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The cryptocurrency revolution

By Andrew Lawford
This article is published on: 29th July 2021

29.07.21

Hodling and the cryptocurrency revolution

Are you hodling? No, that’s not a typo – it is millennial-speak for what you do if you are a true believer in the cryptocurrency revolution. Look it up. I wouldn’t describe myself as old, but I’m certainly old enough not to be automatically in tune with what motivates millennials. However, you can hardly open a newspaper these days without some notable individual passing comment on cryptocurrencies, and they even seem to be going mainstream now that bitcoin has been made legal tender in El Salvador – you can buy residency there for 3 bitcoin. It seemed therefore like a good moment to try and get at least a vague understanding of what cryptocurrencies are, as I suspect that many of the readers of this newsletter will be as confused as I am on the topic, so let’s see what we can discover. I will be focussing particularly on bitcoin, as the main example of a cryptocurrency, but do be aware that bitcoin is only the most prominent out of the estimated 10,000+ cryptos out there.

Everything you don’t know about money, combined with everything you don’t know about technology

This was a tongue-in-cheek definition of cryptocurrencies that I heard not so long ago from an asset manager, but it kept coming back to me every time I saw cryptos mentioned in the press.

Once upon a time, “money” essentially meant some amount of precious metal, generally in the form of a coin which was easily recognisable. Then we evolved to a situation in which we used banknotes to represent an underlying amount of precious metal, and finally we arrived at where we are today, where any link with precious metals has been definitively severed in favour of fractional reserve banking and “fiat” currency controlled by sovereign states – the “fiat” is Latin, meaning “let it be done”, and is the essential expression of our concept of legal tender: something is money not because it has any intrinsic value, but because the law says it is. These fiat currencies rely on trust in the good economic management of the issuing countries, and we can all think of notable examples of where bad management has left fiat currencies broken. I have a 100 trillion dollar note issued by the Reserve Bank of Zimbabwe in my office as a reminder of the importance of sound currencies.

Not many of us could properly explain a fiat currency system and the interactions between bank deposits, bank lending and central bank reserves and, as a result, many find it tempting to say that even major currencies like the US dollar and the euro have little intrinsic value due to the fact that their supply is essentially unlimited. To a certain extent, cryptocurrencies were born out of a lack of trust in fiat currencies (even the “good” ones) and the desire to make money something more regulated (not in the sense of having more government oversight, but rather of wanting precise rules and limitations on the amounts of currency in circulation). In order to be worth something, so the reasoning goes, the supply must be limited and it must be difficult to create – hence the parallels that are sometimes drawn between cryptocurrencies and precious metals.

A lump of gold sitting in a vault somewhere has value simply because we think it has value; up until the time that you find a practical use for that gold, its value is dictated by that vague idea that come (almost) what may, at least it will always be there. Not an amazingly intelligent argument, it must be said, but better than many things that finance has come up with over the years. The basic reason for abandoning the link between money and precious metals was that the supply of commodities like gold or silver were subject to vagaries that had little to do with the overall economic situation, so bullion failed to keep up with our economic growth.

As far as bitcoin is concerned, it is very clear that scarcity is central to its functioning given that it has been set up to have a maximum number of 21 million units. As of today, there are roughly 18.7 million bitcoins that have been created, but the number effectively available for transactions is much lower, due to the fact that many people hodl, and also due to the fact that a large number of coins have been lost (I have read estimates of 20% of the total in existence). You see, if you have a bitcoin, you better make sure you keep hold of the codes that allow you to access it, because there is no “lost password” function if you don’t. Losing the codes is the digital equivalent of throwing your gold bars into the Mariana Trench; they don’t cease to exist, but you will find it all but impossible to recover them. It is worth noting that whilst the scarcity value of bitcoin may be beyond doubt, the fact there are so many other cryptocurrencies around should give pause for thought about the scarcity of the category as a whole.

The creation of bitcoin is one of the things that I struggle with the most – it is commonly called “mining”, in an evident attempt to draw a parallel with precious metals, even though the mining in the case of cryptocurrencies is entirely digital. Essentially, they are discovered by computers contributing to the distributed ledger that monitors all bitcoin transactions. The only explanation of bitcoin mining that has made some sense to me so far is to consider it in terms of a triple-entry accounting system: There are two parties who record a transaction and this is then sealed into bitcoin transaction records by a third party that verifies it through its mining activities (and receives a reward for doing so). Mining, in the world of bitcoin, is technically called a “proof of work” and allows a participant in the network to be rewarded by participating in the distributed ledger and crunching the enormously complicated numbers that guarantee the transactions that have been recorded. This ledger, also known as the blockchain, belongs to everyone and no-one, rather like the internet itself, and it exists in order to eliminate the risk of someone being able to spend the same bitcoin twice. No, I don’t really understand it either.

