Transcript with Show Notes Embedded:
Nick Metta: That is a great question. If you are an Italian tax resident, the Italian tax system is a worldwide taxation system, meaning once you are an Italian tax resident, Italy expects that you file an Italian tax return as a resident and that in that tax return you include all your income worldwide and also some qualified or prescribed assets that you might have outside of Italy.
Kathy McCabe: Like a house?
Nick: Like for example, yes, real estate, financial investments, bank accounts and other assets that might generate income. You are expected to file all of that into your Italian tax return.
Kathy: This is Kathy McCabe. Welcome to the Dream of Italy podcast. You know me from the PBS travel series Dream of Italy and the award-winning website and publication. Join me as we explore the sights and sounds of Bella Italia. From the canals of Venice to the piazzas of Puglia. From the fashion houses of Milan to the vineyards of Tuscany. Hop on, it’s going to be a great ride. Andiamo!
All right, welcome to the Dream of Italy podcast. I have one of my favorites here today. I ask him all my legal questions, Nick Metta of Studio Legale Metta. For some reason that was a mouthful although it shouldn’t be. Always nice to see you Nick, we’ve worked together a long time to bring people the real information because there is so much misinformation out there.
[01:51]
Nick: Yes. Thank you very much for having me.
Kathy: And today we’re going to talk about taxes. It’s that topic everyone likes to avoid, but it’s almost one of the most important things to consider if you’re moving to Italy. Explain to me like I’m a five-year-old, how does it work? If I’m an American citizen and I move to another country, at what point am I required to pay Italian taxes and do I need to pay American taxes too?
Nick: Perfect. Yes. Within the time that we have, I’ll make it as simple and short as possible. You pay taxes in Italy in one of these two cases. If you have income that is sourced in Italy, meaning for example you are an American who wants to invest in a beautiful villa on Lake Como and want to occasionally rent it on Airbnb or something like that. You don’t live in Italy, but you go there, vacation there occasionally and from time to time you might short-term rent it. In that case, the rent is income that is sourced in Italy, meaning generated in Italy, and that generates an obligation to prepare and file an Italian tax return as a non-Italian tax resident. Your tax return for Italy would be limited to the income that you have earned in Italy. That is one case.
The other case is if you as an American citizen become an Italian tax resident. Tax residency is not the same thing as civil residency or immigration residency necessarily. The two things might overlap, but they don’t necessarily do. You become an Italian tax resident when you move your center of vital interests to Italy essentially. They have in the Italian tax rules some indicators of when they can assume that you have moved your center of vital interests to Italy. These are legal assumptions. For example, they can assume that you are an Italian tax resident if you register with the comune with the local township as a resident. If you register with the comune as a resident and you keep that record, which is in Italy a vital record like registering your marriage essentially, registering someone’s birth. If you have that residency registration for more than half of the tax year, so more than 182 days in a tax year from January 1st to December 31st, you will be assumed to be an Italian tax resident. However, if for whatever reason you register your residency and then your plans change, you have to leave and go back to the US to take care of business and then you go to Italy the year after, you can prove that actually your plans were delayed and in spite of that vital record you hadn’t moved your center of vital interests until the year after. So you will be exempted or will be excused for not having filed your Italian tax return for that first year.
Another trigger of assumption of tax residency is if you are physically present in Italy for most of the tax year, meaning more than 182 days. In a leap year, it would be more than 183 days. If you are physically present for more than 182 days, including arrival and departure, even if you arrive 11:30 at night, that day will count as one full day. Italy will assume that you are a tax resident unless once again you can prove that your center of vital interests was overseas somewhere else.
