Italian taxation of foreign investments in Italian real estate is complex.

Transfer taxes charged upon the acquisition of the real estate (alternatively, registration tax or VAT) vary depending on the nature and tax status of the buyer (foreign private individual, foreign company purchasing and owning the real estate directly, or foreign individual or corporate investor purchasing and owning the real estate through an Italian controlled entity), as well as the nature and tax status of the seller (private individual vs. unincorporated business or commercial company registered as a VAT taxpayer).

Income taxes charged on rental income derived from the operation of the real estate vary depending on the character of the real estate (residential vs. commercial).

Income taxes charged upon the sale of the real estate vary depending on whether the real estate is owned directly by a foreign individual or a foreign company without a permanent establishment in Italy, or by a foreign company with a permanent establishment in Italy through which the real estate is operated in the active conduct of a business or an Italian owned or controlled entity.

Finally, taxation on distribution of profits derived from the operation of the real estate vary depending on whether the real estate investment is held through an Italian corporate vehicle owned or controlled by an EU vs a non-EU holding company, an Italian partnership, or directly by a foreign company without permanent establishment in Italy.

I. Transfer Taxes Charged Upon the Acquisition of the Real Estate.

A. General Considerations.

The purchase of real estate in Italy may subject to, alternatively, registration tax or VAT and, in addition, cadastral and mortgage taxes.The buyer normally pays the transfer taxes, although the buyer and seller are jointly and severally liable for the payment of the taxes and for any assessment by the tax authorities. VAT is also paid by the buyer, but an Italian VAT registered entity that is subject to VAT on its sales to customers, can reclaim the VAT paid on the purchase of the real estate by offsetting it with the VAT due to the tax authorities against its output operations. In some circumstances, it can claim the amount of VAT as a refund. EU-resident entities may request a refund of VAT paid if certain conditions are met. A non-EU resident entity must register for VAT and appoints an Italian VAT representative in order to recover any VAT incurred on the purchase.

B. Residential Real Estate.

Sales of residential real estate are normally exempt from VAT. Residential sales are only subject to VAT if the seller is a construction company that has constructed or renovated the property less than five years before the sale, or after five years but has elected to in the deed of sale to subject there sale to VAT. VAT is charged at the rate of 10 percent (22 percent is the property is classified as a luxury dwelling on the real estate register).

The registration tax is charged at the rate of 9 percent on the assessed value of the property, if the buyer is a private individual, or on the actual amount of the purchase price as shown on the purchase deed, if the buyer is a unincorporated business or a (foreign or domestic) commercial entity.

C. Commercial Real Estate.

The sale of commercial real estate (i.e., offices, retail properties and hotels sold separately from any associated business) is subject to VAT at the rate of 22 percent (reduced to 10 percent in case of renovated properties) if the seller is a construction company that constructed or renovated the property less than five years before the sale, or (in any event) the seller is a construction company that elected to subject the sale to VAT in the deed of sale. The sale of commercial property, whether it is exempt from VAT or not, is also subject to cadastral tax at the rate of 1 percent and mortgage tax at the rate fo 3 percent.

D. Going Concern.

The sale of commercial property part of a business is subject to registration tax at the rate of 9 percent applied to the next value of the real estate and 3 percent applied on the net value of all other assets of the business.

E. Stock of an Italian Real Estate Company.

When real estate is acquired by way of purchase of the shares of the company owning it, the transaction is VAT exempt and subject tor registration tax at the fixed amount of 200 euros.

II. Taxation of Rental Income.

A. Operation Through an Italian Corporate Vehicle.

If the real estate is leased to tenants, the rental income generated from the leases is subject to corporate income tax (IRES) at the rate of 24 percent and regional tax (IRAP) at the rate of 3.9 percent.

Taxable income for IRES purposes is the net revenue after the deductions of costs as shown in the company’s annual profit and loss account. In general, all costs relating to the activities of the company can be deducted, including net interest expenses, meaning interest payable minus interest receivable, up to an amount equal to 30 percent of EBITDA. Any excess interest expense can be carried over and deducted in any future year in which the EBITDA exceeds the net interest expense for the year. Interest due on loans secured by a mortgage over the rental property is not subject to the 30 percent limitation and is therefore fully deductible. Depreciation of property is deductible to the extent allowed by tax law. Property tax (IMU) is not deductible for IRES purposes. 10 percent of IRAP paid and IRAP due on cost of employees is deductible for IRES purposes.

