Introduction
This guide briefly sets out the main issues arising on the short term (<30 days) rental of residential (i.e. non commercial/agricultural) accommodation, located in Italy, to carry on a lettings activity.
This guide does not cover the situation where you are purchasing real estate to run a business. Nor does it necessarily cover the position where you are offering what Italian law considers to be ancillary services which mean that the letting activity is automatically considered a business. Services falling into this definition include meals, changes, during the stay, of bed linen, towels, drinks cabinet/cupboard etc. In these circumstances you need to consider whether you need to register a business or set up a company/partnership type entity, to run the activity. Registering as a business may allow to obtain tax deduction for the amortisation of purchase and restructuring costs, reclaim VAT on such costs, but with a requirement to charge VAT (value added tax) on top of the rent and extra tax compliance and reporting obligations. This article only considers the position for private lettings without any ancillary services on short term lets and describes a series of simplified tax regimes without the requirement to register for VAT.
Taxes Due
We dela with income tax in more detail below. In general there is a requirement to pay Italian income tax on all letting income. Agents and platforms involved with the letting of Italian real estate are generally under obligation to withhold tax on payments to landlords of letting income received from tenants. Tax should generally withheld at the rate of 21% of gross rents. The tax so withheld represents a credit against actual due on income to be reported via an annual income tax return.
Apart from the income tax, if you rent out property you may also need to collect and hand over the tourist tax to the local authority where the property is situated. Some local authorities around Italy (mainly those in the main tourist centres) have instituted a local tourist or occupancy tax. And the list of local authorities instituting such a tax is growing. Airbnb has entered into agreements to manage this on behalf of the landlord with some local authorities.
The onwership of proeprtry where you are not registered as resident will comport the payment of a number of other taxes as described here
This guide does not cover the situation where you are purchasing real estate to run a business. Nor does it necessarily cover the position where you are offering what Italian law considers to be ancillary services which mean that the letting activity is automatically considered a business. Services falling into this definition include meals, changes, during the stay, of bed linen, towels, drinks cabinet/cupboard etc. In these circumstances you need to consider whether you need to register a business or set up a company/partnership type entity, to run the activity. Registering as a business may allow to obtain tax deduction for the amortisation of purchase and restructuring costs, reclaim VAT on such costs, but with a requirement to charge VAT on top of the rent. This article only considers the position for private lettings without any ancillary services on short term lets and describes a series of simplified tax regimes.
And feel free to get in touch via our contact form if you have any questions or sign up for a consultation here.
Local authority consents and permissions
Before considering the tax aspects of renting out Italian real estate it is necessary first to consider the question of notices and permits. Declaring income for tax purposes on real estate that is not compliant with the general legal rules for letting out real estate will only lead to fines and penalties.
Recent years have seen an increase in the requirements for obtaining authorization to rent accommodation as a response to lobbying from hoteliers associations, concerned about unfair competition and the tax authorities concerned about evasion of tax on income and to concerns about residential property in historic city centre being available only for tourists. This presents an extremely moveable legislative background.
Policies are set at municipal (comune), regional and central government levels so there is a series of authorities (sometimes in competition with each other) responsible for regulating the sector, meaning that the authorization process varies around Italy.
The authorization process will involve one or more of the following steps.
Checklist for renting Italian real estate
- Consideration of health and safety regulations and especially safety and security kit and/or works required to the property to enable the rental activity to be legally carried on, and the issue of applicable certification of compliance of e.g. electricity and gas systems;
- Consideration of the rules regarding the characteristics of the property to be let and whether these meet the standards required by applicable local and national legislation, classification of the type of letting;
- Consideration of local authority regulations that may restrict property lettings especially in high density tourist areas;
- Consideration of condominium regulations, if applicable, which may seek to restrict short lettings, access to common parts etc.
- Notice to local authority of commencement of the letting activity and in most cases the registrations of the property on the applicable Italian Region’s web portal, obtaining a CIR (regional Identification code).
- Once the CIR is issued, application can be made for issue of a national identification number (CIN) to be reported on the property and on publicity. The CIN is a legal requirement under national law;
- Organizing signs, plaque at the entrance of the property and-or affixing notices of registration details within the property.
- Registration with the Police Service “Questura”, to effect regular reporting of names and details of all people hosted in the accommodation. This can be done online. via the Police Service “Alloggiati Web” portal.
A significant obstacle at present is the fact that non Italian residents (people not registered as resident with the “Anagrafe” maintained by the local Comune), cannot, unless they are Italian citizens, obtain an Italian Digital ID (CIE, electronic ID card or SPID). This means that people who do not have Digital ID must necessarily find third party service providers, as they are not able to register with many of of the online web portals. The EU is rolling out a programme of EU wide digital ID’s issued by Member States, but progress is slow, and anyway will not impact non EU citizens.
What Tax do I Pay?
