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

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

12.10.21

First, let’s start with some good news. It was recently announced that the number of outstanding tax disputes winding their tortuous way through the Italian courts had dipped below 300,000 for the first time. If it doesn’t sound like much to be proud of, consider that back in 1996 it was almost 10 times that number! It just goes to show how much things have already improved, and yet much still remains to be done if we compare this statistic with a similar-sized country like the UK, where there are fewer than 30,000 outstanding disputes. Considering that almost 50% of the disputes in the courts relate to amounts lower than €3,000, it should be easy to find ways to tidy the system up (Mr Draghi, we are awaiting your reforms with bated breath!).

Now let’s look at a couple of recent clarifications/consultations from the Agenzia delle Entrate (Agenzia) – I try to keep people updated on issues that may be of interest to them, with the goal being that of not ending up in the legion of 300,000 referred to in the paragraph above.

7% pensioners regime Italy

A recent ruling (interpello) from the Agenzia has offered some further clarity on the 7% tax regime. Technically, a ruling only applies to the individual who asked for it, but they are obviously indicative of the Agenzia’s thinking on the topic at hand. In this particular example, we have a US resident who is transferring residency to an eligible town in southern Italy (for more basic details on the regime, first have a look at this article). Their pension is in the form of withdrawals from a US IRA account under a SEPP regime (Substantial Equal Periodic Payments) which allows the individual to make periodic withdrawals from the account prior to their ordinary retirement age (which in this case would be 59 years old). After a long introductory disquisition on the subject, the Agenzia has clearly stated that this kind of pension is eligible, the main reason being that it derives from the working activities of the individual in question.

A couple of other points that are also clear from the ruling: 1) there is no minimum age requirement for the 7% regime and; 2) even one-off payments received upon the termination of a work contract could qualify, as long as these derive from pension funds accumulated for that specific purpose during the individual’s working life.

If you find yourself in a grey area, applying for a ruling is a great way to get clarity on your personal situation and is money well spent when considering the alternative of being audited at some point after you have opted into the regime.

7% pensioners regime Italy

Trust consultation document
Anyone who has listened to one of my early podcasts on the subject will know that trusts are a thorny issue for Italian residents – they are formally recognised, thanks to the fact that Italy ratified The Hague Trust Convention, which came into force in 1992 – but from there it has been a constant source of trouble, mainly relating to how they should be taxed. Anyone who has any kind of link with a trust should make sure that they get a working idea of its potential consequences from the Italian point of view. I say “potential”, because there isn’t a great deal of clarity on the subject. The only thing for sure is that the Agenzia is taking a greater interest in these structures – hence the recent publication of a consultation document that seeks to give a cohesive vision of trusts in the Italian context.

You can expect some changes before it becomes definitive, but I am summing up its main points in a series of questions you should be asking yourself (and your advisers) if you have any kind of connection to a trust.

Is the trust itself Italian resident?

  • The fact that a trust has been set up outside of Italy doesn’t mean that the Agenzia cannot consider it to be an Italian resident (the same is also true of company structures)
  • The consultation document indicates that the basic criteria upon which a trust will be considered resident in Italy are the location of its registered office, its centre of administration, or its principal activities
  • There is a simple presumption of Italian residency for any trust that has at least one settlor and one beneficiary resident in Italy
  • A presumption of Italian residency also exists when an Italian resident individual transfers assets to a trust set up in a non-white list country
  • An Italian-resident trust is taxed at IRES rates (Italian corporate taxation) regardless of when distributions are actually made to the beneficiaries

What kind of trust is it (regardless of its residency)?

  • The consultation document discusses two types of trust: “opaco” and “trasparente”, with the distinction essentially being whether or not the beneficiaries have the right to receive distributions from the trust (trasparente), or are only amongst those for whom it is a possibility, but not a right (opaco). In simpler terms, we might call the “opaco” a discretionary trust and the “trasparente” a naked, or transparent trust
  • If you are the beneficiary of a naked trust, essentially you will be taxed on a “look-through” basis, as if the trust didn’t exist. This will involve the potentially difficult process of reconciling the trust’s reporting to the Italian reporting requirements for individuals
  • If you are the beneficiary of a discretionary trust, you are likely to be taxed at financial income tax rates (26%) on any distributions

Is the trust set up in a tax haven or does it otherwise enjoy preferential tax treatment?

