Italy’s tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the
Italian Taxation of Individuals
Italy’s Supreme Court Holding That Economic Interests Prevail Over Personal Ties In Determining Italian Tax Residency
Italy’s Supreme Court’s decision n. 6501 of March 31, 2015, dealing with the case of an Italian citizen who had most of his personal and family connections in Italy but moved to work in another country (Switzerland), where he had most of his economic and financial interests, ruled that the taxpayer’s economic and financial connections…
Overview of Italy’s Tax Reporting Rules
Italian resident taxpayers are required to report all of their assets held outside of Italy, on form RW of their Italian income tax returns (which include various sections and can be considered the equivalent of the FBAR and other international tax returns that are required to be filed in the United States).
Resident taxpayers subject…
Italy’s Tax Provisions on Trusts – Updated
Italy operates specific provisions on tax treatment of trusts. Trusts formed under foreign law are recognized and enforced in Italy pursuant to the Hague Convention on Trusts dated July 1, 1985. To the extent they have Italian assets, or Italian grantor, trustees or beneficiaries or Italian source income, foreign trusts may be subject to Italy’s…
Italian Supreme Court Rules on Individual Tax Residency
The Italian Supreme Court in its Ruling 20285 dated September 4, 2013 held that an individual taxpayer claiming to have his tax residency outside of Italy had properly discharged his burden of proof and correctly established his tax residency abroad by producing copy of his residential lease, regular payments of rent and utility bills and use of personal bank account for day to day expenses, thereby proving that his actual and real residence and domicile was located in the foreign country.
Under Italian tax law, individual tax residency is determined pursuant to highly factual tests and can be established even when there are relatively minor contacts with Italy, such as a house, frequent visits to the country, or business interests located there. Once determined, it subjects the taxpayer to worldwide taxation in Italy both for income and estate tax purposes including the obligation to report all of taxpayer’s assets wherever located in the world under a form that is the equivalent of the american foreign bank account report, except that it requires reporting of non financial assets (such as cars, houses, planes, artworks, etc.) as well as financial assets and accounts. Foreign persons with interests in Italy must pay particular attention to those rules to avoid to be trapped into unintended Italian tax residency.
Under the facts of the case decided by the Supreme Court, the taxpayer – a tennis player originally resident in Italy – claimed to have moved his tax residency to Monaco, while still traveling to Italy and other countries in connection with his business interests and professional activity.
Under Italian law, Monaco is a tax haven, black listed jurisdiction and Italian taxpayers who register as residents there are presumed to be still resident in Italy for Italian tax purpose, unless they prove that their actual residence and domicile is located in that country. For this purpose, residence identifies the taxpayer’s habitual and regular place of living, while domicile identifies the taxpayer’s main center of personal, financial and business interests.
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Italy Amends Its Rules On Tax Disclosure of Foreign Assets
Italy enacted a new law that significantly amends its rules requiring Italian resident individual taxpayers to report their foreign financial investment and accounts and other assets capable of generating foreign source taxable income.
SCOPE OF REPORTING
The fist significant change reduces the scope of the reporting. it eliminates the duty to report intra year transfers…
Overview of Italy’s Tax Provisions on Trust – Updated
Italy does not have domestic rules on trust.
However, trusts created under foreign law are recognized and enforceable in Italy pursuant to the provisions of the 1985 Hague Convention on the Law Applicable to Trusts and Their Recognition, which has been ratified and implemented and is fully effective in Italy as part of Italian legal system.
The Hague Convention was signed on July 1, 1985 and ratified in Italy with law n. 364 of October 16, 1989 and entered into force on January 1, 1992. It is aimed at harmonizing the private international laws of the contracting states relating to trusts; provides that each contracting state recognizes the existence and validity of trusts created by a written trust instrument; sets out the general characteristics of a trust and establishes rules for determining the governing law of trusts with cross-border elements.
According to the Convention, as implemented in Italy, a trust created pursuant to and governed by the law of a country that has provisions governing trusts is recognized and valid in Italy, subject only to the overarching limitation of Italian public order principles.
