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, even if the payer of the pension/benefits is not an Italian resident institution);
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 payable 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 *. Exclusive taxing rights, including as regards retirement benefits relating to government service are reserved to Italy in many of her DTA’s where the recipient is a national of Italy (and sometimes not a national of the other country);
- pensions paid to former employees of certain international institutions where a treaty between Italy and that institution or its founders provides for taxation only in the country of the pension payer;
- some of Italy’s Treaties (e.g. the DTA’s with Canada, Finland, France, Germany, Luxembourg and Sweden), provide for taxing rights in the other country, as regards pensions paid by institutions in the other country, in which case double taxation is avoided by Italy granting a credit for the foreign tax. Credit on the whole will only be due if the relevant Italian tax due 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 at under Italian tax rules/the DTA as a “pension” and considered miscellaneous income, generally taxable only in the country of tax residence ;
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.
It is important to note that the view of the Italian Tax Agency is that a pension paid under the social security legislation of a treaty partner state is always taxable in Italy even if the pensioner worked in government service while contributions were made to the state social security scheme. This concept is enshrined, for example Italy’s treaty with the U.S. which treats U.S. SSA benefits separately from other kinds of retirement benefits, stating that they are liable to tax only tax only in the country of residence. That means Italy will be entitled to tax US SSA retirement benefits.
Also note that despite the wording “ONLY” in Italy’s DTA with the U.S. Treaty in the pensions clause (art 18), the U.S. may feel entitled to tax the same income under the “saving” clause” in Article 1 (General Scope), under which the United States reserves a right overall to tax their own citizens “as if this Convention had not come into effect”. Due to the saving clause, a U.S. citizen who is a tax resident of Italy and receives U.S. source pension payments will be subject to U.S. tax, notwithstanding the language in Article 18. If income is taxed in both countries the U.S. should offer a foreign tax credit such that the Italian tax paid on the same income reduces or offset the U.S. tax due.
* HMRC have published a useful list to help taxpayers identify whether UK source pension schemes are Government or Non-Government for the purposes of the pensions articles of UK DTAs.
Applying the Rules – A Step-by-Step Guide
First Steps
Given the complexity and the wide range of differing terms across Italy’s Double Taxation Agreements (DTAs), it is impossible to find a “one-size-fits-all” answer. The correct approach must determine your fiscal position by following these steps, in order:
Determine Nationality(ies): What country or countries are you a national of?
Analyze Income Sources: You require a full, source-by-source listing of your income, specifically detailing the type of retirement benefit plan in each case.
It is crucial to note that if any payments consist of other, non pension type, benefits (e.g., disability or invalidity benefits), separate rules may apply.
Generally, the type of pension scheme is the key factor that determines if the income from that scheme qualifies for exemption from Italian tax under the government service rules (Article 19).
Establish Italian Statutory Residence: Are you a tax resident of Italy as defined under Italy’s statutory residence test?
Remember
- that the Italian test is an “all in, all out” test for any given calendar year: you are ,generally, either an Italian tax resident for any particular year or you are not.
- If you are not an Italian tax resident for the tax year, it is highly unlikely that you are liable to Italian tax at all on foreign-source pension income.
Special Complexity Check (Dual Residence)
Check for Dual Residence and the Tie-Breaker Clause: If you are an Italian tax resident under Italian domestic law and a tax resident elsewhere under another country’s domestic law (a dual resident), you must check the relevant DTA’s tie-breaker clause.
- Applying this clause determines your single treaty country of residence. You must confirm you are entitled to access treaty benefits, requiring an analysis of domestic rules and the specific terms of the treaty.
- Crucial Financial Warning: Before pursuing this course of action, you need to weigh the potential tax savings against the potentially considerable legal and accounting costs of establishing a non-resident position under a DTA. Defending a challenge from the Italian Tax Agency (Agenzia delle Entrate) on the grounds that your claimed non-residence contradicts a formal declaration of Italian residency (e.g., an application to the Anagrafe) can be costly and time-consuming.
Taxation in Italy (If Tax Resident)
Determine Taxing Rights (If Resident in Italy): If you are an Italian tax resident for the year, the next step is to review your pension income and determine which country has the right to tax the income under the DTA.
- It may be that both countries have taxing rights, in which case you must ensure that a credit for the Italian tax is provided by the source country to avoid double taxation.
- You must also consider the extra administrative complexities if the foreign jurisdiction works with a currency other than the Euro and has a different tax year-end from Italy.
