A summary of the taxes which affect most residents in Italy
The first thing you need to remember, as a fiscally** resident individual of Italy is that you are subject to taxation on your worldwide earned and non-earned income, capital gains and assets (including property). It is your job to make sure that you report these to your commercialista each year to complete your tax return. But before you do it for the first time, a financial planning exercise can come in useful.
** Fiscal residency generally means being registered as a resident at your local comune/municipio.
TAX ON INCOMES
If you are employed or self employed then there are multiple options available, from partita iva, partita iva regime forfettario, rientro di cervello, amongst others. I won’t go into detail here as these really need to be looked at on a case by case basis, but needless to say that there are financial planning opportunities if you are working, or intending to work in Italy. If you have any questions in this area you can contact me on email@example.com
Most of my clients are in, or close to retirement and so understanding how your pension will be taxed as a resident in Italy is of paramount importance.
PRIVATE PENSIONS AND OCCUPATIONAL PENSIONS
If you are in receipt of a pension income and it is being paid from a private pension provider overseas / occupational pension provider or you are in receipt of a state pension / social security, then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the tax paid in the country of origin (assuming that the country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.
I often hear stories of people who are told by their commercialista that their state pension / social security pension is not taxable in Italy. This is absolutely NOT the case. The UK state pension, as an example, is 100% taxable in Italy as is US social security. It is not excluded from the double taxation treaties and therefore must be declared in Italy. Failure to declare could mean fines and penalties.
GOVERNMENT DERIVED PENSIONS
It is a good idea to define what is meant by government paid pensions. The definition according to the Italy/UK double taxation convention1988 is, paid from:
” a political or an administrative subdivision or a local authority”
This generally means civil servants of any kind and foreign office employees but would also include teachers, NHS workers, military personnel, police men and women, fire service etc. In these cases, the pension awarded is taxable only in the state in which it originates, and tax is generally deducted at source in that country of origin.
But there are some tax idiosyncrasies to look out for here. On the positive side, this income is not taken into account when calculating the tax on your other income sources in Italy, e.g. rental income, and it is not declared on your tax declaration in Italy.
On the negative side, for those of you who are thinking of becoming citizens of Italy, these pensions are only taxed in the state of origin UNLESS you become a citizen of Italy and then they are taxable in Italy as well. So for anyone thinking about cittadinanza, plan before you leap!
INVESTMENT INCOME AND CAPITAL GAINS
As of 1st January 2017, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged at a flat tax rate of 26%. Realised capital gains are also taxed at the same rate of 26%.
(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.
1. The income from property overseas.
Overseas net property income (after allowable expenses in the country in which is located) is added to your other income for the year and taxed at your highest marginal rate of income tax.
Where many properties are generating all your income, this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream, pensions, investments and property, to maximise tax planning opportunities and allow you to redirect income from the most tax efficient source at any one time. Relying solely on one type of asset for income in retirement is generally not a good idea.
2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)
A) Value must be defined in this instance. For properties based in the EU, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be significantly more than the cadastral equivalent value.
B) In properties located outside the EU the value for tax purposes is defined as the purchase price or value at time of ownership, where this can be evidenced, otherwise the value of the property is defined as the current market value.
** BREXIT TAX CHANGE** Once the UK leaves the EU the definition of value of the property will change as per the explanations above. This will affect any UK national living in Italy, who owns property in the UK post Brexit, and depending on your circumstances you could find yourself paying more or less in taxation on the property.
DISPOSAL OF UK PROPERTY
If you are thinking about moving to Italy and are looking to dispose of second properties in the UK before the move, then you may be entitled to take advantage of a tax break. If you have owned the UK property for more than 5 full tax years then it is no longer deemed a speculative transaction and you will not be capital gains tax liable, as a resident in Italy, on the disposal.
However, you may also qualify for a tax break in the UK as well, because although non-UK residents are liable to taxation on the disposal of UK property, the purchase price of the property is taken at the point at which the legislation was introduced: 6th April 2015 or later, if applicable. So if you have owned the property for a long time and seen some large capital gains, you could dispose of the property and benefit from a largely reduced tax rate as a result of this cross border financial planning loophole.
TAXES ON ASSETS
1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.
2. Other financial assets
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets, gold holdings, art, classic cars etc or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.
Also, remember that if you have a portfolio of managed assets that are NOT held in a suitably compliant Italian investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia EUR/GBP or USD exchange must be made for each transaction on the correct date.