This is a common question we receive; are Italian citizens required to pay taxes? Italian citizens often ask themselves if they need to pay tax to Italy if living overseas. The answer is no.
Italy does not tax its citizens if they are not residents.
Italian citizens living overseas do not need to pay tax to Italy only because they hold the Italian passport, but rather they must pay tax to Italy only if they have income sources originating from Italy; most notably:
- Rental income;
- Employment income;
- Financial income.
If an Italian citizen has any of the aforementioned income sources originating from Italy, then taxation is due accordingly to the applicable tax brackets. Note that in many circumstances, double tax treaties might apply thus reducing any tax due to Italy, as well as mitigate any withholding tax applicable to non Italian residents.
On the other hand, a tax resident of Italy (irrespective of their nationality) must pay tax on their worldwide income. This means that if you reside in Italy, you must disclose and pay tax on your foreign earned income sources as well as disclose all the foreign held assets such as:
- Bank accounts
- Real estate;
- Investment portfolios;
- Private pension funds;
- Deposit accounts;
For example, an Italian resident receiving dividend income from the United States must report such income source in his Italian tax return and pay 26% flat tax. It doesn’t matter if the income arises from overseas, the Italian tax code requires you to self assess and disclose it. Failure to do so will expose you to harsh penalties and fines.
Who is a tax resident of Italy?
According to the Italian tax law, you are a tax resident if, for the most part of the year:
- Are registered as an Italian resident;
- Have the center of life interests in Italy;
- Have the place of habitual abode in Italy.
Care must be taken to determine whether an individual is a tax resident of Italy or not. If you are wondering why is this important, you should think twice about the worldwide income disclosure requirements. It may happen, that an individual is tax resident of more than one country at the time.
In this case, the double tax treaty art. 4 determines the ultimate place of tax residency.
How does the tax office know about your foreign income sources?
This is a legit question. How do they know?
The answer is rather simple. In an attempt to tackle tax evasion, jurisdictions exchange financial and tax information about citizens and residents.
If you have a bank account in the Netherlands, the Dutch financial institution and the Dutch tax office will provide the information to the Italian tax office under the CRS and DAC6 protocols. Not only they will inform the Italian authorities about your holdings but they will also provide information about the income sources.
In addition, if a double tax treaty is in place, there will be also the tax information exchange agreement according to which jurisdictions will exchange information about your financial position. It is thus becoming harder to conceal your tax affairs from the Italian tax office.
In conclusion, Italian citizens are not required to pay taxes based on their nationality, but rather on their residency.
Click here to calculate your Italian income tax liability