Tax in Italy
Your liability to tax in Italy depends primarily (but not, by any means, only) on your tax residence status. If you are tax resident (read this article for an explanation of what this means) in Italy in any year – and you are either tax resident for a particular tax (calendar year) or you are not – then you are liable to tax on your worldwide income in that year. You must also report your assets worldwide and pay any IVIE or IVAFE (wealth tax) on them.
Italy has a wide network of international double tax and social security treaties. EU legislation can also ease the cross border pain. These can operate to:-
- make you tax resident in your home country in certain limited and specific circumstances, by virtue of the tie-breaker clause, even if you are tax resident in Italy
- make your pension for government service (civil servant, police, fire service army etc.) exempt from Italian tax (and taxable only in your home country)
- exempt you from tax on certain types of income (e.g. teaching, aviation/maritime services, short term employment in Italy)
- exempt you from Italian social security contributions
- ensure you do not pay tax twice either by exempting the income in one country or giving credit for any tax paid in the other jurisdiction.
The analysis of any particular situation is intricate and depends on a whole series of variables – nationality, time spent in a home, type of income, source of income etc. There is no “one size fits all” solution in the cross border tax world Sorry.
Top Ten mistakes
Table of Contents
Timing The Move
Not identifying and planning the timing of a transfer of residence to Italy, can give rise to significant headaches. A move to Italy in the first half of a year, due to the the way 183 day Italian test of tax residence works, means that you considered as tax resident in Italy for the whole year. This in turn means that income earned aboard starting from 1 January of that year, is liable to Italian tax, possibly with offset for any foreign tax paid). If you register as resident with your Comune in the first 183 days of tax year, you are presumed to be tax resident in Italy for the whole of that year. By the same token, you need to cancel your registration as resident before 30 June in any year, if you are leaving Italy, such that you are not considered tax resident for the whole year.
Ideally as a general rule you should be timing a move to or from Italy as near as possible to a calendar year end in order to reduce tax complexity. That complexity may anyway present itself where you are moving from a jurisdiction that has a non calendar tax year extra care is required here.
Liability for Italian tax For Non Residents
Thinking that you are automatically not liable to Italian on income simply because you are not tax resident in any tax year is mistake. Non residents are usually still liable to Italian tax on Italian source income. The technical definition of what constitutes Italian source income includes
- earned income (income from employment or self-employment ) where the services are being performed from Italian soil;
- rental income from real estate situated in Italy;
- income from investments in an Italian company or government/corporate bonds and other kinds of financial income deriving from investments made via an Italian intermediary;
- royalties paid by an Italian entity.
Italy’s double tax treaties may override the position, but accessing treaty benefits needs to be checked, case by case.
Special Tax Regimes
Not realising that Italy has a number of special tax regimes which can make the overall tax burden significantly lower than it would be under standard rates. However it should not be assumed that these regimes will apply automatically. All of the these have stringent conditions for their application and significant penalties can apply if any of the regimes are utilised incorrectly. Electing a special regime obviously increases the possibility of Tax Agency enquiry or audit. These regimes are for example specific low tax regimes for new arrivals in Italy e.g.
- a 50%/60% tax break one earned income under the Impatriates Regime;
- a more substantial tax break for University Professors and Research Workers,
- self employed start-ups (effective rate below 5%) applicable to the self employed with gross income below Euro 85,000 a year;
- flat tax regimes for high net worth individuals and pensioners in the South of Italy and mid- Italy earthquake affected zones.
International Tax Advice
Not taking appropriate international tax advice from an experienced professional in cross border tax issues ahead of the move. Many Italian accountants and CAFS (centri di assistenza fiscale – tax support centres) providing excellent tax filing and compliance support, but are not good at international tax planning.
Pensions and Welfare
Not thinking about pensions, healthcare and social security until it’s too late. The taxation of foreign pension arrangements in Italy can touch on some seriously grey areas.
Italian Social Security
Italian social security can be expensive and the rules for calculating both contributions and pension entitlement especially for geographically mobile works is complex. The social security contributions due on income from employment or self employment need to be reviewed in advance, as the cost may outweigh the tax savings deriving from one of the special regimes.
Investment Income
A common mistake is not checking in advance the Italian tax treatment of investment income and gains in advance, or consider if you can take advantage of “structured financial investment products (“envelopes or wrappers) ” to defer tax on income and simplify tax reporting. Preparing a tax return containing an extensive portfolio of non Italian assets, managed by intermediaries outside Italy, is a seriously time consuming affair. Italy does not willingly grant credit for at source withholding tax on dividends and some kinds of foreign investments funds. The rules on the offset of capital gains and losses are complex.
Anti Tax Avoidance rules
Not realising that Italy has sophisticated anti tax avoidance rules to tax income arising in “low tax jurisdictions” (not just tax havens but anywhere that has a rate of tax which is less than a certain percentage of the applicable Italian rate). Apart from legislation targeted at tax havens there are rules which allow tax to be charged on the profits of any non-Italian company and other entities which are owned/controlled/managed by an Italian tax resident. There are rules that will subject the profits of non-Italian companies which are (deemed to be) carrying on business from Italian territory by virtue of the presence of staff on Italian soil. These are designed to ensure that profits earned abroad are brought into the charge to Italian tax.
Inheritance and Gift Taxes
Not thinking about succession – if you die with property in more than one jurisdiction, the transfer of assets into the names of your loved ones can be difficult – a field day for grasping banks, lawyers and taxmen. Without proper succession planning Italian law may apply to pass assets to your statutory heirs (i.e. the “legitimate” heirs. With a will, you may be able to choose who your estate goes to and the administration of that estate is simplified. Drawing it up allows you to consider inheritance tax and capital gains so as to take mitigating action.
But because the forced succession rules are going to apply automatically in many cases, making a will may not be any of guarantee of a certain position on death. There are other techniques commonly used to ensure an unruffled passage of assets on death.
Business Activities
If you are going to be carrying on a business:
The number one mistake is not realising, that if you are carrying on a business from Italian soil you need to register with the Tax agency, as you start. Generally Italian law grants 30 days from the date of commencement of a business activity from Italian soil, to apply for a VAT number. Penalties apply, not just to late registration in itself, but also to late compliance with the general obligations, such as the issuance of electronic invoicing.
No tax deduction/credit is generally for pre-registration expenses.
Specific rules apply in terms of (electronic) invoicing and filing to follow due process for costs can mean that you will not be able to claim deduction or VAT credit for qualfying business costs.
Tax compliance for any business in Italy starts from the day you start he business.
Many seem to think that it is fine to carry on a business from a non-Italian company from your home or office in Italy and that you won’t be liable to Italian tax on the income.
Keeping Up to Date with Taxes
Not keeping up to date with Italian taxes and social security and not respecting tax filing deadlines or ignoring communications from the authorities. Penalties for late payment in Italy can be harsh. It is a criminal offence to fail to file a tax return. If you are late with a payment or a filing, you can usually make a late payment or filing with reduced penalties. If you wait for the assessment from the authorities the penalties will be unpleasant.
We Can Help
We can help – especially if you talk to us before it is too late. Fill out the contact form and request a fee quote.
We can work on a pre-Italian residency and tax check-up and report. The fee will depend on the complexity of your case and asset profile.
I am coming to Italy to become a citizen in the city of my parents birth. It is not a flat tax city. I will become a resident in that city. After having my citizenship recognized can I then relocate to a flat tax city? I was told that I should go to a Commune in a flat tax city because once you establish residency in a non flat tax city you lose that privilege. Is this true?