This country-specific Q&A provides an overview to tax laws and regulations that may occur in Italy.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/
Which factors bring an individual within the scope of tax on income and capital gains?
In Italy income and capital gains are subject to income tax. Income tax is levied upon residents on their worldwide income, while residents are subject to income tax only in Italian-source income.
For Italian income tax purposes, an individual is regarded as a resident of Italy if at least one of the following conditions is fulfilled for most part of the tax period (i.e., the calendar year): (i) he/she is registered with the Italian Official Register of the resident population; (ii) he/she has his/her residence in Italy for civil law purposes. Residence is defined by the Civil Code as the place in which the person has his/her habitual abode; or (iii) he/she has his/her domicile in Italy for civil law purposes. Domicile is defined by the Civil Code as the place in which a person established the main seat of his/her business and interests.
The rules to determine the source of the income depends on the type of income. However, in general terms, income from employment and self-employment is sourced where the activity is performed, income from real estate is sourced where the property is situated, income from capital is sourced where the payor is resident or has a permanent establishment, and other income is sourced where the income-generating asset is situated or where the income-generating activity is carried out.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
For individuals the tax year coincides with the calendar year. The total taxable income is subject to progressive tax rates up to 43% (plus local surcharges). However, income and gains from financial assets are generally subject to final withholding taxes at flat rates (see 3) and are not computed in the total taxable income. The deadline for the filing of the income tax return is usually the 30th of September of the following year. Taxes are paid through two advance payments during the year (usually in June and November) and the payment of the balance, which must be usually made in June of the following year.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Final withholding taxes generally apply to income and gains from financial assets. Such withholding taxes are generally levied at the 12.5% rate for income and gains from public bonds issued by Italy or white listed States, and at the 26% rate for income and gains from most of the other financial assets. However, certain financial assets do not qualify for final withholding taxes: this is the case for e.g. non-EU investment funds.
Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
The Italian legislation does not provide for a comprehensive wealth tax. Wealth taxes apply to certain types of assets. They are levied upon residents (see 1) on worldwide financial products (a sub-category of financial assets) and real estate, while non-residents are subject to wealth taxes only on Italian-situs financial products and real estate. The rate is 0.2% for financial products and 0.76% for real estate. Wealth taxes are generally assessed through the annual income tax return and the timing of the payments generally coincides with the timing of the payment of income taxes (see 2).
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
Transfers upon death and gifts are subject to inheritance and gift tax at the following rates and with the following exempt amounts:
(a) 4 per cent, if the transfer is made to spouses and direct descendants or ancestors; here, the transfer is subject to tax on the value exceeding Euro 1 million (this exempt amount applies to each beneficiary);
(b) 6 per cent, if the transfer is made to brothers and sisters; here, the transfer is subject to tax on the value exceeding Euro 100,000 (this exempt amount applies to each beneficiary);
(c) 6 per cent, if the transfer is made to relatives up to the fourth degree, to persons related by direct affinity as well as to persons related by collateral affinity up to the third degree; and
(d) 8 per cent, in all other cases.
Lifetime gifts, executed by the deceased to the beneficiary, erode the amount that is exempt from inheritance gift tax. According to two recent judgments of the Supreme Court (No. 24940 of 6 December 2016 and No. 26050 of 16 December 2016), the exempt amounts available on death are not eroded by lifetime transfers (it is fair to say that the position of the Supreme Court does not seem to be shared by the tax authorities).
Inheritance and gift tax is levied on worldwide assets if the deceased or donor had his or her habitual abode in Italy on the date of demise or gift, otherwise it applies only to Italian-situs assets.
The law sets forth non-refutable presumptions whereby certain assets are deemed to be situated in Italy. For example, the following assets are in any event deemed to be situated in Italy: assets enrolled in the public registers of Italy (such as real estate, ships and aircrafts, trademarks and patents) and connected rights of enjoyment in rem; shares and quotas of companies with either the legal seat or the seat of management or the main object in Italy; bonds and other securities in series, other than shares, issued by Italy or by the aforementioned companies; receivables and cheques if the debtor or the issuer is a resident of Italy (irrespective of the location of the security, if any); receivables secured by property situated within Italy up to the value of the property, irrespective of the residence of the debtor.
The inheritance tax return must be filed within 1 year from the date of demise by either of the individuals called to succeed and the legatees, their legal representatives, the administrators or the persons managing the estate. In the event of a gift executed in form of a donation in front of an Italian public notary, the notary is bound to report the gift to the Italian tax authorities. The tax is assessed by the tax authorities following the filing of the inheritance tax return or the reporting of the gift. Specific rules apply to gifts other than formal donations.
It is common to gift the bare ownership of assets to future generations by reserving the right of usufruct. This triggers the levy of gift tax on the value of the sole bare ownership, whilst the expansion of bare ownership to full ownership, upon the death of the usufruct holder, is not subject to inheritance tax.
