One of the most important concepts that must be kept clearly in mind for a person that invests or lives in Italy is the concept of fiscal residency. This concept is different from the concept of administrative residency: in fact a foreign citizen can be "resident" in his own country and in Italy as well at the same time: in this case the word "resident" refers to the concept of administrative residency that means, in most case, to be enlisted in the lists held by the municipality of the town where the person lives. And this is something that can happen in more than one country at the same time, especially for people that own houses in different countries and travel a lot.
The concept that we want to introduce here is the concept of fiscal residency that differs from the concept of administrative residency: if a person is to be considered a fiscal resident in one country, she cannot be considered fiscal resident in any other country: the concept is exclusive. There's only one exception: the case of American Citizens: we will see in future posts that American Citizens are to be considered fiscally resident in the US even if they live in another country.
This is a pretty important rule, as being fiscal resident in one country, say Italy for example (but this is a worldwide rule that is valid for every country) has the relevant consequence that in Italy you will pay taxes for all of your incomes, produced in Italy or elsewhere.
This is the principle of Worldwide Taxation.
Let's make a practical example to better understand:
Mr. Jones is an English citizen that owns a house in London. Some years ago he also bought an house in Venice where he met Mrs. Bianchi that is now his wife; they have a child and live toghether in Venice where Mr. Jones started a new business. In England Mr. Jones also has some investments in stocks.
The questions are:
1 - Where is Mr. Smith administrative resident?
2 - Where is he fiscal resident?
3 - Where does he have to pay taxes? Italy or England?
Let's answer these questions.
1 - He can be administrative resident of both country.
2 - He is for sure fiscal resident only in Italy. We will explain in another post the elements that have to be considered to decide where the person is fiscal resident.
3 - This is the complicated part: Let's say that he has paid 20 in English taxes over the income of 100 from his English stocks and that he has paid 180 in Italian taxes over the income of 1.000 from his Italian new business.
But, for the principle of the Worldwide Taxation, and being fiscal resident in Italy, he will have to declare and pay taxes in Italy for all his worldwide incomes: not only the Italian income but also the English income. So he will have to declare in Italy the following incomes:
1.000 (income produced in Italy) + 100 (income produced in England) = 1.100
We will have to calculate taxes over the income of 1.100 and let's say they are 195.
From the sum of 195 that Mr. Jones owes to the Italian fiscal authorithy (Agenzia delle Entrate) he can deduct the amount of 20 of taxes already paid in England.
195 - 20 = 175
He owes to the Italian fiscal Authorithies 175.
In the hypotesis in which Mr. Jones's family moved to London, they would be fiscal residents in England and they would have to do the opposite: declare in the English tax return also the Italian income and deduct from those taxes tha taxes already paid in Italy.
What is very important to remember is the following:
- If you move to a new country (any country) or invest or live there, but at the same time you still have properties or incomes in your own country, be very aware of the country where you are considered fiscal resident.
- The concept of fiscal residency is unknown to most people, but can have big consequences as many countries have become aware of this phenomenon and they exchange and cross information very quickly.
- Always contact a CPA or a tax advisor to check your situation.