How do you prove that? What is the center of vital interests? It is where you have the majority of your personal and economic interests essentially. When it comes to the US, that is the definition. When it comes to other countries, the definition might change oddly enough, but it comes from the combined interpretation of the Italian tax rules where they only refer to personal interests and the rules in the Italian and American tax treaty against double taxation according to which also economic interests have importance in the consideration whether you have actually moved to Italy. For example, if a person goes to Italy and ends up being sick or stuck or having to take care of something urgent and they cannot go back to the US, might be a pandemic situation type or force majeure strike, you cannot take the flight, whatever. You had counted exactly 182 days and you are forced to stay in the country and you go back. If you left back in the US your spouse, children and your job for which you continue to work remotely, things like that, that would be a pretty easy way to demonstrate that you really didn’t move your center of vital interests. You were kind of under the circumstances forced to stay in Italy, but your mind was still in the US. Other situations might not be that black and white. I have actually several cases where a married couple moved to Italy and they just passed the threshold while they continue to work in the US and their children are spread around the world. That becomes more complex and it really needs to be assessed on a case-by-case situation or scenario. That is basically the main frame within which a person needs to take this tax residency principle into consideration.
[08:26]
Kathy: And if I’m a tax resident in Italy, if I make my money in the US, is it taxed or not?
Nick: That is a great question. If you are an Italian tax resident, the Italian tax system is a worldwide taxation system, meaning once you are an Italian tax resident, Italy expects that you file an Italian tax return as a resident and that in that tax return you include all your income worldwide and also some qualified or prescribed assets that you might have outside of Italy.
Kathy: Like a house?
Nick: Like for example, yes, real estate, financial investments, bank accounts and other assets that might generate income. You are expected to file all of that into your Italian tax return. And for some of those assets, you will owe not only taxes on the income that they generate, for example if you have financial assets, you have investments, you will not only have to report the income, dividends, capital gains and interests, but also there will be a small wealth tax applicable to the value of the assets, the same for real estate. There will be a small wealth tax that applies to the property value. However, there are many ways through which you can reduce the impact of these rules. For example, for real estate, you can disclose and adopt and report into your Italian tax return the acquisition cost of your property overseas, which in most cases in the US with the speed at which the US real estate appreciates over time, usually acquisition cost is much, much lower than the current value. Also the other element that is very important to take into consideration is that you can use the taxes paid in the US as property taxes annually as a tax credit against the Italian wealth tax. So at the end of the day, Italian wealth tax is traditionally in our experience consistently less than the wealth tax that would be applicable on the historic value of the property. So you don’t end up paying any wealth tax, it becomes a simple reporting duty. It is extremely important to report the property even if you don’t have to pay or even if you don’t owe any wealth tax because missing to report an asset overseas implies very significant fines up to 15% the value of the asset, which is very significant. Yes.
Kathy: Wow. This is why you need a tax attorney. This is why people really need advice. It’s not like there are a lot of layers.
[11:05]
Nick: Yes.
Kathy: This is why you need a tax… you need an attorney, you need a tax attorney. This is why people really need advice. It’s not like there’s a lot of layers.
Nick: Yes, strategically you want to plan ahead of time your move. We have sometimes clients who come to us after the fact, once they have already moved to Italy. At that point their options are way more limited. What we recommend is starting the estate plan, tax planning, at least at the very latest 18 months prior to moving to Italy. At the very latest I would say. The earlier you start, the more options you have. Especially if you have retirement accounts. Before taxes, retirement accounts like 401ks and IRAs, those accounts are the ones where you usually can apply most tax-efficient strategies to reduce the impact of taxation once you are an Italian tax resident. But also if you have real estate, there are options and strategies you might pursue, might adopt to minimize the impact because in Italy there are also many tax programs that are incentives for people who relocate to Italy. In Italy, tax liability is personal, individual to the person. So even for a married couple, each individual can opt for an individual tax program. You might have a situation very often actually in our practice where we structure the tax planning within a married couple in a way that we transfer assets to one spouse or the other before moving so that each spouse will be less tax liable in Italy based on the tax program that they adopt before moving. If once again you move to Italy, that option is gone entirely. I mean there are some remedies, there are some opportunities you can still pursue once you are in Italy. There are for sure. However, their impact is not as effective or not as significant.