  • If a discretionary trust is set up in a tax haven, or otherwise happens to enjoy a preferential tax regime, the trust’s income is automatically attributed to its Italian beneficiaries, regardless of whether the trust has actually made a distribution. You could end up paying tax on amounts you haven’t actually received
  • This point follows the similar regime for companies set up in tax havens or enjoying low tax regimes

Gift/inheritance taxes

  • People often set trusts up as vehicles for estate planning. One main source of doubt over the years has been the moment at which Italian gift or inheritance taxes fall due. The doubt has been created by the fact that the Italian Supreme Court (Cassazione) has oscillated between two competing interpretations
  • The first interpretation is that taxes are due at the moment the trust is set up, and should be paid at appropriate rates considering the relationship between the settlor and the ultimate beneficiary. This approach was favoured by those who wanted to pay the taxes now under the relatively low Italian IHT regime, in the anticipation of higher taxes in the future
  • The second interpretation is that taxes are due at the moment of final distribution to the beneficiary concerned
  • Interestingly, both approaches have been applied in the Italian courts, but it seems that the second interpretation is destined to become the definitive one. This puts people who have already applied the first interpretation in something of an awkward position

Will I be subject to foreign assets declarations (IVAFE/IVIE) as a result of being considered “titolare effettivo” (beneficial owner) of the trust’s assets?

  • This is quite a complicated point and is intertwined with the fact that recent reforms have made Italian resident trusts subject to foreign asset declaration rules
  • In some circumstances, even the beneficiaries of foreign discretionary trusts may have to declare the assets held by the trust due to the rules relating to beneficial ownership
  • The penalties for non declaration are such that, if you find yourself in a grey area, you should probably make the declaration (which is a fairly difficult thing to do properly)

Don’t underestimate the level of sophistication that the Agenzia is reaching with its interpretations of trust instruments – they can and will dig into the nature of a trust in order to understand exactly how it works and increasingly they have the expertise to do so. If you do have a connection to a trust or are thinking about setting one up, now might be a good idea to have a chat and review your situation. There are a limited number of circumstances in which they might make sense (for example in terms of protecting vulnerable individuals), but in most other cases we find that there are easier and more “Italian-friendly” ways of reaching the goals people have with their trusts.

If any of the above has raised doubts or queries, I’m always happy to hear from people by e-mail, or even just drop me a WhatsApp message and we’ll organise a time to speak.

How is my UK Pension taxed in Italy?

By Gareth Horsfall - Topics: Italy, UK Pensions, UK pensions in Italy
This article is published on: 2nd October 2020

02.10.20

There is nothing like a cold snap to focus the mind and it certainly arrived with a bang this year. In Rome we lost about 20 degrees of temperature in a week. However, I have to confess that I am rather glad that the autumn months are now upon us because the prolonged hot temperatures play havoc with trying to be productive.

In this article, as you will see, there are a number of shorter topics, but ones which I think are relevant for our lives in Italy. During the summer I have been scanning the financial papers and the ‘norme e tributi’ pages of Sole 24 Ore to see what might affect our lives in the future. Fortunately, the Italian government seemed to give us a break this year and I didn’t find much of significant interest. However, a number of other matters have arisen in the last few weeks

UK pensions and tax when living in Italy

Let’s start with one of the more interesting matters that arose during the summer. I was contacted by a client who was enquiring about taking money out of her QROPS pension (a QROPS is a UK pension that has been moved away from the UK but still operates like a UK pension – useful when living abroad!).

I have always advised my clients that any withdrawals from a UK personal pension are taxed at income tax rates in Italy, but over the last few years I have come across a number of clients whose commercialista has been declaring the pension as a ‘previdenza complementare’. This is the Italian equivalent of a UK personal pension. The main reason for choosing this route seemed to be a preferential flat tax rate of 15%. My argument has always been that the 2 structures have fundamentally different characteristics and therefore a UK personal pension should be considered an irrevocable trust, hence withdrawals are subject to income tax. In fact as far back as June 2018 I wrote the following in an article:

I have heard stories from various people over the years that their commercialisti declare their UK pensions as ‘previdenza complementare‘, which loosely translated means complementary pension. However, the definition does not accurately complete the story. The reason for declaring it in this manner is that it is taxed at a preferential tax rate of 15%.

I must admit here that I don’t think is the correct way of declaring income from an overseas pension / retirement plan. The ‘previdenza complementare‘ is a vehicle used in Italy to complement the pension which is offered through Italian social security (INPS). You may argue that this has the same purpose as that of an overseas pension fund. However, this is where the similarities end.

In the case of a UK pension fund your contributions would attract tax relief during the accumulation phase. In the ‘previdenza complementare‘ (PC) the fund is taxable during the accumulation phase. The UK scheme is also not linked to the state scheme in any way and you can withdraw money from age 55 (personal pension) or scheme retirement age (occupational pension). The PC is linked to the Italian state retirement age. Lastly, since the contributions into a UK fund are paid gross into the plan, then the income is instead taxed on the way out, at the normal rates. The Italian PC has a preferential rate of taxation starting at 15% and reducing to 9% depending on how many years you have been contributing to the fund, because it is taxed during the accumulation phase. In short there are some distinct differences which lead me to believe that declaring a pension fund / retirement fund (which is a trust) as a ‘previdenza complementare’ in Italy, is incorrect. If you are in doubt then speak with your commercialista.

