Snapshot: tax considerations for private clients in Italy

Tax

Residence and domicile

How does an individual become taxable in your jurisdiction?

The general principle underlying the taxation of individuals in Italy is that of ‘tax residency’.

An individual is considered to be a resident in Italy for tax purposes should they meet one of the following requirements for the majority of a certain tax period (that is to say, for more than 183 days a year, even if not consecutive):

  • to be registered at the registry office of an Italian municipality;
  • to have established his or her domicile in Italy and the main centre of his or her affairs and – not only economic-patrimonial but emotional-affective – interests; and
  • to have established his or her residence or habitual abode in the territory of the Italian state.

 

Italian citizens who have removed themselves from the Italian registry and transferred their residency to a state among those deemed of ‘privileged taxation’ are still considered residents in Italy for tax purposes unless there is proof to the contrary.

A tax resident in Italy is taxed both on income produced in Italy and income produced elsewhere in the world (a principle known as worldwide income taxation).

Non-tax-residents who own or generate incomes in Italy are taxed in Italy only on income sourced in Italy.

Income

What, if any, taxes apply to an individual’s income?

The tax levied on income produced by individuals resident in Italy is known as IRPEF.

IRPEF classifies incomes into the six income categories set out in article 6 of Presidential Decree No. 917/1986 of income deriving from:

  • buildings and land;
  • capital;
  • employment (including income assimilated to employment and pension income);
  • self-employment;
  • business; and
  • gains and other (as listed in article 67 of Presidential Decree 917/1986).

 

IRPEF is a ‘personal’ tax insofar as it considers both expenses and charges that affect the taxpayer and his or her family. These take the form of deductible charges (eg, social security and welfare contributions and donations to non-profit organisations), which reduce the total income produced, and ‘tax deductions’ (eg, deductions for spouses, children and other dependent family members; deductions for expenses incurred by health, education or mortgage interest) that affect the gross tax, determined by applying the IRPEF rates to the taxable base.

Non-residents may only deduct certain deductible expenses (such as donations) and enjoy certain deductions (such as deductions for employment, building renovation expenses or certain types of donations) from their total income.

IRPEF is a ‘progressive’ tax in that the amount to be paid increases as income rises. To calculate the gross IRPEF it is necessary to apply the respective percentage rate of taxation to each income bracket. As of January 2022, IRPEF rates apply per the following income brackets:

  • from zero to €15,000: 23 per cent;
  • from €15,001 to €28,000: 27 per cent;
  • from €28,001 to €55,000: 38 per cent;
  • from €55,001 to €75,000: 41 per cent; and
  • more than €75,000: 43 per cent.

 

There are also special, optional tax regimes that allow for reduced taxation of income earned abroad.

The programme, named ‘flat tax for new Italian residents’, is of interest to those – generally UHNW individuals – who have been resident abroad for at least nine years in the 10 years preceding the transfer and provides for a substitute forfeit tax of €100,000 for all income produced out of Italy. There is no need to report where or how much income is collected; the payment of the forfeited tax of €100,000 substitutes any and all tax to be paid by the new resident of Italy on income collected out of Italy. This scheme can also be extended to their family members by paying a substitute tax of €25,000 each. The option is tacitly renewed every year with the payment of the €100,000 tax and ceases to have effect after 15 years.

There is a programme for pensioners who move to Italy after having been tax resident abroad for the previous five years and who become resident of Italy by relocating to an Italian municipality (located in specific regions) with fewer than 20,000 inhabitants. Such programme allows the relocated pensioners to pay a 7 per cent substitute tax on all income earned abroad. The option is tacitly renewed every year, and its effects cease after nine years.

The ‘impatriate workers’ programme is available to workers who transfer their residence to Italy provided that:

  • the worker has not been resident in Italy in the two tax periods preceding the transfer and undertakes to reside there for at least two years; and
  • the work activity is carried out mainly in Italy.

 

For these taxpayers, in the tax period in which their residence is transferred and in the following four periods, income from employment (or similar) and self-employment produced in Italy enjoys a 70 per cent exemption from IRPEF (ie, only 30 per cent of the income is subject to Italian income tax). This is a 90 per cent exemption if the employee or self-employed worker relocates to certain low growth Italian regions, among which are Sardinia and Sicily. The benefits can be extended (different conditions may apply) for an additional five tax periods to workers with at least one child (younger than 18 years old) and those who become owners of at least one residential property unit in Italy after their relocation to Italy.     

Capital gains

What, if any, taxes apply to an individual’s capital gains?

A substitute tax levied at 26 per cent is applied to capital gains (ie, interest and gains of a financial nature).

The 26 per cent taxation is also applied to capital gains and dividends realised from the sale of qualifying or non-qualifying shareholdings for valuable consideration (with withholding tax for dividends and substitute tax for capital gains), as well as to ETFs and mutual funds.

Capital gains on government securities are levied at the different rate of 12.5 per cent in the same way as securities issued by public bodies such as regions, provinces and municipalities, bonds issued by international organisations such as the World Bank and the European Investment Bank and bonds issued by foreign countries included in the ‘white list’ (ie, those countries with which information may be exchanged).

No capital gains tax applies to sales of real estate assets owned or held for more than five years.

No capital gains tax applies to sales of artworks held in private collections.

Lifetime gifts

What, if any, taxes apply if an individual makes lifetime gifts?

The gift of goods between private individuals acting outside the scope of a business does not generate an income tax basis, neither for the donor or the donee. An indirect Italian gift tax is levied at varying rates (up to 8 per cent) and deductibles (up to €1.5 million), depending on the relationship between the donor and the donee.

Inheritance

What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?

