Italian International Tax Reporting Rules Through Part RW of Italian Tax Return

Italian resident taxpayers are required to report to the Italian tax administration their foreign financial investments and assets, which can generate foreign-source income subject to tax in Italy. They report their foreign investments by filling out a special part of their annual income tax return referred to as form RW. Taxpayers who are not otherwise required to file an income tax return  (e.g., those who earn only salary income reported on form 730 equivalent to form W-2 in the United States) must file a full return just for the purpose of reporting their foreign investments on Part RW.

Italian international tax reporting through form RW is very extensive in scope and accompanied by very harsh penalties with very limited opportunities to rectify past mistakes or failures. It includes personal assets other than financial investments (e.g. personal residences, boats, jewelry, artworks). One section of form RW is used to report the value of the reportable assets at the end of the taxable year. Two separate sections are used to report outbound, inbound and foreign transfers of money or other assets relating to foreign assets subject to reporting (i.e. additional investments and disinvestments through purchases, sales or transfers of reportable assets).    

Reporting may be particularly complicated when foreign investments and assets are held through trusts or other foreign entities. Depending on the tax classification and treatment of the entity or trust the taxpayer may be exempt from reporting, required to report his or her own interest in the trust or entity itself, or required to report his or her own undivided ownership interest in the underlying assets held through the entity, with totally different results.

The duty to report revolves around several fundamental tax concepts: tax residency of the taxpayer, ownership of the asset, and tax nature of the asset and associated income.

Italian tax residency rules are far reaching and often based on technical and heavily factual tests. As a result, many non-Italian nationals who spend significant time in Italy for personal or business purposes or have personal, investments or business interests in Italy should act very carefully, especially now that the Italian tax agency is stepping up its enforcement actions in the effort of collecting additional revenue.

Indeed, if it turns out that they should be treated as resident of Italy for Italian tax purposes, they would automatically face the issue of not having reported their non-Italian assets, with all potential penalties associated with it, in addition to the main issue of having failed to file and their tax returns and to pay any taxes due.

International tax reporting rules are very technical and complex to administer. Italy’s tax administration issued a general guidance on international tax reporting of foreign assets and investments with Circular n. 45 of September 13, 2010. 

Italy’s tax administration is increasing its enforcement activities in the area of international tax law and is using banking information about inbound and outbound international transfers of money as starting point to begin audits on international taxpayers.

Audits usually begin with questions about the nature and source of the transfers, taxpayer’s tax status and reasons for not reporting them when the transfers do not show up on taxpayer’s tax returns.  

Enforcement of reporting obligations is particularly strict since the enactment of the third version of Italian international tax amnesty in 2009-2010 (after the first of 2001-2022) specifically aimed at repatriation of foreign unreported investments.

In the light of the above, taxpayers must pay specific attention to their reporting obligations through form RW of their tax returns. Foreign taxpayers with (personal and business) activities, interests and contacts in Italy must use extra caution in determining whether the extent of their presence and contacts in Italy may be such that they may be considered resident of Italy for Italian tax purposes.

In the latter case, they would be subject to Italian tax reporting obligations independently from and in addition to their obligations to report their income and pay their taxes to Italy, with potential harsh penalties for any past failure to report and very limited possibilities to remedy the past failure and mitigate their penalty exposure.

Form RW reporting requires extensive study for taxpayers who use trusts and entities to hold and manage their investments portfolio or business interests.

Any efforts is essential to avoid or minimize  the risks of being exposed to unexpected tax duties for which going back in compliance may prove to be impractical or particularly painful.   

We have prepared an overview of the rules which should help identify the general issues and raise the level of awareness in this particularly challenging area of law.


 

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