Analyze Foreign Tax Credit and Refunds:
- If your pension income is taxed at source by the country that pays the pension, you need to consider whether Italy will grant a tax credit for the foreign tax paid. You must understand the documentary requirements to support this credit claim and ensure all supporting documents are available when you file your Italian tax return.
- Important Note: Italy will not grant a foreign tax credit where the DTA stipulates that the pension income is taxable ONLY in Italy (exclusive taxing right). If the foreign tax was improperly withheld, you will need to file a refund claim in the foreign country, respecting any applicable limitation periods.
Determine Italian Tax Basis: Once it is established that the pension income is taxable in Italy, a final decision must be made on how that income is treated for tax purposes. This step may have a large financial impact:
Option A (The Standard Rate): Is the pension income defined as “pension” income, assimilated to employment income? This means it is liable to tax at scale rates (23% to around 47% including regional and municipal supplements).
Option B (Potentially a Lower Rate and reduced taxable base): Or is the plan structured so it can be treated as investment income? In this case, only the growth element or capital gain within the fund is liable to tax, often at a lower, fixed rate.
Establishing the latter is highly complex. The fact that contributions or investments made into the plan were not eligible for a tax deduction under foreign law may not, on its own, be a determining criterion under Italian rules.
This is an area where specialist tax advice is crucial to check if it is possible to avoid falling into a higher tax bracket and increased taxable base.
Advance Planning
- People with complex pension arrangements should considera the position and especially:withdrawal of funds held in pension schemes where these can be taken out tax free in the original country under that country’s tax legislation (e.g Roth IRA’s, 25% tax free lump sums in the UK, non-taxable Super etc.)
- tax deferral or exemption products that work under Italian rules with a clear, no grey area tax treatment.
IVAFE – wealth tax
See this article for more information
Making sense of the position
For pensionsers coming to live in Italy the position as to where and how retiral benefits are taxed can be extremely complex and if decisions are left to be taken shorty before tax filings are being prepared, a hard pressed tax return preparer will struggle to identify the correct treatment. this should be done ahead of a move, leaving time to ask the authorities for confirmation, if considered necessary, and establish exemption from tax in one of the two states ahead of time. This approach also gives time to carry out any restructure pension and investments ahead of the move to simplify the position and reduce scope for grey areas.
The following examples are based on our experience over the years but ultimately reflect our own view of how retirement benefits should be reported. Our view in any particular case, as set out in the examples may not be shared by the tax authorities.
Scenario: John retires to Italy. He is a British national and tax resident of Italy, receiving a Teacher’s Pension, drawdowns from a SIPP (Self-Invested Personal Pension), and a Retirement Savings Plan handled via an Independent Financial Adviser (IFA) in the UK.
Summary under the Italy-UK DTA:
- UK Teachers’ Pension: This is classified by HMRC as a “government service” pension under DTA Article 19 (2) of the DTA (cf. HMRC manual). As John is a UK national (the paying state) but an Italian resident, and is not a national of Italy, the pension is taxable ONLY in the UK. Italy must exempt this income. John should report the income via a UK self assessment return.
- SIPP: This should be classified as a private pensions under DTA Article 18 (or its equivalent). As such drawdowns are taxable ONLY in Italy (the state of residence), regardless of the work performed while contributions were being made. John must declare the gross income in Italy and is exempt from UK tax.. He should apply to HMRC for a tax code which authorises his SIPP provider to make payment gross or reclaim any UK tax paid
- Retirement Savings Plan: the Italian Tax Authorities may view this as a savings or investment plan, rather than a pension scheme (although this m might depend on certain features of the scheme), and see the relative income as miscellaneous income under art 21 of the Treaty. As such returns of original capital invested should not be liable to tax, but income and gains are liable to Italian tax.
Key Takeaway: Retirees to Italy often have several streams of income potentially taxable in opposite countries, based on whether the pension source is the State and the pension relates to service to the UK government (taxed in UK) or Private (taxed in Italy).
. apply for an NT (No Tax) code in the UK to receive it gross and avoid the hassle of claiming a refund from the UK.
Scenario: Johannes retires to Italy. He is a Finnish national and resident of Italy, receiving a Finnish State Pension (for services to the Finnish government).
Summary under the Italy-Finland DTA (Article 19):
- Finnish State Pension: This is a government service pension. The DTA typically states that a government pension is taxable ONLY in the paying State (Finland).