In a lot of cases I was informed that the commercialista had contacted the local Agenzia delle Entrate and they had confirmed that this is correct. So, who was I to challenge it? However, I still believed that it was incorrect. Of course, no-one challenged it because it also meant the difference between being paying a 15% flat tax rate on that income or progressive income tax rates starting from 23%.

However, during the summer the client I referred to above contacted her commercialista, who did not accept this definition, but in fact presented an ‘interpello’ issued by the Agenzia delle Entrate (an interpello is basically an ‘opinion’ from the Agenzia delle Entrate on a specific case that is presented to them) from May 2020 regarding a UK personal pension holder.

In the interpello (which you can find HEREthe interesting part starts on page 7) it indicates that a UK personal pension should not be considered a ‘previdenza complementare’, but should actually be subject to progressive tax rates in Italy. This is quite an eye-opener because if this is the case, then it flies against the information gained from various commercialisti.

I should add here that the interpello is merely an indicative judgment in this particular case and is by no means a definitive decision for everyone holding a UK personal pension and resident in Italy. However, the fact that the AdE has gone to the trouble to write this gives us a pretty good idea into their thinking, should they choose to follow it up.

final salary pension review

What to do?
So what should you do if your commercialista has advised you to declare your UK personal pension as a ‘previdenza complementare’ and you are now benefitting from the 15% flat tax rate? I would take the interpello to them and ask their opinion based on the new evidence. Or you may choose to do nothing. Whatever your choice or the advice from the commercialista, we are now a little more enlightened into the thoughts of the Agenzia delle Entrate on this topic.

Brexit
It is worth noting here that Brexit is almost upon us and whatever your opinion as to how the UK will exit, a messy unfriendly exit may bring a few matters to light. In particular, the interpello also states that pension funds which ‘could’ be deemed to qualify are those which conduct business cross border and meet the pension rules of both EU states in which they are operating. I don’t know of a UK personal pension provider that does this anyway, but the mere fact that the UK is in the EU may gloss over some of these finer points. But then, what will happen once the UK leaves the EU?

Which leads nicely on to the next problem that Brits are now facing in Italy.

Bank account closures for UK citizens living in the EU

By now, I am sure you have read the headlines saying that a number of UK banks are contacting or have contacted their customers living in the EU to close down their UK banks accounts, potentially leaving them without a UK account. To date the main culprits are the Lloyds banking group, which includes Halifax and the Royal Bank of Scotland, Coutts and Barclays.

I am afraid to say that the rumours are true and I know of a number of people who have been contacted already.

The culprit, of course, is Brexit…

Avoiding bank charges

These banks have now had to weigh up the benefits of retaining bank account holders in the EU post Brexit, because once they out of the EU market place they will be forced to adhere to individual EU jurisdictional regulations, as well as UK regulations, if they want to continue to service clients in any EU state. Clearly, for a bank which has no intention of developing business in Italy (in our case), nor does it have a sufficiently large client base in Italy already, then they are going to need to look to close down activities in those jurisdictions to ensure they do not fall foul of the regulators.

It is interesting that, in contrast, HSBC Bank has not decided to pull from its EU markets because it has sufficient activities which take place throughout the EU. I have also heard that Nationwide is also not pulling any activities just yet.

For many clients this is going to be a very tough time, as you could lose a bank account in the UK when you may still have bills being paid, or you simply use it when you are in the UK. To make matters worse, because you are no longer a resident in the UK, you can no longer request an account from another UK banking group.

Many of the groups will also offer their international bank account services, of which the majority are based in the Isle of Man. This is not a good idea because the Isle of Man is not in the UK, but is a UK dependant territory and is deemed a fiscal paradise. It is currently on the grey list of ‘could do better’ in global fiscal transparency with the EU. It is anyone’s guess what will happen after the UK leaves the EU, but it is certainly not beyond imagination that the EU will look to impose punitive tax measures for anyone holding accounts in UK offshore jurisdictions. Let’s not forget that it only came off the black list in 2015!

So, without any other options perhaps one of the better solutions is to look at an Italian bank which can provide a GBP account. I have used Fineco for years, and recommend it to many clients. They offer a EUR current account linked to a GBP and USD account and transfers of cash between accounts are made at spot rate, with no fee. It might be a solution, but will be no consolation for losing your UK bank account. Once again, another downside of Brexit for those of us that have chosen to live in the EU.

bank-vault

Why you should never leave more than €100,000 (or currency equivalent) in your bank account

Still on the subject of banking, does the sound of a bad bank sound appealing to you? A bank that is so bad that it can take all the bad from all the other banks and just keep it there and away from us all. It sounds like a great idea in theory.

