What does the special tax relief consist of?
A 7% flat tax on all income for all pensioners (regardless of nationality) who:
- have been tax resident outside Italy for at least five (5) years prior to the tax year in which they become Italian tax resident;
- transfer their tax-residence to
- one of the Regions in the South of Italy (Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, Puglia) in a municipality (comune) with a population of fewer than 20,000 inhabitants;
- or to a municipality with fewer than 20,000 inhabitants in defined seismic areas in Marche, Umbria and Lazio;
- have previously been resident for five full tax years in a territory with which Italy has in place arrangements for administrative co-operation (i.e. sharing of tax information, which includes any EU member state and a large number of other countries).
Definition of Pensioner
The definition of pensioner in the legislation and guidelines is rather vague. It appears to include anyone in receipt of a pension (government or private), regardless of age, and regardless of whether the pension income is the principal/prevalent source of income. It is certainly wide enough to encompass all forms of pension, private or public. Given the ease in which private pensions products can be purchased in many countries, and given that all foreign income income (pension or otherwise) will be subject to the flat rate 7% charge), the regime looks very attractive. We are awaiting further guidance from the Italian tax authorities to see to what extent the regime covers private, non-occupational pensions payable to persons who are not in receipt of a state pension.
The pension also needs to be liable to tax in Italy. It is vital to check the terms of the applicable treaty – e.g a double tax treaty or the treaty of the international organisation for which you worked (e.g UN, NATO, EU etc) – as under the terms of the Treaty you may (typically if you worked for government, local authority or an international organisation) be taxable only in the country where your pension provider is based.
The 7% regime applies for ten (it was initially five when the law was introduced) years starting with the year in which the transfer of tax residence is effective. Election for the regime is made in the tax return for that year. This will normally be filed in the year following the first tax year of residence.
Bear in mind that under Italian rules you are either tax resident in any tax period (calendar year) depending on whether you satisfy the requirements for more than six months in any year. So if you transfer your tax residence in the latter half of any year, you will not be able to start on the new regime until the following year. By the same token you should not be liable to Italian tax on non-Italian source income at all for that year of transfer, assuming you do not fall within the definition of Italian tax resident for more than 6 months in that year.
Checking your municipality’s population
A list of applicable local authorities can be extrapolated from the web-site of the Italian statistical service ISTAT, but you should also check directly with the local authority (comune) before moving.
A list of all municipalities in the seismic areas (which also includes municipalities in Umbria, Marche and Lazio, so outside the defined Southern Regions ) can be found here. That list also includes municipalities with more than 20,000 so you will need to check the population with the ISTAT service.
Timing is important as electing the regime must be done in the tax return for the tax year in which the transfer of residence is completed. Since, under Italian tax rules, an individual is generally either resident or not for any tax year, ie. there is no spilt year concept, depending on whether or not the individual is either registered or resident or has their centre of vital interests/habitual abode in Italy for more than half the year, it is important to identify the first tax year in which the regime will start. Failure to make the election in the first year can lead to loss of entitlement altogether. It is also important to ensure, if possible, that you cease to be liable to tax in the country from which you are moving from the first day of the Italian tax year for which you will be resident, since when you are on the regime you cannot generally claim credit for any foreign tax.
The Consequences of Making the Election
- Exemption from income taxes at normal scale rates applicable to pension income and overseas business, employment and rental income;
- Exemption from 26% substitute tax on investment income/dividends and interest from non Italian companies;
- Exemption from declaring foreign assets (no need to compile section RW of the return);
- Exemption from wealth taxes (IVIE and IVAFE) on foreign assets.
The 7% substitute tax means no deductions for tax deductible expenditure or credits (dependents, alimony, energy-saving or real estate refurbishment expenditure etc.)
The regime does not extend to Italian source income on which tax will payable in the normal way ie. subject to marginal rates or applicable other flat-tax rate, such as:
- rental income on Italian property;
- income from employment or self-employment where the activity is carried on from Italian territory;
- deemed land registry income from property in a luxury category or land and buildings generally which are not occupied as the owner’s principal residence property (prima casa);
- pensions paid by the Italian government/Italian based occupational/private pension schemes;
- income from Italian government bonds and from Italian listed companies;
- other investment income paid by an Italian intermediary.
