There are a number of options for the purchase of Italian Real Estate. Here we look at the principal alternative options, but there are others. We look at purchasing:
- Personally (as an individual or individuals), or
- Through a limited liability company (either an Italian company or foreign company), or
- Via an Italian entity – the standard here would be a tax-transparent entity (società semplice) which are often used to better organise ongoing management of the property and costs where there are multiple owners
There is no automatic choice. Much will depend on the type of property and if you are going to rent the property or simply occupy it for your own use. Other structures might exist. It might also be advantageous to arrange a “split structure” e.g. purchase as individuals and rent to the company who then carries on a letting or business activity. Corporate structures and ideas like this, can lead to extra cost which needs to be weighed up against savings.
This note is intended as high level establishment of a framework, to assist the initial decision-making and will be refined once we have reviewed your specific circumstances.
The initial point to note is that this type of planning needs to be effected BEFORE you sign anything, especially an irrevocable offer, which is typically proposed by Italian agents. The terms of such an offer typically constitute a binding legal agreement once accepted by the seller and the terms of it may impact your chosen structure. If you are buying to let, then you must check at the very least in advance that there are no restrictions, either under condominium regulations or local planning laws on the carrying on of a rental activity.
Table of Contents
1. Capital Gains Tax on Future Sale
Any capital gain is calculated as the difference between sale price and purchase price, increased by all costs that are “inherent” to the property. This usually means that purchase agent’s fees can be deducted but not selling agent as fees. All costs claimed for deduction must be appropriately documented.
Note that to be deducibtle the relevant costs
Individuals
Capital gains on the sale of Italian real estate are generally taxable in Italy only if the property is sold within five years of purchase (unless it was used as a primary residence “Prima Casa” or if you running a business or selling land purchased for development. After five years, gains are exempt, under current law. If you are resident outside Italy, the tax position in your country of residence needs to be checked. Many countries around the world tax charge tax to their residents on gains from disposal of real estate wherever it is situated and none of Italy’s DTA’s, so far as we aware, grant exclusive taxing rights to Italy as regards real estate disposals.
Limited Liability Company
A foreign company without a permanent establishment (PE or taxable presence) in Italy is subject to Italian tax on capital gains from Italian real estate under domestic law, without the benefit of the five year exemption. Italy ‘s list of DTA’s contain, so far as we are aware, no exceptions to the standard OECD Model Treaty granting exclusive taxing rights to the country of residence. and the Italy–France tax treaty. The company cannot benefit from exemptions available to individuals (e.g. primary residence “prima casa exemptions”. Whether the activities of the company in Italy constitute a PE needs to be reviewed very carefully.
If deemed to have a PE, the foreign company will be subject to Italian corporate income taxes and filing obligations. as well as potentially VAT on rents. Passive ownership and rental of Italian property does not automatically create a PE. However, active management (e.g. local staff, marketing, contracting) or short-term letting with more than basic auxiliary services may trigger PE status.
PE or not, Italy will also seek to bring gains on sales of shares in a real estate rich company (one which has more than 50% of its total asset value deriving from Italian located real estate held as an investment property) in to the charge to Italian tax.
Buying Italian real estate through a limited liability company — whether Italian or foreign — can trigger Italy’s società di comodo (convenience company) rules. These rules are designed to prevent companies from being used as passive holding vehicles with little or no real business activity. A company is considered di comodo (non‑operational) if it does not meet minimum revenue thresholds calculated on the basis of its assets, including real estate. For property‑holding companies, this means that simply owning a residential or commercial property without generating sufficient rental income can cause the company to be classified as non‑operative. The consequences are significant: the company becomes subject to minimum deemed income/alternative minimum tax, higher corporate and regional production tax bases, restrictions on carrying forward tax losses and on accessing VAT credits. The rules apply even to foreign companies owning Italian property if they are they have or are deemed to have a permament establishment in Italy.
Using a company to hold Italian real estate therefore requires careful planning to avoid creating a liability to tax on a future gain, falling into the società di comodo regime, especially where the property is used privately or generates low rental yields.
Società semplice
These are transparent for Italian tax purposes. Gains are taxed in the hands of the members under same 5 year rule as applies to individuals.