- Nationality Exception: However, the DTA (Article 19, Par. 2(b)) has an exception: if the recipient is a resident of the other state (Italy) AND a national of that other state (Italian), then it is taxable only in the state of residence (Italy).
- Johannes’s Case: Since Johannes is a Finnish national residing in Italy, he does NOT meet the Italian nationality requirement for the exception. Therefore, the pension remains taxable ONLY in Finland. Italy must exempt this income.
Key Takeaway: For government pensions, the **nationality** of the recipient is often the single most important factor determining the exclusive taxing right, according to DTA Article 19.
Scenario: Joe retires to Italy. He is a US citizen and an Italian resident, receiving US Social Security Administration (SSA) income, withdrawals from a 401k/IRA, and distributions from a Roth IRA.
Summary under the Italy-US DTA (Articles 18 & 19):
- US Social Security (SSA): Under the Italy-US DTA (Article 18, Par. 2), US Social Security benefits are taxable ONLY in the US. Italy must exempt this income.
- 401k / IRA: These are generally treated as private pensions. The DTA allows Italy (the country of residence) to tax these. However, because Joe is a **US Citizen** (and the US reserves the right to tax its citizens globally via the **Saving Clause**), the income is taxable **BOTH in the US (source) and in Italy (residence)**. Joe must claim a **foreign tax credit** in the US on his US tax return to mitigate the double taxation.
- Roth IRA: The Italian treatment of Roth IRAs is complex and uncertain. Italy has historically treated the fund’s **investment income** as taxable, even though the final distributions are tax-free in the US. However, due to recent US regulations, many practitioners argue the Roth IRA should be fully exempt in Italy under the DTA. This requires specialist advice and is a high-risk area.
Key Takeaway: For US citizens, the US Savings Clause can lead to **dual taxation (taxable in both)** for private pensions, requiring the use of the Foreign Tax Credit.
Scenario: Jean moves to Italy. She is a French national and an Italian resident, receiving a French State Pension and a **CARDIF Supplemental Pension** (a private scheme).
Summary under the Italy-France DTA:
- French State Pension (Public Service): Generally taxable ONLY in France, unless Jean is an Italian national. Assuming Jean is a French national, it’s taxed exclusively in France.
- Private Pensions (including Supplemental Pension): These are generally taxable ONLY in Italy (state of residence).
- Social Security Exception (Key Difference): The Italy-France DTA has an **Amicable Agreement** (Accordo Amichevole) that specifically defines which pensions paid under **’social security’ legislation** are taxable **in BOTH States**. This can include certain mandatory private pensions or state pensions not tied to public service. Therefore, certain French private pensions (or specific elements of the state pension) may be subject to **taxation in BOTH France and Italy**, with Italy granting a foreign tax credit.
Key Takeaway: The specific **Amicable Agreements** that supplement some DTAs (like with France) are essential for determining if a private pension is subject to the rare and complex **taxable in both** rule.
Scenario: Johnny retires to Italy. He is an Australian national and an Italian resident, receiving an Australian Superannuation Plan, part of which is taxable in Australia and part of which is exempt from Australian tax (Undeducted Purchase Price/UPP).
Summary under the Italy-Australia DTA:
- All Pensions (Public and Private): The Italy-Australia DTA (Article 18) provides for a clean rule: all pensions (including superannuation and state pensions) are taxable **ONLY in the State of Residence** (Italy). This is one of the more favorable DTAs for incoming retirees. Australia must exempt the income.
- Tax Basis (The Catch): The crucial complexity here is how Italy taxes the Australian Super. In Australia, the portion of a pension attributable to the **Undeducted Purchase Price (UPP)** is exempt from Australian tax. When this income is declared in Italy, the Italian tax authority generally taxes the **entire gross amount**, as it does not recognize the UPP exemption mechanism.
Key Takeaway: Even when the DTA gives Italy the exclusive right to tax, the **tax basis calculation** (Step 7 in the guide) can result in a higher tax bill in Italy than the retiree was used to in the source country (e.g., losing the benefit of the UPP exclusion).
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 or other international agreement) 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. If the benefit is received in a non Euro currency it needs to be converted into Euro at the appropriate monthly average rate per Bank of Italy exchange rates.
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, by listing 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 use a different average annual rate and apply it to the total shown in the annual certification issued by your pension provider in a consistent manner, 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.