Having Italian source income is no bar to accessing the 7% regime. It just means that you will need to report that income separately and pay tax on it in the normal way. For example you will likely need to register for VAT (and social security) is you are carrying an activity of self-employment from Italy. You are free to make investments in Italian financial investments and products, but, again, you will be liable to tax at normal Italian rates on the relevant income or gains (typically withheld at source by the bank or financial institution).
Foreign Tax on non-Italian source income
Under the special regime, you are not able to claim credit for any foreign tax. It seems to be the view of the Italian tax authorities (although specific clarification would be helpful) that the 7% applies to the gross income received and the not the net amount after deduction or payment of any foreign tax.
To overcome the risk of double taxation, the Italian legislator has granted the possibility of opting out of the regime on a country-by-country basis, selecting all income sourced in a particular country, and electing this to be taxed at normal rates. This you would want to do, if you were liable to tax in that country, and the foreign tax credit covers your Italian tax liability (or gives you an Italian tax liability that is less than 7% of the gross income.)
It should be noted that the exemption from completing Form RW in the tax return and from the payment of IVIE and IVAFE only concerns the jurisdictions included in the option. If you elect to exclude income from a particular country from the 7% substitute tax, then you will need to complete the RW section of the tax return showing opening and year end values for the investments/assets/bank accounts in the country that is excluded from the 7% regime, paying the relevant IVIE and IVAFE.
After the special regime expires
At the end of the flat tax period, absent any extension by the Italian government via new legislation, the taxpayer will go onto the normal regime. This means taxation at ordinary rates/substitute tax on investment income and gains on worldwide income, if still resident.
The flat-tax period can be ended at will by the taxpayer revoking the option. It will also terminate, if they move their residence to another municipality that does not qualify for the relief.
If any of the requirements for the relief ceases to apply during the period for which the special regime applies, then the taxpayer will go onto the normal tax regime for the next tax period.
Foreign Pension Income
Note that if you are resident in or have a pension paid by a government or local authority in another country (and one with which Italy has a double tax treaty) and the pension derives from your job with that government or local authority, then you may not be liable to Italian tax at all on that pension income. In this case you may well be liable to tax on the pension income in the country that pays the pension, and you will not be able to properly elect the 7% regime, if your only pension income derives from government service.
How We Can Help
- Provide an advance report on your resident status and estimate the amount of tax you would be liable to, were you to move to Italy
- Put you in touch with reliable property consultants you can help you manage the property search, acquisition and refurbishment process
- Assist with the legal aspects of purchasing/renting real estate reviewing contracts/purchase deed, acting under power of attorney,
- Advise on structuring the acquisition in the most tax efficient manner – especially where you are going to be using the property as part of business activity, advising on best regime taxwise and focussing on tax deductions for refurbishment and improvement costs.
- Advice on and preparation of wills, planning your succession, managing Italian forced heirship rules, family trusts and optimising inheritance and gift tax.
If you have any questions or would like further information on this regime feel free to contact us
Legislation and Official Guidance
Art 24-ter of the Italian Tax Code
Agenzia delle Entrate provvedimento n. 167878/2019.
Art 24 III of the Italian Tax Code
Decree-Law 17 October 2016, no. 189 List of municipalities in seismic zones contained Annex 1, 2 and 2(II)
Tax Agency Circular 17 July 2020 No 21/E
Legge 30 December 2018, no. 145 (article 1, para. 274)
Interpello Reply no. 616 of 20 September 2021- Application of 7% regime to U.S. US supplementary pension scheme (SEPP)
Interpello Reply no. 244 of 13 April 2021 – 7% regime not applicable to Irish voluntary pension scheme.
Hi my name is Richard , I just retired from State government in the US and have a pension and also will start collecting Social Security benefits. I’m thinking of living in Italy. I read your article on foreign income pension, so if I understood I only have to pay my taxes to the US government and not to the Italian Government. is this correct? Thank You.
Dear Richard. Yes as a general rule the U/S Italy double treaty provides that pensions received for government service are taxable only in the country that pays the pension, even if you are resident in the other state (Italy).
I have similar question. I currently get SSA “Disability” pay that will be converted to regular US SSA Retirement pay in early 2024. From what I’ve read US Social Security Retirement pay is Taxable in Italy at the Standard Rates ? Wondering if there is some sort of exception if the SSA pay is “Disability” Pay.
