New interesting Tax Benefit for retired Americans who want to move to Italy: a FLAT TAX AT 7 PER CENT
The following article analyzes the fiscal law introduced December 30th,
2018, regarding the new FLAT TAX at 7%. This fiscal law establishes a
particularly interesting tax benefit for all America
residents who receive foreign pensions and would like to permanently transfer
their residency to Southern Italy .
Please, see the following post for all the updates on this new Tax Break.
First of all, let’s look at an initial analysis of the fiscal law,
highlighting the most prominent aspects:
SUBJECTIVE limit of the tax benefit:
A) The
individuals benefiting are persons receiving a pension granted by a foreign
country (not only America
First CONDITION for the tax benefit:
B) Individuals
as described in point A, in order to benefit from the fiscal law, must transfer
their fiscal residency to Italy, specifically to a municipality containing a
population of up to 20,000 inhabitants, in the following regions:
- SICILIA (SICILY
- CAMPANIA
- PUGLIA
(APULIA );
- ABRUZZO;
- SARDEGNA (SARDINIA );
- BASILICATA
- MOLISE
- CALABRIA
OBJECTIVE characteristics of the tax benefit:
C)
Individuals meeting the conditions requested by the fiscal law can make the
option to tax all of their foreign incomes at a FLAT TAX RATE OF 7%.
DURATION of the tax benefit:
D) The
tax benefit is valid for the first 9 tax periods following the period in which
residency was transferred to Italy
Additional CONDITIONS:
E) The
tax benefit is admitted for persons who have not been fiscal residents in Italy within the 5 tax periods prior to the
period in which residency is transferred in Italy
F) The tax
benefit is admitted for individuals who transfer their residency from foreign
countries with which there is an agreement of administrative collaboration and
fiscal information exchange (undoubtedly including the United States
Additional CHARACTERISTICS:
G) As
previously stated, the tax benefit is not mandatory and should be applied as an
option. It is still possible for the individual who transfers his/her residency
to Italy to use the alternative regime ”Regime dei Paperoni,” (the so called
"Donald Duck" regime) which allows a FLAT taxation of €100,000
regardless of the income produced abroad.
H) The FLAT TAX
at 7% can also be applied only to some foreign countries, specifically
indicated when the option is selected: in such cases, the FLAT TAX regime would
apply to income produced in those countries, while the ordinary regime would
apply to all the remaining countries.
Now let’s look each point of the fiscal law in more detail.
It is important to note that the first information sheets from the Italian
Tax Authorities will provide more specific indications on how to apply this
fiscal law.
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SUBJECTIVE limit of the tax benefit.
A) The
individuals benefiting are persons receiving a pension granted by a foreign
country.
Such condition requires that the individual meet both of the following
characteristics:
- be retired;
- the pension must
be dispensed by a foreign entity.
The question hence arises if an individual who is a recipient of both an
Italian and an American pension can be the beneficiary of the above-mentioned
tax benefit. An initial literal interpretation seems to impede the use of the
benefit, as the condition to access the benefit appears to be
reception of only a foreign pension, therefore excluding individuals who are
also receiving an Italian pension.
It also appears evident that a such interpretation could inadvertently
exclude certain groups of individuals, given that statistics show that a
significant number of Italian foreign pensions are of scarce amounts. It would
be contradictory to exclude Retiree A who receives Social Security equaling
$2000/month, in addition to a small Italian pension of $150/month, compared to
Retiree B who receives Social Security equaling $5000/month. In order to
untangle such specific details, we must await further clarification from
Italian fiscal authorithies.
Another interpretative issue emerges concerning foreign pensions: must
these be strictly Social Security, or may they be pensions of any kind, such as
401(k) or IRA, ROTH IRA, TIAA CREF, etc.?
At this point we cannot identify any reason for which to exclude
individuals who receive pensions from private funds, given that the fiscal law
simple refers to an amount distributed by “foreign sources,” without any other
specification as to the nature of the pension received by the foreign subject,
be it public or private. So we consider that persons receiving foreign pensions
as
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First CONDITION for the tax benefit.
B) Individuals
as described in point A, in order to benefit from the fiscal law, must transfer
their fiscal residency to Italy, specifically to a municipality containing a
population of up to 20,000 inhabitants, in the following regions:
- SICILIA (SICILY
- CAMPANIA
- PUGLIA
(APULIA );
- ABRUZZO;
- SARDEGNA (SARDINIA );
- BASILICATA
- MOLISE
- CALABRIA
Here the fiscal law seems clear, although there are a few things to keep
in mind: the process through which a certain municipality is considered as part
of the fiscal law is not specified:
-Which entity declares the population of a municipality: ISTAT (the
Italian Public Department for Statistics) data, or other entities?
-Which time period must be used as reference when qualifying a
municipality as having a population of less than 20,000? It might seem obvious
that the time reference should be the moment in which an individual applies for
residency in the municipality. However, if ISTAT data is used as a reference,
then it refers to the latest census, which is obviously previous to the residency
application.
It is hence not clear what would happen if one wants to be a part of a
municipality in which the last census data reports 19,816 inhabitants, yet
other sources report data well over 20,000 inhabitants at the moment of the
residency application.