In case of lease of residential real estate, gross rents are taxed without any deduction for costs, except for ordinary maintenance expenses not exceeding 15 percent of the amount of gross rents. Interest due on loans used to finance the acquisition of the real estate is deductible within the limit of 30 percent of EBITDA, while interest due on loans secured by a mortgage on the residential rental property is not subject to the 30 percent limitation and therefore is fully deductible.

The taxable income subject to IRAP is the amount of revenue after the deduction of costs as shown in the annual profit and loss account. However, not all costs relating to the company’s activities can be deducted. In particular, interest payments, cost of employees, IMU and IRES payments are not deductible.

B. Operation Through an Italian Partnership.

An Italian partnership is a transparent entity for incomer tax purposes. As a result, its income is taxed directly to its partners. In case of foreign partners, the income is taxed at the corporate rate of 24 percent plus IRAP rate of 3.9 percent. Interest is entirely deductible for purpose of computing the taxable income of the partnership, taxable to its partners, without the 30 percent EBITDA limitation.

C. Direct Operation By A Foreign Entity Without a Permanent Establishment in Italy.

Renting real estate does not automatically arise to an active trade or business, When a foreign entity operates an Italian rental property outside of the conduct of an active trade of business, gross rental income derived from the rental of the property is subject to corporate tax at the rate fo 24 percent, with no deduction of depreciation or other costs incurred in connection with the rebate of the property, expect for ordinary maintenance expenses not exceeding 15 percent of the amount of gross rents. Interest on loans obtained to finance the acquisition of the property for secured by a mortgage on the property is not deductible for corporate tax purposes.

III. Taxation of Profit Distributions.

A. Investment Through an Italian Corporate Vehicle.

Generally, distribution of profits to foreign shareholders is subject to a 26 perdent withholding tax. However, dividends paid to EU-based corporate shareholders are subject to a reduced 1.20 percent withholding tax. Dividends distributed to EU-based parent companies which qualify for the benefits of the EU parent-subsidiary directive are totally exempt from withholding tax. Italian dividend withholding tax may also be reduced by way of a tax treaty between Italy and the investor’s home country.

B. Investment Through an Italian Partnership.

Non-resident partners are subject to tax in Italy on their share of the partnership’s income, and not withholding tax applies on distributions of profits from the partnership to its partners.

C. Direct Investment By A Foreign Entity With No Permanent Establishment in Italy.

Once rental income has been taxed in Italy it can be repatriated to the foreign company without any further Italian tax.

IV. Taxation At Exit.

A. Investment Through an Italian Corporate Vehicle.

Gains derived from the sale of the real estate are subject to corporate tax (IRES) at the rate of 24 percent regardless of how much time has elapsed since its acquisition. The taxable gain is the difference between the adjusted tax basis of the property at the time of the sale (i.e., purchase price minus the depreciation deductions) and the sale price.The gain is also generally subject to IRAP at thew rate of 3.9 percent. However, if the property is sold as part of a going concern, IRAP does not apply.

Any gain derived from the sale of the stock of the Italian corporate vehicle would be fully taxable. The taxable amount of the gain would be the difference between the adjusted tax basis of the shares in the Italian vehicle and the sale price. Participation exemption rules do not apply.

In case of liquidation of the Italian vehicle owning the real estate, the Italian company would recognized a gain equal to the difference between its adjusted tax basis in the property (equal to the purchase price minus depreciation deductions) and the fair market value of the property at the time of the liquidation. Then, distributions to shareholders upon liquidation would be treated as dividends, to the extent that they come out of the profits of the Italian corporate vehicle, subject to dividend withholding tax. The execs would be taxable as a gain.

B. Direct Investment By A Foreign Entity With No Permanent Establishment in Italy.

Gains derived from the sale of the real estate are not subject to corporate tax (IRES) of the property is sold more than five years after its acquisition. If the property is sold within five years of its acquisition, IRES applies at the rate of 24 percent. Sicne decoration is not deductible, the amount of taxable gain is the difference between the purchase price and the sale price.

C. Investment Through a Partnership.

Gains derived from the sale of the real estate owned through an Italian partnership are taxed at the level of partners.

In a future post we will deal with the tax planning aspects of investing in Italian real estate through an Italian real estate investment fund or an Italian real estate investment company (RE SICAV).

With the Legislative Decree n. 90 of May 25, 2017, published on June 19, 2017 Italy finally adopted and transposed into its own legal system the EU Directive 2015/849, usually referred to as the “IV Anti Money Laundering Directive”.