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
Exemptions from inheritance and gift tax are laid down for certain assets. Assets of cultural value that have been recognised as such by the Italian competent authorities prior to the death/gift of the individual are exempt from inheritance and gift tax. A 50% exemption applies to the Italian real estate of cultural value recognised as such after the decease/gift. Italian public debt securities are free from inheritance tax. The exemption applies also to public debt securities issued by EU or EEA Member States.
In order to facilitate the generation transfer of businesses, an exemption from inheritance and gift tax applies to the transfer of businesses and participations in companies and partnerships to spouses or descendants. For participations in companies, the exemption is subject to the additional condition that the recipient receives or reaches a controlling shareholding. The control must be retained for five years following the transfer, otherwise the exemption will be clawed back.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
An exemption from inheritance and gift tax applies transfers to public entities or legally recognised foundations or associations having the exclusive purpose of assistance, study, scientific research, education, instruction or any other purpose with public benefit. The exemption also applies to transfers to legally recognised public entities and foundations and associations other than those mentioned above, as long as such transfers be made for the purposes indicated above (assistance, etc.). Both the exemptions also apply to foreign public entities and associations and foundations established in EU or EEA Member States, or, subject to a requirement of reciprocity, established in other foreign states.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Such real property is subject to wealth tax on Italian real estate, which is levied at the general rate of 0.76% on the deemed value of the property resulting from the Land Registry. If the property is rented out, then the rental income is subject income tax. Upon certain conditions, the rental income from an Italian real property can be subject to an optional flat tax at the 21% rate on the gross rent, rather than progressive tax rates on the rental income. The real property is also exposed to inheritance and gift tax (if the reported value is at least equal to the aforementioned deemed value, then the reported value cannot be challenged by the tax authorities). Capital gains from the sale of the real property are not taxable provided that either the property was inherited or it has been owned for at least 5 years.
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
Individuals may be subject also to indirect taxes, such as VAT, registration tax (which may apply upon e.g. the purchase of Italian real property), cadastral and mortgage taxes (which apply upon any transfer of Italian real property at the overall 3% rate) or the financial transaction tax. The financial transaction tax applies, among the others, to transfers of the ownership of shares in Italian companies (at the general rate of 0.2%).
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
- Forfait tax regime
Individuals that have been non-resident of Italy in at least 9 of the last 10 years can move to Italy and opt for the forfait tax regime, which provides that:
i. All foreign-source income and gains are subject to a substitute tax equal to 100,000 Euro per year;
ii. Foreign assets are not subject to wealth taxes;
iii. Foreign assets are not subject to inheritance and gift tax;
iv. Foreign assets are not subject to reporting obligations;
v. As an exception, foreign-source capital gains on substantial shareholdings realized in the first 5 years of Italian tax residence are subject to income tax according to general rules. As a consequence, during such 5-year period, substantial shareholdings are subject to reporting obligations. This carve out from the scope of the lump sum tax regime is a specific anti-avoidance rule and therefore it may be siapplied, subject to conditions, through an advance ruling procedure.
The option for the substitute tax regime is effective up to a maximum period of 15 years. The option can be revoked by the individual, but, if revoked, is no longer available.
- Impatriate tax regime
The impatriate regime provides, under specific conditions, for a 50% exemption from income tax for Italian-source income from employment and self-employment for the first year of Italian tax residence and the subsequent four tax years.
- Forfait tax regime
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
Individuals moving to Italy under the forfait tax regime must consider the filing of a ruling on the entitlement to such special regime and its application to their specific facts and circumstances, and must consider any restructuring of their foreign assets that may help minimizing taxation of source since foreign taxes will not be creditable in Italy.
Individual moving to Italy under the ordinary tax regime may consider to reorganise their ownership structure to make them more tax effective in the light of Italian tax laws and to try to obtain a step-up the tax basis of assets.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
Italian succession law provides for forced heirship rules. The reserved quota of the estate, which is reserved to forced heirs, depends on the composition of the family of the deceased upon death. For instance, if the spouse and three children are the forced heirs, 50 per cent of the estate of the deceased is the reserved quota for the children, to be divided in equal shares. For the purposes of calculating the reserved quota, the value of the estate of the deceased is equal to the value of all the assets owned at the time of death, net of any debts, plus the value of all assets that were gifted or settled into trusts by the deceased during his of her life.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
The community property regime is the default regime applicable to all property acquired during marriage, unless the spouses have elected (either at the time of their marriage or at a later date) for the separation of property regime.
What factors cause the succession law of the jurisdiction to apply on the death of an individual?