Kathy: That is great advice. The sooner that you can get the advice, to talk to a professional like you, the better. Because you and I have talked with my interest in moving to Italy and I’ve learned things that even when we’ve done our workshops that I didn’t know. One of the things that I’ve learned through working with you and talking to you is there are more incentives than people realize. Why does Italy get such a bad rap for taxes? What are the standard brackets, what’s the structure and how does it work? Is it 50% usually?
[14:13]
Nick: Unfortunately Italy has a very high taxation system for Italians, for people who live in Italy. The taxes are very high in general, especially for workers because they are the ones who have access to the least amount of options. Let me tell you what these standard brackets are. In Italy it’s a progressive tax system like in the US. Your first portion of income is taxed at the lower tax rate which between the national and local tax rates will be the total aggregate will be approximately 24% up to 28,000€. Then for the portion of income between 28,000€ to 50,000€, your taxes are going to be approximately 35%. Anything above 50,000 is taxed at approximately 46%, 47% in certain areas of Italy depending on local taxes. That is if you are an Italian resident who has lived in Italy and who is for example an employee.
However, Italy has several tax programs even for Italians who have lived in Italy for all their life. For example, there is a flat taxation on rental income where you can opt for a 21% flat tax. However, that applies to your gross rental income so you are not allowed any deductions. People still like it because 21% for people who have real estate investments usually is much better than 46%. Even if they pay on the gross amount, that still makes sense. Also there are even better options for small businesses. If you have some small properties that you rent and you don’t make more than 85,000 a year in your revenue, you can just pay 15% which actually comes down to about 10% on your rental income essentially. That’s actually another option. Then if you also are a consultant, a marketing consultant or an advisor in whatever field and you don’t make more than 85,000€ which is approximately $100,000 a year, you also can take advantage of this small business program and pay only about 10% on your gross income.
These are the options for people who already live in Italy and who cannot access any program for relocation. If however you have not moved to Italy or are within your first year, you might be entitled to some relocation tax programs. For example, if you are a digital nomad, there are some options for you to be taxed. If you have high qualifications, which you would if you are a digital nomad under the visa requirements, you might be entitled to a 60% income tax exclusion of your income. So 60% of your income would be excluded. If you have a minor child, it would be 50%, which is still huge. Because if let’s say you make 200,000, you have many clients, we have a lot of clients who are within the range of $180,000, $220,000 and $250,000. Let’s say 200,000€. If you are taxed only on 100,000, it means that the other 100,000 is completely tax-free. You’re saving there alone about 46,000€. Just on that. That is for up to five years. Then there is the 7% tax program for people who have a pension. About that I wanted to share something that people actually don’t get very often and actually they get confused. Many people think that to get the 7% they have to get to Italy with an elective residency visa which is for retired people. But that’s actually not true. Taxes and immigration are completely different. The tax laws and immigration laws are completely separate. Whatever visa or entitlement you have to move to Italy, you might be a dual citizen or just an Italian who lived overseas for at least five years and want to go back. As far as you have a pension that is paid outside of Italy and that you already earn at the time when you move to Italy, that will qualify you for the 7%. Even if once you are in Italy, you decide to take up a job and continue to work. It is not incompatible to work. In our opinion and based on rulings and tax sources and information in our opinion, you can get two tax programs in one. You can get the 7% on all your foreign income and also you can get the 50% tax exclusion if you decide to work in Italy.
[19:53]
Kathy: Wow. So the 7%, because people I think get confused about this, the 7% only applies to your retirement income?
Nick: No, it only applies to income that is sourced overseas. Exactly. What people get confused a lot is people who are working, continuing like they already collect a pension.
Kathy: Sure, maybe they were in the military and they leave.
Nick: Exactly. I was about to say, most of our clients who are in this situation were in the military. They are very young professionals who were in the military and they served long enough that now they earn a pension. However, they are now in the private sector as consultants or as employees. What happens is when they move back to Italy they tell me, will I apply 7% to my consulting business? I say no, because that income is considered sourced in Italy even if your employer is in the US and you get paid in the US.