Purely internal trusts, with Italian grantors, Italian beneficiaries and assets located in Italy are also recognized.
With the Finance Bill for 2007 Italy enacted, for the first time, specific provisions dictating the tax treatment of trusts for Italian tax purposes. They establish general principles on tax classification and treatment of trusts in Italy for income and indirect tax purposes and have significant cross-border implications
On August 6, 2007 Italy’s tax administration issued Circular n. 48/E that provides administrative guidance on the interpretation and application of the new tax provisions on trust. Circular 48/E clarifies the tax treatment of trusts both for income tax and transfer (indirect) tax purposes.
Subsequently, Italy’s tax administration issued additional interpretative guidance by way of Circular n. 61/E issued on December 27, 2010.
Generally, for a trust to exist as a legal and tax entity separate from the grantor, the trustee and its beneficiaries, there must be a real and effective legal separation of the trust’s assets from both the estate of the grantor and the beneficiaries of the trust and the trustee must be granted with real powers of administration of the trust, acting independently from and not being under the direct or indirect control of the grantor or beneficiaries of the trust.
Once it is positively established that a trust actually exists, as a general rule, for income tax purposes trusts are classified as separate taxable entities and taxed as corporations.
However, trusts with income beneficiaries that are identified and named in the trust agreement are treated as fiscally transparent entities – that is, income is attributed to the beneficiaries as provided for in the trust agreement, regardless of whether and how the trust distributes its funds, and the beneficiaries are taxed directly on their share of trust’s income. This fiscally transparent treatment applies also in the event that after the initial creation of the trust, the trustee determines the income beneficiaries of the trust pursuant to the authority granted in the trust agreement.
A trust is resident in Italy for tax purposes if its place of management or place of activity is located in Italy. Trusts formed in jurisdictions that do not allow exchange of information with Italy are treated as residents and subject to worldwide taxation in Italy, if certain connections with Italy exist (for example, if any grantor or beneficiary is Italian), unless taxpayers provide sufficient evidence that they are resident (that is, effectively managed) outside of Italy.
Trusts must keep tax books to compute their taxable income (taxed upon the trust in case of fiscally non transparent trusts, or passed through to and taxed upon the beneficiaries in case of fiscally transparent trusts).
A gratuitous transfer of assets to a trust is subject to gift or estate tax. The tax is charged at reduced rates (4 and 6 per cent) if beneficiaries named in the trust agreement or determined by the trustee at any time thereafter are close family members. Otherwise, the regular rate for trusts with no identified beneficiaries or beneficiaries that are not close family members or charitable trust is 8 per cent.
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US Tax Administration Issued Final Regulations on FATCA Implementing International Tax Reporting and Compliance
On January 17, 2013 the IRS issued final regulations providing rules on information reporting by foreign financial institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities.
Under the Foreign Account Tax Compliance Act of 2009 (FATCA), enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147…
Reciprocal Inter Governmental Agreement Will Introduce Automatic and Reciprocal US-Italy Disclosure and Exchange of Information For Tax Purposes
The new U.S. FATCA legislation and implementing inter governmental agreements granting reciprocal and automatic exchange of financial information between tax administrations will make international tax reporting and compliance mandatory and unavoidable, and will tax authorities with formidable tools for international audits and enforcement activities.
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Italian International Tax Reporting Rules Through Part RW of Italian Tax Return
Italian resident taxpayers are required to report their foreign financial investments and assets which can generate foreign-source income subject to tax in Italy, by filling out a special part of their annual income tax return referred to as form RW. Foreign individuals who have (personal and business) interests and contacts with Italy that may trigger Italian tax residency under Italian residency or domicile tests would be subject to the same reporting obligations. Italy’s tax administration is stepping up its enforcement efforts in this area of law and penalties for failure to report are particular harsh and difficult to mitigate after the fact. We have prepared an overview of Italian international tax reporting rules with a general discussions of some of the relevant issues that arise in this area of law.
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