The Italian Tax System
If you are resident in Italy then you are liable to tax on your worldwide income and worldwide gains. You will be a resident in Italy if you have your home there, if you spend more than 183 days a year there or if you are registered at the Office of Records in Italy. Italy has income tax, capital gains tax, inheritance tax and value added tax, however it does not have a wealth tax. The tax year in Italy is the calendar year. If you do become a tax resident of Italy, it is your responsibility to inform the tax authorities; it is not their job to find you.
Tax Rates
The Italian tax rates are progressive from 23 per cent and increase up to a maximum of 43 per cent income tax rate on income over €75,000 (£50,000). Additional regional and municipal taxes can also be levied.
Professional income and business income is subject to a further tax (known as IRAP) at the rate of 4.25 per cent on the net income derived from activities carried out in Italy.
Deductions are available when calculating taxable income (e.g. social security contributions). In addition, certain deductions are available against the calculated tax liability e.g. a limited amount of mortgage interest relief.
Rental Income
If you have rental income from a property in Italy (even if you are not resident there), in calculating the taxable income, 15 per cent of the gross income is deductible in lieu of expenses, and thus the usual progressive income tax rates apply to 85 per cent of the gross income. The gross income can be reduced by 15 per cent for your expenses - they do not have to be detailed.
If you are UK resident, this income is also taxable in the UK, although you may deduct any expenses 'wholly and exclusively' for the purposes of the letting, such as interest on any loan used to acquire or improve the property, agent fees, repairs and maintenance etc. In order to avoid double taxation, any tax paid in Italy can be offset against the UK tax liability on the same income.
Municipality Tax on Real Estate
Similar to the local council tax, Italy imposes a tax on the value of the real estate ranging between 0.4 per cent and 0.7 per cent. The value is the "cadastral value" which is not necessarily the same as the market value.
Capital Gains on Property
If you sell your property within five years of acquisition, then the gain is taxable as if it is income. If you sell it after five years, the gain is exempt.
If you are resident in the UK, the gain will also be taxable in the UK, using UK rules. Any tax payable in Italy can be offset against any UK liability to avoid double taxation.
Professional & Income Business Tax
There is another tax known as IRAP which subjects your trading income to a further tax at 4.25 per cent on the net income relating to activities carried out in Italy.
Inheritance and Gifts Tax
Italy has recently reintroduced inheritance taxes on bequests and lifetime gifts tax, payable at rates of between four per cent and eight per cent, depending on the relationship between the donee and donor.
It now applies at a rate of four per cent on an increasing basis over a threshold of Û1 millon (£680,000) per beneficiary where the beneficiary is a spouse and/or direct descendants. Siblings are entitled to a lower exemption of €100,000 (£68,000), and pay six per cent on any balance.
The rates can be higher if the beneficiary is someone like your sister, and beneficiaries that are not related to the donor, i.e. an unmarried partner or step-child, are not entitled to any allowance and pay tax at a flat rate of eight per cent.
Wealth Tax
There is no wealth tax in Italy.
Investment Income
Investment income on the whole is taxed at a rate of 12.5 per cent.
Trusts
Trusts are not particularly tax efficient in Italy. However, in certain circumstances an Irrevocable Discretionary Trust will be tax efficient.
Succession Law
Italian succession law does not apply to foreign nationals.
See also:
The author, David Franks of Blevins Franks, is a specialist in the expatriate financial sector.
First published in Homes Overseas Magazine May 2007.
Some information contained within this article may have changed since it was first published. Homes Overseas strongly advises you to seek current legal and financial advise from a qualified professional.