It is also said that bitcoins and their transactions are “immutable” – I suppose to the same extent that precious metals are immutable. But does this really make any sense? Aside from the apparent lack of ability to hack the blockchain today, can we really be confident that in a thousand (or a million!) years bitcoin will still be unhackable and attractive to a sufficiently large community of people? Perhaps this is more of a philosophical question than anything else, but us humans do get wrapped up in the idea that the big issues of today are the big issues for all time. I suspect our distant descendants, assuming the human race is lucky enough to survive, will become interested in many things beyond bitcoin or cryptocurrencies in general. In this context, the best parallel to draw is with technological innovation: today, not many people are interested in steam engines or dirigible balloons, once important technological developments, and the same may be true for bitcoin in a few decades. For bitcoin to enjoy any value at all, it is dependent on the bitcoin community continuing to support it through time. It would be highly unwise to think that nothing will ever come to supplant it, because human experience with other technologies suggests that better things are always on the horizon. The same cannot be said for precious metals, which may wax and wane in terms of community interest, but do not depend on community interest for their existence. My gold bar will still be there in a thousand years if it is kept safe, regardless of what people might think about it. What might happen to it over the course of a million years is a question I find rather difficult to ponder, but it’s probably fine for the next few thousand.

In all of this, the real evolution may be arriving shortly, and it is not to be found amongst the many new variations on the bitcoin theme that have come into existence. Many have looked upon cryptocurrencies as a way of thumbing one’s nose at traditional financial structures – no more central banks and traditional bank accounts for me please! Yet the governments of this world are not going to give up the privilege of being able to issue national currency without a fight, and it could be that they will try to beat the cryptos at their own game. Some cryptos, known as “stablecoins” are backed by a given fiat currency, but it has been suggested that the most appropriate issuers of such coins are the central banks themselves. One idea is that each of us could end up, as of right, with our own account at the central bank of the nation we live in. If this were to happen, then bank runs would no longer be an issue and commercial banks would have to reinvent their business models, at least in part. Presumably physical cash would become a thing of the past. This is not speculation on my part – the ECB is publicly discussing the benefits of digital coins and the Bank for International Settlements – the central banks’ central bank – has even commented that this is “a concept whose time has come.” The full BIS report is available here for anyone who is interested.

Much has also been said about the potential of the blockchain – essentially the network that runs bitcoin – to revolutionise everything from banking to contracts. We’ll just have to wait and see how all of that shakes out, but it is clear that there are numerous technologies being developed and brought to bear on finance and commerce and it’s by no means clear that blockchain technology is the only answer. In any case, even if the blockchain network is valuable, this says nothing about whether any given cryptocurrency that relies on it has value.

As I suppose must be obvious by now, my research for this article hasn’t convinced me that cryptocurrencies are a good place to speculate (please let’s not use the term “investment” in this context!) – and certainly I see no reason why investment in this sort of asset should supplant traditional assets in an investment portfolio. As boring as it may sound, what really counts in investment is not jumping on that latest bandwagon, but planning one’s affairs properly whilst having a disciplined approach and a long-term view.

As a final point, for any Italian residents, please also be aware that bitcoin investments and gains deriving therefrom are subject to declarations and taxation in Italy – you may think your cryptos are 100% anonymous, but I wouldn’t be betting on it.

Are you moving to Italy?

By Andrew Lawford
This article is published on: 16th June 2021

16.06.21

I hope you are enjoying the summer weather and the return to comparative normality – long may it last!

I wanted to let you know about a new podcast episode that has just been released. It is entitled “Brexit (and more…)”, so will be of particular interest to UK nationals residing or considering taking residency in Italy, but it also explores quite a few topics that will be more generally applicable.

As it’s quite a long episode, I thought it would be helpful to give you an index of topics covered and the approximate minute markers so that you can easily locate the sections that are of interest to you.