The following point should also be considered: what happens, in terms of
tax benefit, if the applicant enters Italy and applies for residency in a
municipality as listed in the fiscal law, yet also uses a home in another
municipality and/or another Italian region (while keeping residency in the
first)?
Here the fiscal law does not request “the absence of other residences”
in Italy
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OBJECTIVE characteristics of the tax benefit.
C) Individuals meeting
the conditions requested by the fiscal law can make the option to tax all of
their foreign incomes at a FLAT TAX RATE OF 7%.
Now let’s begin the critical part of this analysis: the points which
seem more interesting for American retired persons currently living in the United States and with the desire to move to Italy
1) What happens to other income deriving from
financial investments (interests, dividends and capital gain) that the retired
American matures in his/her American funds after he/she has begun living in Italy
We take for granted that the individual who moves to Italy prefers to keep the core of his/her
financial wealth in the United States ,
and hence bring to Italy
This is an important point which is not clearly expressed in the fiscal
law. The literal interpretation indicates that the FLAT TAX at 7% applies
to all income, and therefore includes:
- dividends
- interests
- capital gain
matured from financial investments in AMERICAN BANKS.
The fiscal law, in fact, reports that such investments qualify to
receive the tax benefit as the tax benefit applies to “…income in any category,
perceived from foreign sources or produced abroad…”
2) Considering that the American person wanting to
reside in Italy is almost certainly an American citizen who is also obliged to
a file tax return also in the US due to his/her American citizenship, what
would his/her comprehensive fiscal position be?
This point is very important and will be dealt with exhaustively in the
next post, with simulations looking at specific cases.
We can, however, already anticipate a few relevant points:
-If the individual entering Italy ,
other than being an American citizen, is also an Italian citizen, the
Convention against double taxation between the US
and Italy dictates that the
retirement income be taxed only in Italy US
pension back in the United
States
-It is still true that American financial incomes are still subject to
American taxation in the American tax return, as the person is an American
Citizen: in this case the FLAT TAX at 7% is interesting for those who would
like to avoid the Italian taxation at 26% otherwise dictated for such income,
which would worsen the comprehensive taxation.
In case you need more information on that, please contact us for a
simulation of your case.
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DURATION of the tax benefit.
D) The tax benefit is valid for the first 9 tax periods
following the period in which residency was transferred to Italy
On this point we have to make a few considerations on what will happe
after the fifth year.
Depending on every personal case, we have already set up a way to
optimize taxation (respecting all American and Italian fiscal laws) after the
end of the tax benefit.
We will talk about that in one of our future post.
In case you need more information on that, please contact us for a
simulation of your case.
Additional CONDITIONS.
E) The tax
benefit is admitted for persons who have not been fiscal residents in Italy within the 5 tax periods prior to the
period in which residency is transferred in Italy
F) The tax
benefit is admitted for individuals who transfer their residency from foreign
countries with which there is an agreement of administrative collaboration and
fiscal information exchange (undoubtedly including the United States
There is not much to say regarding condition F): there is no doubt that
the United States
Regarding the condition which states that the individual entering Italy
should not have had fiscal residency in Italy during the five tax periods prior
to the period in which the tax benefit it requested, there is an important
consideration to be made about so-called “EXPATS,” individuals who were born in
Italy and went to live in the United States many years ago and have now decided
to return.
Here the important point is the following: to be able to benefit from
the tax credit, the individuals must, alternatively:
- be registered with AIRE (Anagrafe Italiani Residenti all'ESTERO),
formed in 1990.
- have expatriated before 1990 AND ALSO have been deleted from the
registry in the Italian municipality.
An individual who has been a de facto resident abroad but who
has not been deleted from the registry in the Italian municipality IS NOT
ELIGIBLE TO RECEIVE THE TAX BENEFIT.
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Additional CHARACTERISTICS.
G) As previously
stated, the tax benefit is not mandatory and should be applied as an option. It
is still possible for the individual who transfers his/her residency to Italy
to use the alternative regime ”Regime dei Paperoni,” (the so called
"Donald Duck" regime) which allows a FLAT taxation of €100,000 regardless
of the income produced abroad.
H) The FLAT TAX
at 7% can also be applied only to some foreign countries, specifically
indicated when the option is selected: in such cases, the FLAT TAX regime would
apply to income produced in those countries, while the ordinary regime would
apply to all the remaining countries.
The FLAT TAX at 7% is alternative to the so-called “Regime dei Paperoni”
("Donald Duck Regime").
You may only opt for the FLAT TAX at 7% tax benefit from certain foreign
countries, keeping the ordinary taxation for the other countries. This option
gives some flexibility in outlining fiscal strategies for an individual who
decides to come to live in Italy
Some final considerations: the FLAT TAX at 7% per retired persons who
move to municipalities in Southern Italy seems
like a very interesting opportunity, in particular for many American EXPATS
with Italian origins who are thinking of returning to the homeland in their
“Golden Years.”
CONTACT US FOR MORE INFORMATION
If you need more information you can send an email to:
enrico.povolo@dottcomm.net
or make a phone call to the following number:
+39 0444 322987
Enrico Povolo
Ennio Vial