Tax in Italy
Your liability to tax in Italy depends primarily on your 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 by virtue of the tie-breaker
- 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
- Getting registered as resident with your Comune in the first half of a tax year. If you wait until 5 July you may well not be considered Italian tax resident in that tax year. If you register before the end of June in any year you will, absent protection under a double tax treaty (a complex technical issue) be considered tax resident for the whole year – ie. liable to tax on worldwide income received on or after 1 January of that that and liable to wealth tax on assets held in the 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. ;
- Not realising that Italy has a number of special tax regimes which can make the overall tax burden significantly lower than the standard rates. There are low tax regimes for new arrivals in Italy (50% tax break), start-ups (effective rate as low as 4% ) people earning less than Euro 30,000 (soon to be 100,000 if government proposals are approved by Parliament, and a flat tax for high net worth individuals (possibly to be extended soon to pensioners);
- 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) are good bookkeepers and excellent tax compliance managers, but are not good at international tax and cash flow planning;
- Not thinking about pensions, healthcare and social security until it’s too late. The taxation of foreign private pensions in Italy is a seriously grey area. A common mistake is not checking on the tax treatment in advance so that you can take advantage of “blocker” or “converter” structures prior to arrival so that the Italian tax treatment is clear. Italian social security can be expensive and you may not get much benefit if you are in Italy short term or later in your life;
- 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 half the applicable Italian rate) and ensure that income and gains earned abroad are brought into the charge to Italian tax. Your home country may also have similar legislation and consider Italian source income “offshore income”;
- Not thinking about stepping up the base costs of your assets – bed and breakfasting – so that any Italian tax on a future gain is reduced and checking whether you can have a tax-free period in the cross-over period while moving;
- Not thinking about doing a will – 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 a will Italian law will apply to pass assets to your statutory heirs. With a will, you can 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;
- If you are going to be carrying on a business:
- forgetting that there are alternatives to working as a sole trader or self-employed consultant that may improve your tax and social security position;
- not thinking about how you can get an Italian tax deduction for contributions to a personal pension scheme and how to reduce the costs of contributions to an Italian state scheme which might not actually provide you any benefit – especially if you are only going to be here for few years;
- failing to get registered for VAT in time. So no tax deduction/credit for pre-registration expenses;
- taking over existing businesses without appropriate tax and social security (especially for any staff) due diligence;
- not understanding the various regimes for the taxation of rental income;
- paying suppliers off the books;
- Thinking 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;
- 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 – especially if you talk to us before it is too late. Fill out the client sign-up form and request a fee quote.
We work on a fixed fee basis for a pre-Italian residency check-up and report. The fee will depend on the complexity of your case and asset profile.