2. Rental Income – Taxation and Treaty Relief
Individuals
Rental income from short-term letting is taxable in Italy. The “cedolare secca” regime may apply (flat 21% tax on gross rents, no deductions for a single property rising to 26% where multiple properties are let). Alternative regime maybe available, and permit deduction for running and maintenance costs, but this generally requires registration for VAT, and hence, in particular, the requirement to add 10% VAT to rents. See this article for more information on renting Italian real estate as an individual.
Limited Liability Company
Rental income is taxable in Italy. Gross rents after allowable deductions are subject to corporate income tax at a 24% rate. IRAP, regional production tax ,will not apply unless the company is running or deemed to be running a business using the property. A foreign company may claim a foreign tax credit in its country of residence under the treaty, but administrative complexity increases. French tax treatment of foreign rental income in a company structure may be less favourable than personal ownership (depends on costs)
Società semplice
Income flows through to members. Italian tax applies, with potential credit in France depending on member’s status. Will require filing of four separate Italian income tax returns, involving possibly some extra expense compared to the Sarl. The cedolare secco regime is not permitted for individuals who are members of società semplice, with the result that tax will be charged at scale rates.
3. Purchase Tax – Prima Casa Benefits
Individuals
Purchasing as an individual may allow you to benefit from reduced registration tax – 2% instead of 9% for residential property which will be occupied as a main residence and where you register as resident with the Anagrafe at the property. The tax base is a multiple of deemed land registry yield, which is often lower than the purchase price.
The prima casa reduction will likely require transfer of tax residence to Italy, with serious potential consequences in terms of income tax on worldwide income and wealth tax on worldwide assets.
There is also a prima casa reduction in purchase VAT due – e.g. where you are purchase in a new build or restructured property from a business.
Company
Not eligible for “prima casa” benefits. Standard rates apply.
Società semplice
Also not eligible for “prima casa” benefits.
5. VAT Considerations
Rental Income: Short-term rental of a single apartment is only subject to VAT if provided with ancillary services beyond the standard minimum (e.g. wifi, aircon and bed linen). Long-term residential leases are typically VAT-exempt, with no right of recovery of input VAT.
VAT Recovery: An individuals registered for VAT carrying on a fully VATable business may be able to to recover Italian VAT on property purchase (if applicable) or renovation costs if registered for VAT in Italy and conducting taxable rental activity.
6. Practical Aspects
Notarial Process
All purchases/transfers of a legal right to Italian real estate require a public deed executed before an Italian notary.
Prior to completion (and indeed prior to any preliminary contract), a purchaser will need to obtain an Italian fiscal code number.
What can seem a fairly complex process where individuals are purchased is further complicated where a company is the purchaser.
An individual purchaser can make the purchase in question, possibly assisted by an interpreter or translator, as the notary needs to ensure that an individual signing a deed of purchase understands the meaning of what they are signing.
A power of attorney with authenticated signature certified by a notary in the country of residence (and possibly apostille) can be produced for any individual not attending the signing of documents before the Italian notary.
For a corporate purchaser the following typically will be required:
- Italian fiscal code numbers for directors and the company itself
- Anti money laundering as required by the Italian notary – usually a form of self certification to the effect that the funds being used derive from a legitimate source
- Certified translations of company incorporation documents and by-laws/statutes
- Certified translations
- Certified copy of minutes of board approving the real estate acquisition and possibly delegating power to an individual director or group of directors to execute the necessary documentation
- Powers of attorney
- Extracts from the foreign business registry extracts
- Certification from a notary in the country of orgin of the company, to the effect that the company is in good standing and that any individual representing the company is authorised so to do.
Italian Tax Reporting:
Individuals: Annual Italian tax return to report official land registry yield for days not let out, and rents on days in which the property is rented.
Company: Will require an annual tax return Italian tax filings. If teh company has a PE or deemed to have a PE it must register with Business Registry and will need to comply with, more or less the standard Italian accounting, e-invoicing, accounts preparation and filing obligations as well as VAT registration, filings and payment rules.
Società semplice: Requires limited Italian filings and member-level tax reporting.