Conflicts of law rules are regulated by the EU Regulation No. 650/2012 of 4 July 2012 (the EU Succession Regulation). Habitual residence in Italy would generally lead to the application of Italian succession law. If the habitual residence of the individual is located outside of Italy, Italian succession law may still be applicable due to a renvoi to Italian succession law (see 14). In both cases, the possibility to elect for a foreign law of nationality is granted.
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
If habitual residence is situated in a State not bound by the EU Succession Regulation, then Italian succession law may still be applicable to the extent that the private international law rules of such a State makes a renvoi to Italian succession law.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
Executing a will is always recommended. The formalities provided under Italian law are minimal. Indeed, also an holographic can be valid.
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
The party to succeed, either by law or by will, can either accept (expressly or implicitly) or renounce the estate. In the meantime, unless the deceased has appointed one or more executors by will, he/she is also entitled to administer the estate (if he/she does not, an administrator may be appointed by the court). The renunciation and the acceptance of the estate are retroactive as from the death of the deceased from both a civil and tax law perspective. The party to succeed can accept the estate with or without the benefit of the inventory. In the former case, the heir is liable for the debts inherited (and for the legacies) up to the value of the inherited assets.
Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
The Italian Civil Code does not regulate the trust, (but trusts regulated by foreign laws can be recognised in Italy; see 21).
Italian foundations may be created to achieve purposes of social benefit, not to pursue the segregation and conservation of family wealth.
The Italian non-commercial partnership (società semplice) is widely used to hold assets including real estate. The partnership agreement can be structured in a very flexible way. The splitting of voting rights from profit participation rights may be achieved. Individuals other than family members may be prevented from acquiring an interest in the partnership and from being involved in the management of the assets.
How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?
Italian foundations are granted legal personality through a process of recognition by the authorities, which ascertain, among the others, the social benefit purpose and the availability of adequate financial means. They are also subject to on-going supervision.
The Italian non-commercial partnership is created by notarial deed.
Provisions setting out the general framework of the register of beneficial owners of companies and commercial partnerships (but not Italian non-commercial partnerships) and trusts/foundations have been recently enacted. The implementing provisions are still to be issued.
What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
From an income tax perspective, (foreign law) trusts (resident or not) can be subject to three different regimes. They can be (i) separate taxable persons subject to corporate income tax; (ii) subject to a transparency regime whereby the income of the trust is computed at the level of the trust but then imputed to the beneficiary (if the beneficiary has a right to the trust income); or (iii) wholly disregarded (this is the case for e.g. revocable trusts). From an inheritance and gift tax perspective, according to the tax authorities’ view, the addition of assets to the trust fund is a taxable event. Tax rates and exempt amounts are computed on the basis of the family relationship between the settlor and the beneficiaries.
Italian non-commercial partnerships are subject to a transparency regime, which allows to preserve certain beneficial features of individual taxation (e.g. flat rates on most income and gains from financial assets and no taxation of capital gains on real property after a 5-year holding period).
Are foreign trusts, private foundations etc recognised?
Foreign law trusts are recognised pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition (hereinafter “the Hague Convention”), which was ratified by Italy in 1989. Foreign family foundations are recognised too.
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
See 20. The same regime applies to foreign family foundations.
To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
Italian courts may argue that trusts providing for very intrusive powers of the settlor are not to be recognized pursuant to the Hague Convention and therefore are tamquam non esset. In other cases, Italian courts did not recognise trusts by making reference to the concept of ‘sham trust’. This concept is given a broader meaning compared to the meaning under English law. Indeed, under English law a trust is a sham only if there is an agreement between the trustee and the settlor when the trust is settled that terms governing the transfer of the funds to the trustee are not those set out in the trust deed, but are some other terms. On the other hand, Italian courts sometimes use the concept of sham trust also when the settlor has significant control over the trust fund. Furthermore, the recognition of a trust cannot affect the application of Italian forced heirship rules, if applicable.
What provision can be made to hold and manage assets for minor children and grandchildren?
Minors can own assets under Italian law. However, in such a case the law generally provides that the parents have the right of usufruct over such assets and that the income of the usufruct holder must be used for the maintenance of the family and for the education of the minor.
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Italian law allows an individual to designate, by notarial deed, another individual as a candidate for the appointment as his/her guardian. If the appointing individual becomes then incapacitated, the competent Italian court will appoint another individual as a guardian, which assists or replaces (depending on the degree of incapacity) the incapacitated in dealing with the assets. The court can appoint an individual different from the candidate only on the ground of serious reasons.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Charitable activities are usually carried out in Italy by Italian foundations (see 18).
What important legislative changes do you anticipate so far as they affect your advice to private clients?
Recently, the tax reporting obligations upon resident individuals in relation to non-resident trusts have been amended. Administrative guidelines have not been issued yet. The forthcoming release of such guidelines will hopefully provide useful clarifications on the scope and operation of the new reporting obligations for resident beneficiaries and settlors of non-resident trusts.