The two things in life we can’t avoid, death and taxes. If you thought the taxman was on your case back in the UK or US, you ain’t seen nothing yet. Italians ‘enjoy’ countless different types of taxation, levied on a local, regional and national level — everything from income tax to a levy for taking away the trash.
Following you’ll find a whistlestop tour of tax as it applies to living in Italy. A couple of provisos though: this is only a guide and should not be used as the basis for your tax planning. Tax law changes by the year and you must consult a tax professional before making any decisions which may change your status or liability. That professional in Italy is a commercialista, though we strongly advise you to also confer with an accountant or adviser back home.
Taxation is very high in Italy, with Italians handing over up to 45 per cent of their gross income to the authorities. But there is an upside for foreigners here. You have to pay your tax somewhere, but you can elect to be a taxpayer in Italy or at home (we’d obviously advise you to keep your tax affairs at home). By doing so, you’ll enjoy the cheap cost of living in Italy, while sheltering yourself from the usurious tax laws … and you’ll be better off as a result.
You have to steer a little carefully to ensure you don’t become liable to Italian taxation. One of the prime areas is the location of your assets. Don’t transfer all your money into an Italian account as not only are the bank charges high (and Italian banks have a long way to go to match the efficiency and competitiveness of their UK and American counterparts), but you may become liable for Italian tax. Maintain a home (or offshore bank account) and only transfer cash into an Italian account as you need it. After all, with debit and credit cards, electronic and internet banking and the rest, you don’t need a local bank branch these days (you possibly don’t have one anyway).
You must inform your home tax authority in UK or the US whether you are to be resident in Italy or at home, and where you should be assessed for tax purposes; otherwise you risk being taxed in both countries. As an expatriate you may also be able to keep your accounts offshore in tax havens such as Gibraltar or the Channel Islands.
If you elect to pay income tax in Italy, you’ll find it an expensive tax. IRPEF (Imposta sui redetti delle persone fisiche) is a progressive tax and has a low starting threshold, though thanks to the Berlusconi government the top levels are lower than they were. Up to €15000 it’s charged at 23%; €15001 to €29000 at 29%; €29001 to €32600 the rate is 31%; €32601 to €70000 €39%; €70001 and above the rate rises to 45%.
Unusually, IRPEF doesnít just relate to earned incomes or salaries: itís also levied on the presumed value of your house. While we may just about be able to swallow paying Capital Gains Tax on the increase in the value of our houses when we sell them, being taxed on the notional, year-by-year increase is a bit of a shocker.
The rate varies depending on the region and city, and there are allowances for dependent spouses and children. There are also allowances for medical bills, mortgage interest, university fees and life assurance. Tax is charged PAYE and is adjusted the following year. If you are a self-employed worker in Italy, you’ll be partly taxed at source and partly on what you declare … get a commercialista, who will handle your tax affairs for you. You’ll also pay social security contributions of around 10% of your income.
Everybody, whether Italian or foreign, who takes part in financial transactions in the country needs a tax identification number or codice fiscale. You’ll become taxable as residents once you do 183 days work (more than half the year) in Italy. Let’s not deny, it’s a complex system. Tax evasion is traditionally much more common than in the UK or US. At the top levels of ‘supertax’, rates have been historically very high and evasion rife. 83% of the population declare an income of less than €4000pa. And many of us will be confused by the Italian system of tax amnesties and the reporting requirements for foreign investments. Another complication is that your possessions are taxable, not just your income, so for goodness sake don’t move your yacht and Jaguar to Italy, as they may become tax liabilities. Again, call the commercialista.
IRAP is an issue if you are planning to set up a business or work on a self-employed basis in Italy. The smallest companies will pay this, though how much depends on region, and the basic rate is 4.25%. Businesses also need to become familiar with IVA (roughly equating to UK VAT or US sales taxes) and the codice fiscale. IVA (Imposta sul valore aggiunto) rises in stages from 4% to 10% to 20%. Standard rate is 20% for clothes, food is 10%.
Once you own real estate in Italy, youíll become liable for another new tax, ICI (Imposta Comunale sugli Immobili). This is a property tax levied by the comune (the equivalent of your local council in the UK or US) and based on the rateable value (valore catastale) of your house, rather like the Council Tax in the UK. Annoyingly, you canít set up Direct Debits or put a cheque in the post, paying your ICI involves queueing up to pay at the post office twice a year.
There is tax payable on completion of your purchase of real estate, such as Líimposta del registro, you can read more about that in our section on completing the sale. There is also VAT or sales tax to pay if you buy real estate from a builder or a housing association or co-op. This ranges from 4% - 10% depending on whether itís to be your main domicile, whether you already live in the municipality or if itís to be a second home.
There is some good news however. While property values are periodically taxed via IRPEF, there is now no capital gains tax on property (the former INVIM) and there is no wealth tax. Inheritance and gifting of property are sheltered too, with gifts under €80,760 or to close family members shielded from tax. The position on inheritance, with numerous exemptions and a sliding scale of marginal taxation is complex and you should seek expert advice. And again, itís not quite as rosy as it sounds. Though Berlusconiís government conceived the plan as a way of attracting capital back into Italy, your real estate owned in Italy is regarded as being subject to the tax laws of your home country. Again, this is a juncture for consulting the commercialista or your home tax advisor.
The very phrase ‘double taxation’ may send a shiver through your bones. Countries such as the UK and US have double taxation treaties with Italy, to avoid the unfairness of your getting taxed in two countries on the same assets.
UK residents should tell the Inspector of Taxes; they will send you a form P85 to fill in. They will require proof that you are leaving UK jurisdiction before they remove your UK tax liabilities — evidence of having both sold a UK house and bought or rented Italian real estate should do it. If you are planning to work in Italy, then the P45 from your last employer in the UK, plus a proof of employment from an Italian employer should be sufficient to convince them you are no longer their concern. For more details on living and working abroad go to the Inland Revenue website.
Itís different for Americans. The IRS expects you to keep filing tax returns (and paying taxes) each year, unless you elect to become a permanent resident of Italy. America, like Britain, has a double taxation arrangement with Italy. Find more at the IRS website.
Weíve banged on at length about consulting a commercialista or tax advisor at home. Itís vital to get your tax and other financial affairs in order before you move. If nothing else it will force you to take a good look at your finances. You may find that going offshore with your bank accounts or mortgages yields huge benefits, and moving to a foreign country and assuming expat status could be the perfect time to do this. Planning is all. A good audit of your affairs, with a competent professional who can advise you how to best shield your assets from the taxman, could save you thousands of euros and lots of sleepless nights.
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