Kathy: Because you are in Italy.
Nick: Because you are in Italy. Exactly. But you can take advantage of the 50% income tax exclusion. To go back to one of your first questions whether you are taxed also in the US. Now I’m not a US accountant, but we work with a lot of US CPAs. We prepare taxes for Italians and also we work with CPAs and we make sure that the two taxations, the two tax filings are in sync and take advantage of all leverages and opportunities between the two jurisdictions. US CPAs will tell you that all the taxes paid in Italy on income, whether it is the 7% or whether it is the regular brackets rates, all of those can be used as a tax credit in the US. Usually in our experience you don’t pay taxes in the US unless the taxes in Italy are so low like in the example of the 7%, that might be lower than what you would owe in the US. You might owe the difference in the US.
Kathy: When we’re talking about retirement, IRAs and I think a lot of people don’t understand what happens, how your IRA is taxed or your Roth is taxed if you move to Italy. What does that look like?
[22:14]
Nick: With respect to Roth, in Italy in our opinion the safe approach, and you will find people telling you the opposite of what I’m telling you, because accountants are professionals and each accountant might have a different opinion and you also get judgments that are contradicting sometimes. You might have a case law that contradicts a precedent in Italy. That’s not unfortunately that unusual. However, and that’s why we adopt a prudent approach where we tell our clients, especially doing tax planning, Roth IRAs we recommend treating Roth IRAs as taxable accounts. Any dividend you earn from the Roth IRA, we recommend reporting it and paying taxes on those dividends and capital gains. However, when you draw money from the Roth, you don’t pay taxes, you don’t pay income taxes on those distributions. That’s our suggestion and we haven’t had any issues with the tax authorities adopting that interpretation and approach. Because in our opinion that way Italian tax authorities get what they need to get and it is consistent. Italian tax authorities usually like consistencies. Obviously you cannot treat a Roth IRA one year in one way and one year different. With respect to traditional IRAs or even 401ks, you don’t pay taxes on any dividend or capital gains. However, when you take money out and there is a distribution, you pay taxes on that money as income. If you are under the 7%, you pay 7% on it. That’s why for example one of our suggestions is if you are in the 7%, draw everything you can from your retirement accounts, from your taxable accounts, so that they are all taxed at 7% and then you don’t have to worry about distribution taxation and this additional brackets up to 46% when you might have also in your social security. There is also tax in Italy.
Kathy: So you pay tax in Italy on social security.
Nick: Yes, on social security, yes.
Kathy: Along those lines, what are some of or what is the number one misconception? You talk to so many people about taxes. What is most confusing?
Nick: There are probably I would say two that go hand in hand. One is that sometimes people really think that with taxes, since there are so many people who have the same problem, they can figure it out because they have filed their taxes personally in the US. That’s common practice. I mean, I could probably file my taxes in the US if I wasn’t as busy as I am, so I give my taxes to a CPA, but most of our clients file their taxes in the US on their own, or I would say many at least. They think that it shouldn’t be that hard filing it in Italy either. If you read the treaty…
Kathy: No.