1:28 – Working with a UK financial adviser as an Italian resident
8:55 – Equivalency in financial services between UK and EU
12:57 – Taxation of EU-domiciled managed funds vs UK-domiciled managed funds post-Brexit for Italian residents
15:50 – Tax declarations in Italy for directly-held foreign financial investments
18:15 – The €51,645.69 question – holding foreign currencies as an Italian resident
21:38 – ISAs – what they mean in Italy
23:42 – Quadro RW – why you need to declare the mere existence of your foreign assets (as well the income that derives from them). Common Reporting Standards and why you should assume that information is being exchanged automatically with the Italian tax authorities
25:20 – The taxation of UK real estate as an Italian resident (rental income and wealth tax (from 28:20))
33:00 – Thinking about real estate investments once you move to Italy
35:15 – Capital gains tax on foreign property (with particular comment on the situation for UK property owners who are non-resident in the UK)
38:15 – Tax-efficient investment wrappers – what they can do and how they need to be set up. Some comment on inheritance taxes in Italy
43:44 – The 7% pensioners’ tax regime
50:10 – Italy vs Italia – and why you should persevere if you want to move here

Available on:
Apple Podcasts
Spotify
Stitcher
Google Podcasts

Click on the above links to listen

Do you have investments in the UK?

By Andrew Lawford
This article is published on: 4th February 2021

04.02.21

Time for a closer look at foreign portfolios

In one of my articles last year I looked into the complexity of the taxation regime for the various types of investment income that can arise for an Italian resident. I would suggest that you read that article, or at least its section on funds, as background before continuing. In this article we are going to look in greater depth at the taxation of funds, or collective investment schemes (from now on I’ll refer to these simply as “collectives”). While this may seem a somewhat dry topic, it will be of particular concern to those who have investments in the UK, given that their tax treatment will be changing now that Brexit has come to pass. Equally, though, many people will have investments in collectives that they made in their countries of origin that do not pass muster in Italy, and these will bring less than desirable consequences from a taxation perspective.

Ufficio Complicazione Affari Semplici

Let’s first make it clear that there is nothing in Italian law that makes it illegal for an Italian resident to own certain kinds of foreign asset, but as many people find out when navigating the Italian system, the fact that you are allowed to do something doesn’t automatically mean that it will be easy. In fact, Italy has a mythical government office known as the Ufficio Complicazione Affari Semplici (the Office of Complicating Simple Matters – it even has its own Facebook page) which, if it actually existed, might well be one of the most efficient government entities in the country (I am joking, of course, but it does sometimes feel that way)!

Anyway, back to the main point of this article: there is an important distinction made in Italian tax law between EU domicile as against non-EU domicile for collectives.* In order to enjoy the basic 26% rate of taxation for financial income, collectives must either respect the UCITS regulations (i.e. be authorised under the EU law for collective investment undertakings), or, if non-UCITS, they must be domiciled in the EU or EEA, registered for distribution in Italy and managed by an EU licensed asset manager. These requirements will exclude almost all non-EU domiciled collectives, with UK collectives the most recent addition to the list (as from 1st January 2021). So what happens when you have invested in a collective that isn’t covered by EU rules? Any income generated will be taxed at your marginal income tax rates, which is likely to be penalising for all except those with limited incomes (the lowest income tax band is 23% in Italy).

Much has been made in the press of the fact that financial services were excluded from the Brexit agreement. Below is what this looks like in practice (the following is an excerpt from a letter sent by the fund manager Janus Henderson to investors in their UK domiciled funds):

“With effect from 1 January 2021, UK domiciled investment funds that had previously operated under the Undertakings for the Collective Investment in Transferable Securities (UCITS) regulations will cease to be classed as UCITS and will instead become “UK UCITS”. From the same date, UK domiciled Non-UCITS Retail Schemes (NURS) will cease to be classed as EU Alternative Investment Funds (AIFs) and instead will be classed as third country AIFs. Any UK domiciled Janus Henderson funds that were registered for marketing purposes in any EU 27 countries will no longer be registered and marketing of the funds will therefore cease. For the avoidance of doubt our “UK UCITS” and NURS will not be registered for marketing in the EU as third country AIFs.”

Also on the list for unfavourable tax treatment you will find any non-UCITS ETFs, which would include all of those listed in the US (remember that ETFs are simply collectives that trade on a stock exchange). It will also include holdings in Investment Trusts listed in the UK. To be fair, UK Investment Trusts have always been in an unusual situation – something I found out first hand a number of years ago after holding an Investment Trust through an Italian bank. I was amazed at the paperwork that arrived at year end relating to this holding, the income from which I was obliged to put in my tax return (to be taxed at marginal rates). At the time there was also a complicated distinction made between the variation of the fund’s NAV compared with the variation of the price of the shares that I had bought and sold – although I believe that particular distortion has now been resolved for listed funds like ETFs (every now and again something slips past the Office of Complicating Simple Matters).

