This month sees a new post from Gareth Horsfall of the Spectrum IFA Group, where he provides his clients with an in depth understanding of the cross over between local and International tax planning structures.
Over to Gareth:
This month I would like to clarify information surrounding the latest taxes on foreign held assets for Italian residents. I thought that the expat community had received this message, loud and clear, but from my many meetings with expats it is becoming clear there is a lot of confusion as to what one should pay in relation to the taxes specifically on overseas property and assets. (I think most people are aware of IMU on Italian property by now, so I will refrain from covering that ground). So here goes with a very light and interesting read!
Who has to report/pay the taxes being imposed?
Anyone who is tax resident in Italy and who has a house and/or financial assets overseas. You are included if in 2011 you were either signed up as resident with your Comune OR living in Italy for more than 180 days, OR the centre of your business and domestic activities was Italy (in other words, you earned income in Italy and/or your family lived here).
Imposta sul valore degli immobili situati all’estero.
Tax on the value of property situated abroad has just been introduced.
Unfortunately for everyone clarifications are still awaited from the government and/or the tax authorities, especially with regard to the base imponibile (taxable value) to be used. But we do know some things for sure, as follows:
This tax on overseas property is being charged on real estate held abroad by people who are tax-resident in Italy (whatever their nationality).
The charge on real estate is set at 0.76%. Any taxes paid in the country in which the real estate is located can be deducted and if the net total is less than 200 euro, the tax does not have to be paid
Of course, this would not be Italy if it were simple. A problem has been the taxable value of the property held overseas on which the tax would be calculated. Originally it was to be based on purchase cost (if evidenced) or fair market value. Of course this throws up lots of problems and so has now been revised.
It has been revised to the taxable value of real estate held in any country belonging to the EEA (European Economic Area: i.e. the EU + Iceland, Liechtenstein and Norway) is the one used for property tax purposes or for property transfers in that country i.e the land registry value. (the valore catastale in Italy). We await full confirmation that this will be retroactively applied to 2011.
For property situated outside the EEA, the two alternatives mentioned above – purchase cost or market value – remain, with all the problems that might come with it.
However, uncertainty remains over the overseas property taxes that can be deducted. Each country has its own logic: it could be a wealth tax (France), a council tax (UK), but clarification is still being awaited. Mortgage interest cannot be deducted.
What is the taxable value?
And just when you thought that they couldn’t think of anymore taxes we now have:
Tax on foreign financial investments (not real estate)
It is the foreign equivalent of the tax on financial investments in Italy.
This tax is due on all sorts of financial investments (stocks and shares) including those held in pension funds. You will have to gather information and give it to your tax advisor. This information will essentially be fund and/or portfolio valuations at 31 December 2011.
The tax will be charged in 2011 and 2012 at a rate of 0.10% (that’s tax of €200 on investments of €200,000), but the rate will rise in 2013 to 0.15% (€300 on investments of €200,000). Current and deposit accounts in EU/EEA countries will be charged a flat €34.20.
You will also need to provide information on movements to and from abroad on these investments and/or other funds/bank accounts.
What are the risks for expats?
1. Failure to report foreign-held assets and significant financial movements between Italy and abroad is in itself an offence. If you’ve never done it, that’s several times you haven’t complied. The fines for non-compliance are steep: from 10-50% of the amount not reported and even confiscation of the funds concerned. (This is unlikely to happen unless your name starts ‘Don’…………..but worth taking into consideration)
2. If you comply, what might have normally gone unnoticed suddenly becomes visible.
3. However, if you decide not to report information on your foreign held assets, and then you are discovered you can expect that the taxman’s fury will not go unnoticed. Severe penalties and fines will be imposed, maybe by a factor of 10.
4. And the last risk is that unreported funds might in the future be difficult to bring into the country (this might be your main supplementary income plan or pension) and you cannot justify where it came from. Since 2009 any undeclared funds held in offshore tax havens (Jersey, Guernsey, Isle of Man and the rest) are assumed to be derived from deliberate tax evasion. And the Italian system being the way it is, the fines come first and the proof of innocence follows.
What might have been acceptable, perfectly legal or at worst overlooked in the past, is now becoming very serious. There won’t be any special treatment for expats.
The Italian government has significantly reduced the amount of money for local Comuni around the country in an effort to alleviate public finances. However, to reenergise the Comuni into self preservation mode they have decreed that 100% of any fines/penalties/and back taxes discovered as a result of tax evasion/failure to report can be retained at a local level for 3 years. So if you thought it was Big Brother that was watching, you might be in for a shock. The enemy is now in your community !
And on that happy note, I will leave you with a joke:
What’s the difference between a taxidermist and a tax collector?
The taxidermist only takes the skin.
The views expressed here are those of Gareth Horsfall. They are not necessarily shared by Italian Reflections, the Spectrum IFA Group or any other financial institution, named or implied. They are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities are for illustrative or informational purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.