If the deceased was resident in Italy at the time of his or her death, inheritance tax is due on all assets and rights transferred to the heir, even if they exist abroad.

The rates and exemptions established for inheritance tax are provided for in article 2(48) of Law Decree No. 262/2006. In particular, the following rates are applied:

  • 4 per cent for transfers made in favour of spouses or relatives in a straight line (ascending and descending) to be applied on the total net value, exceeding for each beneficiary, the amount of €1 million;
  • 6 per cent for transfers in favour of brothers or sisters to be applied on the total net value, for each beneficiary, exceeding €100,000;
  • 6 per cent for transfers in favour of other relatives up to the fourth degree of collateral relatives up to the third degree, to be applied on the total net value transferred, without application of any deductible; and
  • 8 per cent for transfers in favour of all other persons to be applied on the total net value transferred, without application of any deductible.

 

The law also provides for a €1.5 million deductible for transfers made in favour of disabled persons.

Real property

What, if any, taxes apply to an individual’s real property?

The possession of real estate in the territory of the state is subject to the payment of Italian municipal property tax (IMU) and waste tax (TARI).

IMU is not due for an individual’s main home and its appurtenances, nor for the marital home assigned to the spouse following legal separation, annulment, dissolution or termination of the civil effects of marriage, with the exception of luxury real estate units.

Anyone who owns or holds premises or open spaces, for any use whatsoever, that produces urban waste is also required to pay the TARI.

Non-cash assets

What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?

Italian VAT applies to import of goods and services from other countries to Italy by individuals who import for personal use and enjoyment.

The following goods are subject to excise duties:

  • energy products (eg, petrol, gas oil, natural gas and coal);
  • alcohol and alcoholic drinks (eg, wine, beer and ethylic alcohol);
  • processed tobaccos (eg, cigars, cigarettes and tobacco); and
  • electric power.

 

Excise duties imposed on a product must be verified on the basis of its customs combined nomenclature code.

Other taxes

What, if any, other taxes may be particularly relevant to an individual?

In Italy, a wealth tax is levied on financial investments held outside Italy by an individual who qualifies as an Italian resident for tax purposes (IVAFE).

The applicable tax rate is 0.2 per cent to be calculated on the value of the financial investments as of 31 December or at the end of the holding period.

Trusts and other holding vehicles

What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?

As a result of the 2007 Finance Act, Italian resident trusts are subject to corporate income tax (IRES) – the current IRES rate being 24 per cent.

Incomes collected by trusts for which beneficiaries hold no right to obtain distributions from the trust (so-called non-look-through trusts) are taxed directly and exclusively in the hands of the trust.

Incomes from trusts that are tax-transparent or ‘look through’, on the other hand, are taxed when collected by the beneficiaries in the hands of the beneficiaries applying IRPEF tax brackets and rates.

With reference to the different relevant moments of the ‘life’ of the trust (creation, endowment or transfers to beneficiaries), the Italian tax system also provides for the application of indirect taxes.

More specifically, the deed of trust whereby the settlor expresses the will to set up the trust, if drafted by public deed or by authenticated private deed, will be subject to a fixed registration tax (amounting to €200).

Inheritance and gift tax are instead due on transfers to beneficiaries of the trust assets (including, in addition to the initial assets, any subsequent contributions made by the settlor – or third parties – to the trust).

Mortgage and land registry taxes are due, respectively, for the formalities of transcription of deeds implying the transfer of ownership of real estate assets to the trust.

Charities

How are charities taxed in your jurisdiction?

The 2021 Italian Budget Law provided that the profits (dividends) received by Italian tax resident non-commercial entities and by Italian permanent establishments of non-resident non-commercial entities that carry out charity activities are included in the taxable base relevant for Italian income tax (IRES) purposes at a 50 per cent rate, in lieu of the 100 per cent rate ordinarily applicable.

The Italian tax system provides numerous tax benefits for taxpayers who make donations to certain categories of bodies of particular social importance (eg, non-profit organisations, associations, universities and schools and religious institutions) with the aim of economically supporting their social commitments.

These benefits are granted in the form of tax deductions (charges that directly affect the gross tax in percentage terms, reducing the tax payable by the taxpayer) or deductions from the IRPEF taxable income (charges that are deducted from the total income relevant for IRPEF purposes, before the tax is calculated).

To be able to benefit from most of these tax deductions or deductions, payment must not be made in cash but by traceable payment methods (eg, debit or credit card, bank or bank draft or bank transfer).

Anti-avoidance and anti-abuse provisions

What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?

The regulation of ‘abuse of rights’ is provided for by article 10-bis of Law 212/2000 (Statute of Taxpayers’ Rights), which – by unifying the notions of ‘abuse of rights’ and ‘tax avoidance’ – provides that ‘abuse of rights’ can be claimed when a taxpayer carries out ‘one or more transactions devoid of economic substance that, while formally complying with tax rules, essentially achieve undue tax advantages’.

Three prerequisites are therefore necessary for the existence of abuse:

  • the realisation of an undue tax advantage (ie, a benefit, even if not immediate, realised contrary to the purpose of the tax rules or the principles of tax law);
  • the lack of economic substance of the transactions carried out; and
  • the circumstance that the advantage is the essential effect of the transaction in relation to all the other purposes pursued by the taxpayer.

 

Transactions that, while meeting the above three conditions, are justified by valid non-marginal non-fiscal reasons, including organisational or managerial reasons, which correspond to the structural or functional improvement of the enterprise or of the taxpayer’s professional activity, are not considered abusive.

Valid non-marginal economic reasons exist only if the transaction would not have taken place in their absence.

Source link