Italy has a well-defined tax system that applies to residents and non-residents alike, with specific rules for financial investments. If you are considered a tax resident in Italy, you are taxed on worldwide income, while non-residents are taxed on income sourced in Italy. Investment income, such as capital gains, dividends, and interest, is generally taxed at a flat rate of 26%, with some exceptions, like Italian government bonds, which are taxed at 12.5%.
This article outlines the principal tax rates, reporting needs, and how to optimize your tax position. For professional advice, firms like Accounting Bolla have expertise in assisting expats and investors with tax planning in Italy.
Knowing the tax rates involved, leveraging tax treaties, and availing special regimes like the €100,000 lump sum tax for new residents, investors can plan their finances to remain within compliance bounds while maintaining low tax liabilities.
Who Is an Italian Tax Resident?
First of all, you must determine if you are an Italian tax resident or not. According to Italian law, you are an Italian tax resident if:
- You are in Italy for more than 183 days each year.
- Your main residence is Italy or where you live most of your personal and economic life.
- If you are a tax resident, you are taxed on all of your income, whether Italian or foreign. If you are not a tax resident, you only pay tax on income from Italy.
Taxes on Different Forms of Financial Investments
Next is to understand tax types and forms, as different types of financial investments in Italy are subject to varying tax rates and rules.
Capital Gains and Dividends
First, if you sell an investment, i.e., shares or bonds, and make a profit, then it is a capital gain. Italian capital gains are 26% taxable. Dividends (money made by companies in which you invested) are also 26% taxable.
However, there are some exceptions:
- Income from Italian or EU state government bonds is 12.5% taxable only.
- If you have investments for over 5 years, you might not be taxed for the gains.
Interest Income
Next comes interest income from bank accounts, savings accounts, or bonds, which is taxed at 26%. However, interest on Italian government bonds (such as BOTs) is taxed at just 12.5%.
Real Estate Investments
Even if you own a home or any property abroad, you are still obligated to pay taxes for income it might generate. As an example, we will use the rental income you receive from your rental property. You will pay rent income towards your income tax, which would be 23% to 43% based on what your income is.
Foreign Investments
If you are investing abroad, like stocks or mutual funds, you do pay tax on these investments in Italy. But Italy has agreements (so-called tax agreements) with most countries by which you do not have to pay the same income tax twice.
Non-Harmonized Funds
Non-harmonized funds, or “non-UCITS” funds, are investment funds that fall short of the European Union’s UCITS (Undertakings for Collective Investment in Transferable Securities) directives. They are usually found in non-EU jurisdictions or are structured differently from regular mutual funds. Non-harmonized funds in Italy are taxed at a higher rate than harmonized funds. Capital gains and returns on non-harmonized funds are taxable at 26%, the same as other financial investments. But tax treatment would vary depending on the fund structure and jurisdiction, so it is important to get advice from professionals in order to understand the implications for your portfolio in particular.
Special Tax Rules for New Residents
If you are moving to Italy, you might qualify for a special tax deal called the lump sum tax. Here is how it goes:
- You pay a single annual tax of € 200,000 on all of your foreign earnings (earnings made outside of Italy).
- This deal is for a maximum of 15 years.
- This is a great option for people who have a lot of foreign earnings because it simplifies taxes and can save you money.
Wealth Taxes in Italy
Wealth is also taxed. In Italy, there are two main wealth tax types:
- IVIE, which is a property tax on property you own outside of Italy. The tax is 0.76% of the property value.
- IVAFE, which is a tax on financial assets (like bank accounts or investments) you own outside of Italy. The tax is 0.2% of the total value of these assets.
Both of these taxes are in addition to the taxes you pay on income.
For tax-haven located financial assets (countries or jurisdictions that offer favorable tax regimes, commonly with low or no tax rates, strict financial privacy law, and minimal reporting obligations) by Italy, the IVAFE rate is doubled to 0.4%. Tax havens are typically criticized for tax evasion and avoidance, as well as other illegal financial activities like money laundering. Italy also maintains a list of jurisdictions that it considers tax havens, and an asset that is held in such jurisdictions would trigger the higher tax rate. It is important to check the most recent list of tax havens to avoid surprises and be in compliance.
Social Security Contributions
But what if you work in Italy? It’s simple. If you are working in Italy or have a company, you may be required to pay social security. These are not income taxes and are used to fund such items as medical care and pensions. The amount you pay is based on your earnings.
How to Report Your Taxes
So, we already know what types of taxes there are; next, we should pay them. But when are taxes due? It highly depends.
Annual Tax Return
Once every year, you must submit a tax return called the Redditi PF. The return is for all your income in Italy and abroad. The deadline is usually November 30th of the following year.
Declaration of Foreign Assets
You must declare bank accounts, investments, and property if you have any abroad. Omitting them will get you heavy fines.
Tax Audits
Italian tax authorities, or Agenzia delle Entrate, can check your records to make sure they are correct. To avoid problems, keep good records of all your financial transactions.
Maybe Saving On Taxes?
In Italy, investments are appreciated by the government, so it’s extremely simple to decrease some percentages of taxes investing or applying tax treaties.
Invest in Tax-Friendly Funds
Some investments pay less tax. For example:
- Italian government bonds are taxed at 12.5% rather than 26%.
- Some pension funds and life insurance policies have tax advantages.
Make Use of Tax Treaties
Italy has over 90 countries that it has double tax agreements with. You can receive a credit in Italy on foreign income that has already been taxed when you are already abroad and a resident.
Benefit from the Lump Sum Tax
As a new resident of considerable foreign income, you can avoid cashing out and keep taxation simple by paying the €100,000 lump sum tax.
Plan Your Investments
Final point. Having investments for more than 5 years will get you exempted from paying capital gains tax. Furthermore, having your income spread over a series of years will keep you at a lower tax bracket.
In conclusion
It is vital that whoever lives or intends to live in Italy knows how investments are taxed. Although the tax system appears complicated, understanding the laws will save you money and prevent you from having issues. To learn Italy’s taxation laws smoothly, engaging professionals like Accounting Bolla will be of immense assistance to you. Their professionals help expats and investors pay their taxes hassle-free.
Whether you are investing in real estate, stocks, or foreign assets, tax planning will help you lower liabilities and boost returns.
Would you like to read more about this topic? Then take a look at our related articles here, Tax Returns in Italy, Immigrating in Italy by Investment and Documents Needed to Live in Italy: A Complete Guide for Expats