What about the US?
Any American readers should be particularly concerned, because they cannot hold EU collectives due to the arcane nature of US taxation, which makes compliance difficult even for non-resident US citizens.

You are unwise to hold EU collectives from a US point of view, and unwise to hold US collectives from an Italian point of view. So what to do? Do not despair: much will depend on your individual situation, but we can often help to improve substantially the overall tax efficiency and declaration burden relating to your portfolio.

The bottom line is that you should never assume that what works well in one country will work well in another, and especially not one like Italy that has government offices specialised in complicating matters!

If you would like to discuss your own situation then please get in touch. Our aim is to simplify complicated matters as much as possible whilst making sure that your assets are well managed, with a view to the long term. In this context, avoiding unnecessary tax exposure remains a key element of most successful investment strategies. With proper guidance in the process of portfolio construction, it is entirely possible both to enhance investment returns and reduce administrative complexity.

* Normally you can tell where a collective is domiciled by looking at the first two digits of its ISIN code (ISIN stands for International Securities Identification Number, a 12 digit alphanumeric code which almost all financial instruments have): IT will identify an Italian security, GB a UK security, LU a Luxembourg security and so on.

Banks, Bonds and Badwill

By Andrew Lawford
This article is published on: 13th December 2020

13.12.20

Today I’d like to explore the topic of Italian banking consolidation – but first I’d like to mention my new podcast episode, which features an interview with entrepreneur Andrew Meo, who walks us through his experience of starting a business in Italy – Milan based Rocket Espresso www.rocket-espresso.com. Even if you have no interest in starting a business in Italy, his story is a compelling one and gives us the chance to think more deeply about the prospects for the Italian economy. Check it out on iTunes, Spotify, Google Podcasts or Stitcher.

Now on to the banks
It probably hasn’t escaped your attention that there has recently been a new round of consolidation in the Italian banking market. It’s really no exaggeration to say that once Intesa Sanpaolo completes its takeover of UBI Banca and if, as seems likely, Unicredit ends up having the House of Horrors that is Monte dei Paschi di Siena foisted upon it (see below), that there will really only be 2 large banks in Italy. Of course, Italy has many, many banks – just look here at the list of members of Italian Banking Association, but in terms of concentration of assets, the situation is clear.*

* Please note that the Intesa – UBI takeover has yet to complete and the combination of Unicredit – MPS is currently only a rumour

Intesa, in particular, has been making the best of a bad situation over recent years, having taken on, for the sum of €1, the good parts of two failed banks from the Veneto region (Veneto Banca and Banca Popolare di Vicenza) in a deal that was breathtakingly good for them. Aside from being able to pick and choose only the best bits of the banks, they also received the following benefits (see the press release from June 2017):

A public cash contribution of €3.5bn to guarantee the stability of Intesa’s financial ratios;
A further public cash contribution of €1.285bn to cover “integration and rationalisation charges”;
Public guarantees of €1.5bn “to sterilise risks, obligations and claims” arising before the transfer to Intesa;
Full availability of deferred tax assets (roughly €2bn);
The right to give back certain higher-risk loans if these turn bad by the end of 2020

Nice work if you can get it!
The reality is that Intesa was able to call the shots in this deal, because Unicredit, the only other Italian bank theoretically able to take on the task, was still trying to sort out its own troubles with non-performing loans, having had to launch capital increases for €20bn or so in the period between 2012 – 2017 (a €13bn capital increase had just been completed at the time of the Intesa deal for the Veneto banks).

Moving on to the recent deal to acquire UBI Banca, we encounter the curious phenomenon of badwill, or “negative goodwill” as Intesa prefers to define it.

Intesa presentation re: UBI Banca acquisition – February 2020

Instinctively, we could define “goodwill” as that aspect of a business that defines the value it provides to its customers. In accounting terms, goodwill is an intangible asset that arises in an acquisition when the price paid is greater than the value of the net assets received. It follows from this that “badwill” arises when you get assets of a greater value than the price paid for them. Such is the story of Italian banking (and most banks in Europe, to be fair) – their assets simply aren’t perceived as having great value. In Italy, in particular, after a long period of struggling with non-performing loans, the market is worried that a fresh batch will be showing up over the coming years once the effects of COVID support have worn off.