[25:38]
Nick: I know. So they think, I have the treaty against double taxation, I have the Agenzia delle Entrate, the Italian revenue office rulings and regulations, so I got this AI, I’m going to do it. Well I can tell you that one thing that people miss in most cases is the tax treaty is very important, but then there is the technical explanation which is a document that the US government, the Treasury in the US, has issued that includes a ton of exceptions to the treaty rules. You read the treaty, but then there is another document that contradicts it in very important sections of the treaty. For example, about social security and pension payment, the treaty says that it should be taxed only in the country where you live. Many people come to us and say, oh, you pay only in Italy because the US has agreed that it should be taxed only in Italy. Well in reality in the technical explanation it says clearly that social security and pensions are excluded from that exclusivity rule. Therefore that is one thing to take into consideration. And the other thing is the tax credit, the famous tax credit. You know how everyone says, well there is the tax credit, so I will not pay taxes. If I pay taxes in the US, I get a credit in Italy for the taxes paid in the US. First of all, the tax treaty doesn’t tell you that you can choose where to pay taxes. The tax treaty tells you in what country you pay taxes first and then the taxes that you pay in that country are final. The treaty says that the other country can tax you for the difference or can acknowledge the taxes paid in the first country as a tax credit. However, while the US is very, very good at acknowledging foreign taxes as a tax credit in the US and also giving you refunds if you pay first taxes in the US, Italy is exactly the opposite. Italy, if you pay taxes first in the US, will give you such a hard time to use those taxes as a tax credit that will force you to basically either give up on trying to get that money back or getting that credit recognized or force you to go to court to take the Italian tax authorities to court. There are several cases sitting in courts right now. Even if the tax authorities lose the case, they many times are not forced to refund you for legal fees. It doesn’t make a lot of sense. So in our tax strategy and planning what we tell clients is do not count on Italy recognizing the taxes that you pay in the US that much. Do not bank on it. If you have an alternative option, go for it. For example, if you have the 7% opportunity and now actually there are way more towns that are being included because they raised the threshold to 30,000 people for these towns, go for it because you can keep your income overseas and you basically will not have to deal with the tax credit essentially, it will be just under 7%.
Kathy: Wow. See, this is why I think you should hire a professional. Because it’s like you could say this fact, oh wait, but if…
Nick: Yes, there are so many ifs and so many circumstances that play into it. Also your plans. Like some of these programs require you to commit to stay and to be a resident for a certain number of years. Other programs don’t. You know what I mean? So many times it’s not just a matter of choosing what might work for you in a year or two, but you might need to make a plan a little bit more mid-term or even long-term.
[29:39]
Kathy: If you think you’re going to stay until you’re retired, 10 years, 15 years, what do you do with the IRA and there’s so individualized. If our audience, our listeners, our viewers would like to consult with you, and I know many from Dream of Italy have, your website is Studio Legale Metta. M-E-T-T-A, they can Google, and we have a code “DREAM15”. You can put in that you want 30 minutes, but you’ll get an extra 15 minutes. Nick, you have a whole team, as I know really well. I know you’re the tax guy and you have a PhD in taxation, but tell me just a little bit about the other attorneys and what they can offer.
Nick: We work exactly with people who move to Italy or want to move to Italy and or have investments in Italy. So we have a real estate department. We have an estate planning and estate and wills department where we deal with inheritance and wills and stuff like that. Then we have a citizenship department for people who want to pursue citizenship. And an immigration area where there are attorneys helping you find out what visa might work best for you, how you can spend more time in Italy legally. Obviously we have a tax department with a certified Italian accountant fluent in English and we prepare taxes for people who moved to Italy and have to file taxes as a tax resident or also we prepare taxes for people who just have investments in Italy. As any good law firm, we also have a litigation department because sometimes things don’t go exactly as they are supposed to go. So yes, sometimes it has to get to take a case to court. Although one of my associates who is in the litigation department said, Nick, I love litigation and fighting and court hearings and discussions, but we don’t have enough cases to litigate in court. I said, yes, we don’t, because we don’t take cases to court because we like to avoid disputes. So that goes through good planning, good contracts and also when you get sued or there is an option to sue, you first try alternative remedies that cost much less and take you to the desired result. Because unfortunately the Italian justice system is not perfect and you don’t want to get into a lawsuit.
Kathy: To risk it. Yes. Well, thank you as always for coming on to talk about taxes. I think this answered a lot of questions for people and if not, I know that they can get in touch with you.
Nick: Thank you very much for having me. It’s been a pleasure as always and I’ll be very happy to provide additional feedback to anyone who might have questions. Thank you.
Kathy: You can find all the show notes at dreamofitaly.com/podcast.
Nick: Thank you.