One area that attracts particular attention concerns the new reporting rules applicable to trusts.

Article 21, paragraph 3 of Decree n. 90 provides that “trusts producing juridical effects relevant for tax purposes, in accordance with article 73 of the Presidential Decree n. 917 of January 22, 1986, shall be registered with a special section of the Register of Enterprises”.

Italy (which does not have domestic trust laws) recognizes and gives legal effect to trust set up and governed under foreign law, pursuant to the Hague Convention on Trust of July 1, 1985 implemented in Italy with law n. 364 of October 16, 1989.

Article 73 of Presidential Decree n. 917 (Italy’s Unified Income Tax Code) classify all trust as separata taxable entities for Italian income tax purposes. Trusts administered abroad are classified as foreign (non resident) trusts. Trusts administered in Italy are classified as domestic (resident) trusts. Foreign trusts are taxed solely on their Italian source income, while domestic trusts are taxed on their worldwide income, Trusts with identified income beneficiaries are taxed on a fiscally transparent basis (they compute their taxable income, which is then attributed to and taxed upon the income beneficiaries as designated in the trust agreement). Trusts without identified income beneficiaries are subject to Italy’s corporate income tax.

The scope of the new duty to register a trust into the Register of Enterprises, set forth in Decree n. 90, is extended to trusts which “produce relevant legal effects for tax purposes in Italy”. As a result, trusts subject to reporting include all domestic trust, foreign trusts with Italian assets or income, as well as foreign trusts with Italian settlor or beneficiaries.

Article 22, paragraph 5 of Decree n. 90 provides that fiduciaries and trustees of express trusts, which are recognized and enforceable in Italy pursuant to the 1964 Hague Convention on Trusts, shall collect and conserve sufficient and adequate and updated information on the beneficial ownership of the trust, meaning, information relating to the settlor, trustee or trustees, guardian, or any other person acting on behalf of the trustee, individual beneficiaries or class of beneficiaries, as well as any other person who exercises the control over the assets of the trust through direct or indirect ownership or other means. Trustee shall conserve that information for a minimum period of five years, and shall make it accessible to the authorities who are entitled to have access to that information for investigation purposes (typically, tax agencies in charge of tax inquiries and audits, and department of justice in charge with anti money laundering and criminal investigations). The information referred to at article 22 shall be filed electronically with the Register of Enterprises. Trustees are personally liable and subject to penalties for failure to comply with the duty to report.

Article 21, paragraph 5 of Decree n. 90 provides that the Ministry of Economy and Finance shall issue a regulation with specific provisions concerning:

a) the information to file with the register,
b) the procedure for filing and disclosure of the information to the governmental agencies which may require them, as part of tax or criminal investigations,
c) the procedure for the access to the register for review of filed information,
d) the procedure to determine the right to access the filed information,
e) the exchange of information on trusts between the Register and Tax Agency’s databases, concerning a trust’s tax code or VAT number, as well as any agreements setting up, amending or terminating a trust, or transferring assets into tor outside a trust, as they are relevant for the purpose of the application of income or transfer taxes relating to the trust.

The regulation, which has not been adopted yet, shall be very important to finalize and complete the law on new trust reporting rules. Sub paragraph e) of article 21.5 seems to suggest that also the relevant agreements concerning a trust may have to be file or disclosed. If that is the case, the reporting, which is due under the trustee’s personal responsibility, shall be quite challenging and require careful handling.

We would like to inform all our clients, contacts and friends that our new web site is now on line. The new web site encompasses all previous information about our services and areas on practice in a more professional, nice looking and user friendly format.  The "News" section on the web site will work in tandem with our blog. We hope you will find our web site informative and useful and look forward to receiving your valuable comments and feedback.

 

For practitioner and professionals active in the international tax arena, it is interesting to know that the International Tax Institute, Inc. has launched its new web site (www.internationaltaxinstitute.org)

Founded in 1961, the International Tax Institute, Inc. is a non-profit organization run by tax professionals to benefit the international tax community.  It provides continuing education led by top tax professionals as well as government policy-makers. 

Its core program is a series of monthly luncheon seminars, which are available to members and non-members. It provides New York State Continuing Legal Education Credits to lawyers, and New York State Continuing Professional Education Credits to accountants.

It is a membership organization comprised of the top global accounting and law firms, as well as boutique international firms.  Individual memberships are also available.  Non-members are welcome at all its programs.