out and knowing the normal process for the Legge di Bilancio we may not know the final details until after the 1st Jan 2023.
Since the superbonus scheme started the Italian government have now paid (or are awaiting payment) of €51 billion of tax rebates. The objective is to reduce that to €31 billion for the period between 2023 and 2028.
For anyone looking to apply for the ‘Bonus Edilizia‘ right now, my suggestion would be to get your requests in and push the people who are making the application on your behalf to make sure that you qualify for the current bonus amounts. If not, you may find the amount you get back is lower than you had expected.
By Gareth Horsfall
This article is published on: 7th December 2021
Well, it’s the moment that we have all been waiting for. The announcement was made on the 25th November. The new income tax bracket bands (IRPEF) from 2022. Unfortunately, I have to report that they really are not going to make a big difference to most people, but some savings might be available.
I know I mentioned in one of my previous E-zines that there was also talk of a possible allowance being introduced as well, but this area is still being debated. The talk is that an allowance will not be forthcoming for everyone, but that they will merely extend or enlarge the current no-tax area. This is not the same as an allowance which everyone would receive regardless of their income; instead it is offered to those with lower incomes, in different classifications. At present the no-tax areas apply as follows:
For employed workers: €8145pa
Pensioners: €8130pa (this increases for the over 75s to €9000pa)
Self employed workers: €4800pa
** You would not be taxed at all if you were earning / receiving income equating to those figures exactly. However, the more that your total income increases over these figures, the more of the no-tax area that you lose. Hence distinguishing this from a tax allowance. It is more like a means-tested benefit ***
Remember that Italy also has its highly complex system of detractions and deductions which can help to reduce your overall tax bill further. This, with the changes made in the income tax rates, will also be under review, but I suspect it will still remain in some shape or form for the future. The complication here is always knowing what you are eligible to deduct and how. To keep on top of the current system of deductions and detractions, you almost need to make it a full time job, from tax deductions for installing a water filtration system in the house, to veterinary bills and expenses. Anyway, more on that as and when I know more myself.
For now, let’s concentrate on the fact that income tax rates have now been reviewed and subsequently will change for 2022.
Entrepreneurial progress?
I think that back in 2019, maybe earlier, I wrote an E-zine bemoaning the fact that Italy’s tax system was cutting off the opportunity for entrepreneurs and small business owners to go to the next level and start to create the next generation of SMEs (small to medium sized businesses), purely because of its taxation and ‘contributi’ system. My bug bear was that as soon as your income went over €28000 then Italy imposed a taxation of 38% on income earned, until total income exceeded €55000, when the tax rate increased again. This, in addition to the high level of social security contributions, was the equivalent of asking someone to run a marathon but chopping them off at the knees before they started, and as the marathon progressed (if they could even make it that far) then would start to chop more of the leg off as they progressed. Hence, why would you even start?
(I am exaggerating a little because for some years now there has been a tax regime for self employed people earning up to €65000pa where they can pay just 15% income tax per annum, but without the opportunity to offset any business expenses. Most small business people I know are on this regime, which is great, but what if you can, or want to, earn more than €65000pa and take your business to the next level?)
These were always the bigger questions. Well, thankfully, Sig. Draghi has used the cloak of Covid (or more likely the cloak of a serious amount of funding from the EU) to do something about this and has made changes to the income tax rates. However, let’s have a look at the current system of taxation before we look at the new. IRPEF as things currently stand is charged as follows:
| €0 – €15,000 | 23% |
| €15001 – €28000 | 27% |
| €28001 – €55000 | 38% |
| €55001 – €75000 | 41% |
| €75000+ | 43% |
The biggest leap here being the move from 27% to 38% after €28000pa In the shake up, we now go from 5 bands to 4 and the bands have been widened as follows:
| €0 – €15000 | remains at 23% |
| €15001 – €28000 | will now go from 27% to 25% |
| €28000 – €55000 | will fall from 38% to 35% |
And the biggest change here is that from €55000 pa the rate will pass straight to 43%
What can be learnt from this?
I think the lesson from this change is very simple. One which I think fits into current world thinking. The individual earning more (in this case €55000pa) is now going to pay more tax and those on lower than €55000pa incomes, in Italy, are going to be incentivised to spend more with lower taxes. It’s not a stupid strategy in all honestly because people with less income will naturally spend the extra cash that is available to them. Those with higher incomes will normally siphon off surplus income into reserves (investments/pensions etc).
So, all in all Italy is doing what a lot of countries already do. And we are told that this is just ‘stage 1’ of the reformed income tax regime (essentially to get something over the line before the end of 2021), but more reforms are pending from 2022 onwards. As my classic phrase goes ‘I wait to be amazed!’.
Summary
That all being said, for a lot of people it will mean some tax savings, especially those with income between €15000 and €55000. The full saving in these tax brackets will be €1070pa. Not to be sniffed at as the cost of utilities and food has increased substantially in the last year. For anyone else, you are not really going to see much change at all, and I suspect the system of detractions and deductions will continue for now to help anyone reduce their income tax liabilities even further. In Italy, it would seem, things happen piece meal and over a longish period of time. No one politician or political party really has the political clout to push such sweeping reforms as might be needed and get them put into place, even Mario Draghi. However, the ability to push through smaller reforms which make a big difference over time seems to be more the status quo. As usual, we bumble along and react to things as they happen and continue to enjoy the life that Italy affords us.
By Gareth Horsfall
This article is published on: 29th October 2021
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 gareth.horsfall@spectrum-ifa.com or on cell +39 3336492356.
My initial consultations are free and there is no obligation to discuss things further, if you so wish.
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.
By Gareth Horsfall
This article is published on: 27th September 2021
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.
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 gareth.horsfall@spectrum-ifa.com or send me a message/call on +39 333 649 2356
By Gareth Horsfall
This article is published on: 4th June 2021
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.
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!
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.
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”
By Andrew Lawford
This article is published on: 4th February 2021
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)!
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).
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.