Hi, My name is Marco. I am currently resident in the UK. Thinking of moving to one of the qualifying comuni this year to take advantage of the 7% tax for pensioners. My concern is that the law applies only up to the end of 2021. and to qualify I will need to move my residence before June the 1st so that I have spent more than 6 months in Italy this year. What happens if I can’t make it so soon (i.e. I move sometime in September )and the new government cancels it?
Where did you see that the law only applies up to the end of 2021? The special 7% regime is enacted into art 24 ter of the Italian Tax Code and there is no mention in the Code of the regime expiring at any time. Yes, we have a new Government (nearly) but I have not read of any intention on their part (and it is anyway a bit early) to bring the regime to an end so soon.
Hi my name is Patrick. I’m currently receiving a private pension in Canada. According to the Italy/Canada tax treaty, if I become a tax resident in Italy, Canada will withhold 15% of that pension. Can I claim a tax credit in Canada for the amount of taxes paid in Italy (7%)? Thank you…great article!
Yes you can take credit for the Canadian tax as long as the income is liable to Italian tax at normal Italian rates
You cannot offset the Canadian tax if you have a special regime such as the special 7% flat tax for pensioners taking up residence in Italy. So the 7% flat tax would be on top of any Canadian tax. If you are on the 7% regime you can opt out for income from from specific countries but this is only likely to be worthwhile if you have income sources and assets in other countries apart from Canada.
The offset of the credit is subject to the general rules on foreign tax credit offsets – e.g. you need to be able to prove that the tax has been “definitively paid” – so no right of refund. The credit for the Canadian tax cannot exceed the relevant Italian tax due on the same income.
PS watch the Canadian exit tax – I don’t think you can claim an Italian tax credit for the exit tax, since the relevant income or gain is not a real income or a gain, and is not liable to Italian tax.
I am in Canada where I have a lot of Bitcoin. I want to move to Italy under the 7% rule. Once I become tax resident, can I cash it out and pay 7%? Also, as per Patrick above, “Canada withholds 15% of my pension???”
Nice question! If you have foreign source (ie. non Italian) pension income If you have foreign source i.e. non Italian pension income and you meet the other conditions for the relief then all of Europe non Italian source income is subject to the 7% .
So the issue in this case is whether a bit cloying is defined as foreign source income or gains or whether it is considered Italian schools.
This is the matter of some debate at the moment. The Italian tax code consider contains the list all what is considered to be Italian source income, but of course since that list was written before the existence of crypto currency, bitcoin is not on the list.
I have seen some comments in the specialist press to the effect that your wallet or private key is held on a computer or USB drive which is physically in Italy, such that the owner can conducted trades directly from the terminal in Italy, there in the relevant income or gains will be considered to have an Italian source, and as such be liable to normal Italian taxes and not the 7%.
On the other hand if you make use of a foreign (non Italian) provider or intermediary then any income or gains will consider to have a foreign source and thus be liable to the 7%.
It’s something I’d need to look at in more detail.
Good evening, I believe I am in a similar situation as Patrick Theniere but with a little twist. My private pension in Canada is a pension I paid into as an employee (police officer) for the City. Does this mean I was a government employee or employee of a local authority? Does this mean I would pay no taxes in Italy if I became a resident of Italy and only pay the 15% Canadian tax? Not clear on the paragraph about “Foreign Pension Income”. I have dual citizenship. Thank you in advance for your response.
When you register as resident you make a declaration, before a public official, that your “residence” (centre of vital interests) and “habitual abode” are at the address contained in that declaration. The penalties for making a false declaration are steep and include the possibility of incarceration. There are many reasons (apart from the 7% tax regime) that motivate people to declare that they are resident in premises which may not represent their real “habitual abode” – ie. the place where they live on permanent and stable basis. Examples include obtaining the benefit of reduced purchase tax when they acquire real estate, exemption or reduction in property ownership taxes, and indeed an attempt to escape service of official documents such as tax assessments and notices. The tax authorities are under a duty to check whether the declared residence corresponds with the real place that a person is living and will typically to this through the issue of questionnaires requesting documented evidence that the taxpayer does indeed live at the address they have declared as their residence. They may therefore ask the taxpayer to produce, for example, copies of utility bills showing that the taxpayer has actually been occupying the property, or bank statements which show expenses made in the neighbourhood. Our smartphones give a very indicator of where we are spending in our time and the tax authorities can obtain the relevant records. The tax authorities are interested primarily in securing the extra due. Bear in mind that at any time there are up to six tax years open to assessment (assuming one has filed an annual tax return, paying the 7%) and the authorities will primarily be seeking payment of the extra tax at scale rates as well as administrative penalties, which often start at something over 100% of unpaid tax which falls due for all open years.
