General Principles
Under Italian law:
A taxpayer who is tax resident in Italy for any Italian tax year is, as a general rule, liable to Italian income taxes on worldwide income (including pension income/retirement benefits);
Italy has a wide range of treaties for the avoidance of double taxation (DTA’s). Under these DTA’s the general rule is that retirement benefits are taxed ONLY in the country of tax residence.
However exceptions to the general rule may apply under an applicable DTA, by way of example:
- government service pensions * – retirement benefits to former employees of the State or subdivision by that State where the recipient is not a national of Italy, which are taxed ONLY in the paying country;
- some of Italy’s Treaties (e.g. the DTA with France) provide for taxing rights in the other country, as regards over pensions paid by institutions in the other country, in which case double taxation is avoided by Italy granting a credit for the foreign tax (if the relevant Italian tax is not a substitute flat tax – e.g, the flat tax regime for pensioners).
- retirement benefits paid by “private institutions”, such as life insurance backed pension products and non occupational pensions which may not be classified under Italian tax rules/the DTA as a “pension”;
The position is complex and each individual’s position, and the relevant DTA, if applicable, need to be checked on a case by case basis to determine the correct tax treatment of particular income sources.
* HMRC have published a useful list to help taxpayers identify whether UK source pensions are Government or Non-Government for the purposes of the pensions articles of UK DTAs.
Amount To Be Taxed
Timing – the “Taxable Moment”
If your pension is liable to tax in Italy (which will be the general position absent exemption under a DTA) then you need to follow Italian rules on the timing of a receipt for tax purposes. The general principle under Italian tax rules, applicable to individuals – the rules may be different for business income – income is taxable at the time it is received. As regards retirement benefits this will generally be the day on which payment of the benefit is received.
Pension institutions in some countries countries issue an annual certificate of pension/retirement benefits paid in the course of the year, sometimes showing tax withheld, if any (e.g. form P60 in the UK or 1099 in the U.S).
Receipts in non Euro Currencies
As an Italian tax resident you must report your income in Euros. There then arrives an issue if the retirement benefits are paid in a non Euro currency and translating the original values in foreign currency to Euro. In this case it is necessary, if you want to do things properly, to list the dates of each receipt during the year and the amount, so as to be able to convert non Euro values into Euro at the applicable monthly rate – ideally using Bank of Italy exchange rates – for the month of receipt. And whilst the Tax Agency are unlikely to complain if you simply use an average annual rate and apply it to the total shown in the annual certification issued by your pension provider, doing it properly should not be too onerous. It is actually quite easy of you can download your bank statements directly into Excel or Google Sheets, remove all non relevant transactions living just a list of pension receipts.
Different Tax Year Ends
Where the foreign tax year is different from the Italian tax (calendar) year, a month by month listing of pension receipts becomes necessary in order to report actual amounts received in the Italian tax (calendar) year by reference to amounts shown received in the bank statements. The total of actual receipts can then be reconciled, more or less precisely, to the annual certificates spanning the Italian tax year, to check that the amounts shown per bank statements on a calendar year basis reconcile to the annual certificates issued on the basis of the foreign tax year.
Template Spreadsheet
Click here or on the preview screen below to view a Google Sheet template for this purpose. You download as an Excel file or make a copy in Google Sheets if you want to edit the file.
You can give the completed spreadsheet showing the calculations and reconciliation to the foreign annual certificates along with the annual certificates themselves to whoever is preparing your tax return, so as to have the requisite audit trail in case of enquiry by the Italian Tax Agency. Original bank statements should be kept in case these need to be produced. remember that the Italian Tax Agency have, as a general rules 6 years from the end of the relevant income year to raise an assessment on the tax return, so you should keep supporting documents for at least 6 years.
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