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
Decree-Law 17 October 2016, no. 189 List of municipalities in seismic zones contained Annex 1, 2 and 2(II)