Broadly there are three Italian tax regimes for short term rental income. This article only deals with rental income from residential property received in a private capacity, i.e. where you rent residential property on short term holiday lets. The three regimes are the:
- Gross rent flat rate basis (Cedolare secca) – a 21% or 26% flat tax (the default regime);
- Normal income tax (IRPEF) regime – tax is applied at scale rates on 95% of total gross rental income;
- Registering for VAT under the regime forfettario (only for individuals who are tax resident in Italy or who derive at least 75% of total income from Italian sources.
Flat Rate “Cedolare Secca”
Under this regime you pay tax at 26% on the gross rent. No deduction is admitted for expenses – it is a flat rate applied to the rent paid by tenants. No deduction is allowed even for letting platform fees or cleaning and management costs, except to say that we have seen a legal argument being developed that the definition of gross rents should exclude the letting platform fee. that may be an issue for the Italian courts to decide.
The rate is reduced to 21% if you are letting no more than property. If you are letting out different buildings on the same property, it will be necessary to check if this can qualify as a single letting or not, based on the circumstances.
There is a reduced rate for “protected tenancies” i.e. contracts where the tenant has special legal rights under a protected tenancy, and so not usually applicable to short term lettings.
For long term lets (more than 30 days) this applies as an alternative to the normal income tax regime outlined above, whereas it is the default regime for short term lets. For long term lets (more than 30 days), the option needs to be exercised by indication as such in the rental agreement itself.
Standard Income Tax Rates
For individuals who are not letting property as part of business activity, the standard income tax IRPEF regime taxes rent received based on the normal scale rates, after a flat 5% deduction for expenses. So if your rental income received from tenants in the tax year is € 12,000, you pay income tax (IRPEF) on Euro 11,400. Again, no specific deduction is allowed for expenses such as cleaning costs, interest or depreciation of the property, regardless of whether it is let furnished or unfurnished, short term or long term. All you get is the 5% lump-sum deduction.
Opting for the regime however allows the taxpayer to benefit, if they are entitled (and many non resident landlords will not be entitled) from other standard deductions which are not available where the income under the cedolare secca regime is applied.
Registering for VAT under the Regime Forfetario
Income Tax
As an alternative if you are intending to rent out your property on short term lets (e.g. via airbnb or booking.com) you could consider registering for VAT under the 5% or 15% flat tax regime known as the regime forfetario. Under this regime the landlord is subject to a flat rate of tax on 40% of gross income. This regime is only available if you are either tax resident in Italy for any relevant tax year, or your derive more than 75% of total income from the Italian source rentals.
There a number of other conditions to access the “regime forfettario” including staying within the statutory threshold of gross rents received which is currently Euro 85,000 per annum.
Social Security
However landlords who are registered under the regime forfettario are also potentially liable to Italian social security, if rents exceed the relevant thresholds, which would take the total annual bill for tax and social security to at most around 15% of gross rents A reduction may be available for the first five years of operating a new letting activity.
The bulk of the total cost is thus represented by social security contributions – mainly contributions to the Italian state pension scheme. On this regime, you will likely need an accounting and tax compliance service to handle electronic invoicing and other formalities /filings required by the regime. Overall the total cost will usually still be less than the 21% under the flat tax regime.
VAT (Value Added Tax)
Under the Regime although you are registered for VAT, you do not need to add VAT to rents. by the same token you cannot recover the VAT to suppliers.
B&B, rent-a room or vacation home owners belonging to the flat-rate scheme enjoy an additional benefit as they may not be subject to the annual minimum income social security contribution generally applicable to artisans and traders.
For the first year of starting the activity a reduction equal to 35% of the contributions to be paid, may be claimable via an online application form.
Again, under the regime forfettario it is not possible to offset the standard tax credits and deductions, but there is a sizeable lump-sum deduction in place of actual costs.
Some (potentially) useful links
https://www.regione.lombardia.it/wps/portal/istituzionale/HP/DettaglioRedazionale/servizi-e-informazioni/Imprese/Imprese-turistiche/Ricettivita-non-alberghiera/strutture-ricettive-non-alberghiere/strutture-ricettive-non-alberghiere
https://www.flussituristici.servizirl.it/Turismo5/app/
https://alloggiatiweb.poliziadistato.it/PortaleAlloggiati/
Which regime is appropriate/convenient will depend on a number of factors such as:
- the type of property (e.g. residential, commercial or agricultural) and what is exactly is going to be rented
- the number of properties to be rented
- the kind of activity and ancillary services to be offered
- the forecast income
- your other sources of income
- the prospective rent
- costs for purchase and restructuring and VAT on the same
- costs of managing the rental activity and VAT on the same
- tax on purchase if applicable
- the number of staff involved, if any
- whether you are taking advantage of tax relief for restructuring or energy saving works and equipment
- the planning, building, letting and condominium consents available for the kind of activity.