On the other hand the tax authorities have invested a lot of time in seeking showing that people who, although they have purported to shift their residence outside italy in order to evade tax, continue to be de facto resident in Italy by virtue of the fact that that notwithstanding they are living and working abroad, they continue to maintain their “home” in Italy. A long string of e.g. entrepreneurs, wealthy motor sport professionals and opera/pop singers have been deemed to remain tax resident in Italy, notwithstanding their plans to the contrary. It is clear from the numerous court judgments that the concept of residence is where your “home” is – the place to which you intend to return, sooner or later. See this article for more analysis of the very technical concepts of “residence” “domicile” and “habitual abode”.
Ultimately the question depends on your facts and circumstances. If you register as resident in the South, spend most of the time there and rent Airnbnb’s or short terms lets in Florence, Rome then no-one is going to complain. You cannot anyway register as resident in two places. You can elect domicile (an official address for service of documents) at an address in Florence or Rome, but that obviously means signalling to the authorities that you may be spending time away from what they might want to check is your real residence. If you rent a small apartment in the South as a convenience address and live all of the year in Florence, this will most likely not be acceptable to the tax authorities.
You have to remember that the 7% tax regime is a policy of the Italian Government designed to attract pensioners to the Southern Regions of Italy with the expectation that they will live there and contribute to the local economy through the purchase of goods and services. You cannot really complain if the Italy tax authorities take an aggressive approach to perceived abuse of the policy.
I am American but have a UN pension and want to become resident in Italy. So does the US/Italy treaty apply to me and mean that I only pay taxes in the US OR is there some UN treaty that applies to me and states some other arrangement? In addition I heard that Italy does not tax public pensions but only private pensions. Is that correct? If so, is a UN pension public or private? I would assume it is public since it is funded by member states (government). My pension is paid out of New York. Thank you in advance for your expertise on this
We are a married couple of European citizenship. My husband (66yrs) is a pensioner (in receipt of both a state pension & small private pension). I’m his wife (63yrs) & so not yet in receipt of a state pension. However, I am a beneficiary of my husband’s private pension & my entitlement to this private pension is current & will continue for my lifetime, irrespective of my husband. My question is : am I for the purposes of this legislation, deemed to be a pensioner? Or must I wait until I’m 66 & receive a pension in my own name? Thanks in advance!
I recently became an Italian Citizen (Dual US), and I’m looking into moving to the EU, possibly Italy. My main source of income is US Social Security Income, but I can supplement that a little through self-employment (IT work over the internet). My understanding is that US SSA payments (retirement or disability) are taxable in Italy. I was kind of disappointed to hear that since I pay almost nothing on that in the US, but would have to pay substantial tax on that amount in Italy if I did not live in a 7% tax zone, and I would still have to pay the 7% in a 7% zone.
Just wondering if that is correct. Also, as a citizen, would I be eligible to enroll in the health care system there without any additional charges or premiums ?
I’ve looked at some other countries, and Austria and Romania seem like viable options because I think Austria does not tax US SSA (they use it to determine your tax bracket if you have additional income, but the SSA portion is not taxes), and Romania has favorable income tax rates relative to other EU countries. The drawback with another EU country is that I would have to have some sort of health coverage.
I take it that my self-employment income in Italy would be taxed at standard rates in Italy and could be quite high ?
Hi Mosie. In your case you need particular tax planning otherwise you will run into double tax. Italy may want to tax your IRA withdrawals (@7%) but will disallow taking a credit for the USA tax (because of the 7% regime). You thus end up in a double tax position; paying tax in USA AND Italy.
Social security is a different issue since the treaty prescribes that it is not taxable in Italy (but only in the USA). The USA thus retained the full taxation rights on SS income.
There is some planning that I have done for my clients that results in IRA distributions solely be taxable in the USA. So then at least you end up with a ‘single country problem’. The effective rate will depend on whether you are a US citizen (or not) and the amount that you withdraw/convert annually. But we can calculate the sweet spot that will give you the most optimal outcome (=higher net amount).