On the 25th September the EU had a consultation round table event with a number of European bank leaders, asset management groups and government officials to discuss the possibility of creating a European-wide ‘bad bank’ which would take all that bad debt (debt which cannot be paid back for one reason or another) and which is currently sat on the balance sheets of a lot of European banks, particularly Italian ones and other Southern European states. The idea being that this bad debt could be whisked away from the banks, freeing them up from the worry of having to manage this debt and giving them the liberty to start lending once again, supposedly to individuals and businesses which pose a better credit risk and would be more reliable at paying the debt back.

So far so good. I would not argue at this point. It seems like a good idea to help stimulate economies especially after the COVID-19 crisis.

But morally, should we accept this?

This is the argument put forward by a number of EU functionaries who argue that the banks are, once again, getting another bail out at the cost of the taxpayer. You and I.

To remedy this, the ‘Bank recovery and resolution directive’ (BRRD) has proposed that certain parties should also have to meet some of that cost as well as the EU/taxpayer. Those parties have been identified as the shareholders of the bank, holders of the banks bonds and lastly, the one that should interest us all: deposit holders with more than €100,000 or currency equivalent held in any banking group. Does this mean that the EU, to fund the COVID-19 crisis, could make a cash grab on deposit holders with more than €100,000 or currency equivalent in their accounts? At this point it is only a proposal, but I shall be watching this space carefully.

Based on this news, there is probably no better time to look at your financial plans closely, especially if you are holding high levels of cash in any banks around Europe.

NS&I slashes rates!

You might be someone who has been investing in NS&I products in the UK as a diversifier to your other holdings, or maybe just someone who likes to ‘play it safe’ with your money.

National Savings and Investments

National Savings and Investments, NS&I, are backed by the UK government and due to the COVID-19 crisis, the government has now moved to slash rates on all national savings products to the point where you have to ask yourself, ‘are they worth it?’

The rate on the Direct Saver account has been slashed from 1% interest per annum to just 0.15%. Income Bonds, which have for a long time been considered a best buy, have been slashed from 1% interest rate to just 0.01% pa.

Not only that, but the average interest rate on Premium Bonds (with the chance to win the big prize) will fall from 1.4% to just 1% and the amount of prizes issued will be reduced significantly.

If that is not enough, the Bank of England is also toying with the idea of introducing a negative base interest rate. If they apply that to the NS&I products, then you will be effectively paying the government to hold them.

Time to consider alternatives to protect your capital?

Digital Payments

Cashback for cashless transactions

Italy has been desperately trying to find ways for the people to start using digital forms of payment instead of cash so that the economy can become more fiscally transparent and they can raise more tax revenue.

By the end of November we will have confirmation on the new push to drive people towards using digital methods of payments in Italy, even for small transactions, such a buying coffee at the bar. The Italian government has come up with an idea to incentivise the drive to digital forms of payment.

Firstly, from next year the maximum spend on contactless forms of payment will rise from €30 to €50.

In addition, they have dreamt up another seemingly difficult to navigate proposal for a refund of expenses paid by card payments. I will have a go at deciphering it here:

1. You will get a 10% reimbursement on expenses paid up to a maximum spend of €3000 per annum (hence a tax refund of max €300 pa).

2. But, to achieve this you must make a minimum of 50 transactions every 6 months (100 every year) and the €3000 is in fact split into a spend of a maximum of €1500 every 6 months. The idea being that you can’t just go and spend on something costing €1500 every 6 months or a series of high value items to reach the limit.

To receive the refund you will need to register on the app and enter your codice fiscale, and your debit/credit card details.

3. Not only are they offering cash back on transactions but they are discussing a ‘super cashback’ prize of €3000 for the first 100,000 people who reach the maximum number of digital transactions in a year, within the limits provided above.

Certainly food for thought. Watch out for confirmation of these offers sometime before the end of November and then start registering to get your cashback. In theory it should be easy, but based on previous experience of Italian government initiatives I fear it may turn out to be more complicated than first glance.

I hoped you have enjoyed this ‘return to normality’ article. I will be sending out more information in the coming weeks and months to keep you up to speed with the goings on in the financial world and how that might impact our lives in Italy.

If any information from this article has interested you and you would like to get in contact, you can reach me on gareth.horsfall@spectrum-ifa.com or on cell phone 333 649 2356 by call, sms or whatsapp.

Gareth Horsfall ezine