- whether you are tax resident in Italy or not
- whether you will derive more than 75% of total income from the letting activity
- the capital gains tax position on future sale
All of these factors need to be weighed up at the planning stage. It is difficult, if not impossible, to switch from one regime to another. And feel free to get in touch via our contact form if you have any questions.
1 How do I pay the tax?
1.1 Self Assessment & payment
Taxes on rental income are, on the whole, self-assessed in the annual return to be filed before the annual deadline, typically the 30 September of the following tax year. This deadline is often extended due to delays in issuing the forms or software – It was 31 October for 2017 and 2018, 2 December for 2019).
“Self-assessed” means that the taxpayer needs to report the income in his or her annual tax return and pay the tax over to the tax authorities via the Form 24. You can pay the tax at your bank or via your online banking if you have an Italian bank. “International” operators such as N26, Revolut or Transferwise do not, at the time of writing, have this facility.
Tax must be paid (usually – blanket extensions are sometimes given) on or before the 30 June of the year following the year in which the income was received (or was due under the tenancy agreement). At the same time you need to make payment in advance of the current year liability, leading to the “Double whammy” in year 2 of your activities. The advance payment is 95% of the total of the prior year tax. If the amount of the advance payment exceeds 257.52 euros, you can pay the advance in two installments: – First advance payment of 50% by 30 June; – Second advance payment of 50% by 30 November 40%);
Generally it is possible to pay late with a small uplift – the amount of which increases as time goes by. However steep penalties apply for a late payment which is assessed by the Tax Office.
1.2 Withholding Tax
The only exception to general principle that you pay your own tax is for short terms lettings (less than 30 days) made through agencies/web platforms. At the present time this withholding tax has – for the most part Italian agencies who withhold the tax at source, i.e. they deduct the tax from income paid by the tenant before passing on the proceeds net of tax to the landlord or landlady. Airbnb and other international agencies/platforms are, at the time of writing not applying the withholding tax and renters ae paid there proceeds without deduction of tax (except tourist tax).
If your agent/web platform withholding tax at source they will give you a certificate at the end of the year (the CU). At this stage, you do not need to do anything more unless you think that you would be better off.
2 Running it as a business
Purchasing property which you can use in the running of a business activity gives you two principal advantages:-
· You can obtain an income tax deduction for expenditure such as
· Costs of purchase, including taxes and professional fees(probably in terms of depreciation, although is fairly limited and tax relief will be spread over a number of years;
· Refurbishment costs, again possible over a number of years by way of tax depreciation, especially for additions and improvements
· Maintenance and running costs
· Advertising, publicity and directly related entertaining and travel costs
· Agency fees/commissions
· Cleaning costs
· Staff costs
· If you are running a hotel type business you can recover the VAT (value added tax) you pay for the purchase and on the various expenses mentioned in the previous paragraph.
Running has a business has a number of disadvantages though
· Additional administration accounting and tax compliance costs
· If you are running a hotel type VAT registered business you will need to add VAT onto your invoices (usually this means an uplift of 10% on the invoices you deliver).
· If you use a limited liability company there are “società di comodo – dummy company or alternative minimum tax rules that can operate to impose a deemed minimum annual income tax based on the presumed yield of the property if you do not make sufficient income – often a problem in early years. These same rules can operate to deny a carry forward of early losses and VAT credits.
· If the building is used in a business any gain on a future disposal will be liable to tax. Most residential, non business, property held by an individual for more than five years is not liable to tax on sale.
If you intend to purchase property to use in a business then you need to make the decision EARLY. It is in general not possible to backdate a business registration, so if you incur costs before being registered (or before the legal entity you are going to use to trade through is set up and registered) you may not be entitled to tax relief (or VAT credit) for the relative expenditure.
There are a number of ways of structuring a real estate business venture, each with its own tax regime such as:
· Running the business as a sole trader under
· The rules applicable to agricultural undertakings/agriturismi
· Running the business as a bed and breakfast, room rental e.g. affitacamera or pesnione or private lettings business
· Self-employed under the flat rate regime. Under this regime a lump sum deduction (around 20-30%) deduction is given for costs and VAT is not recoverable.
· Self-employed under the normal tax/accounting regime
· Running the business through a company, branch of a foreign company or a trust.
Which regime is appropriate/convenient will depend on a number of factors such as the type of property (agricultural or urban), the kind of business , the number of staff involved, if any, the forecast income and expenditure, the planning and building consents available for the kind of activity.
All of these factors need to be weighed up at the planning stage.
3 Indirect Taxes on rental contracts
A letting agreement, if for a period of more than 30 days, is subject to a registration tax of 2% of the gross rent on initial registration and each annual anniversary after that. Stamp Duty is also payable – 16 euro per each 4 pages of the agreement. No registration tax/stamp duty applies to short-term and holiday lets – the flat rate tax or “cedolare secca” avoids the need to pay the registration tax.