Moving on to Unicredit, there was some hope that under its CEO of recent years, Jean Pierre Mustier, that the bank could become an Italian champion of consolidation in Europe. In particular, Mr Mustier’s old employer, Société Générale, was floated as a potential candidate for a tie-up, and certainly a far more presentable option than that of a domestic union with Monte dei Paschi di Siena, undoubtedly the ugliest girl at the dance of Italian banking consolidation. In recent weeks, Mr Mustier has decided to hand in his resignation after clashing with his Board of Directors, so it seems only to be a question of time before the unhappy couple announces their engagement.

All of this concentration of banking assets in two main groups leads to a number of considerations. Firstly, the unhealthy connection between bank balance sheets and Italian sovereign credit risk seems to be growing. Between them, Intesa-UBI and Unicredit-MPS hold about €175bn of Italian sovereign debt (as at 30/06/2020). The banks themselves have also become so large that they might not only be “too big to fail”, but also “too big to save” – assuming that the ultimate backstop is always an implicit government guarantee.

From our perspective as depositors, whilst we wait for the proposed EDIS (European Deposit Insurance Scheme), the best we have is the Italian FITD (Fondo Interbancario di Tutela dei Depositi), which does guarantee deposits up to €100,000, but is based on a system of mutual assistance between the banks – if one of the two giants were to stumble, the system may well struggle to make good on all claims.

All this brings to mind the wisdom of the following quotation from Mark Twain:
“I’m more concerned about the return of my money
than the return on my money”

It clearly makes sense to have a bank account in Italy if you are living here, and there are some good, low cost options out there. Many of you may already have the bulk of your financial assets in Italy and some of you are probably thinking seriously about moving more funds here, given that a number of UK banks will struggle (or even refuse) to service Italian residents after Brexit. However, there are also good reasons to maintain a substantial portion of your financial assets outside of Italy, and I can help you to understand all the options and eliminate the complications that arise from the tax declarations. Please feel free to get in touch if you’d like to learn more.

And with that, the only thing left to do is wish you all a pleasant and relaxing Christmas and New Year – with any luck, 2021 will be a substantial improvement on 2020 (admittedly a low bar to jump over!).

Investment income taxation in Italy

By Andrew Lawford
This article is published on: 5th November 2020

05.11.20

This should be easy, shouldn’t it? Everything gets taxed at 26% – dividends, interest and capital gains. However, for anyone who has delved into the world of Italian fiscal matters, it should be obvious that the words “easy”, “taxation” and “Italy” do not belong in the same sentence.

Let’s try and examine how it all works
Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

DOWNLOAD THE TAX GUIDE TO ITALY

Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Assets held in Italy:
Let’s start by looking at the situation for those assets held in Italy (i.e. in an account at an Italian financial institution):

For directly-held, unmanaged investments at an Italian bank or financial intermediary, the 26% rate will apply to income flows (e.g. dividends and coupons) at the time they are received and to capital gains at the time they are realised. This system is known as regime amministrato and it is generally the default position that most people will find themselves in when they open an account in Italy, unless they opt for a discretionary asset management service (see below). Under this system, the bank or other intermediary involved makes withholding payments on the client’s behalf and no further tax is due.

You can opt out of this system and elect to make your own declarations and tax payments (regime dichiarativo), however this is likely to be a sensible option only for someone who has assets spread over a number of different banks, as it is the only way to off-set gains realised in one bank with losses realised in another. The cost of doing this is that you will have to take responsibility for the correct declaration of all your investment income, which is no easy task. It will necessitate a lot of work on your part, as well as the need to find a local tax accountant willing and able to handle this aspect of your tax return.

If you decide to use a financial adviser to help with the choice of your investments in the above context, it is worth noting that any explicit cost of the service will attract Italian VAT at 22% (and if you are not paying an explicit cost, then you should look closely at the assets you are being advised to purchase – expensive, commission-paying funds are still very much alive in the Italian market). It is not possible to deduct the advise cost from your gross results before taxation is withheld.

DOWNLOAD THE TAX GUIDE TO ITALY

The weird world of fund taxation:
One of the more perverse aspects of financial income taxation in Italy is the treatment of fund investments (basically any collective investment scheme, including ETFs). These will produce what is known as reddito di capitale when they generate dividends or are sold at a profit, but a reddito diverso when sold at a loss. What this means in practical terms is that in a portfolio containing only funds, you cannot off-set losses against gains. If you do accumulate losses through selling losing investments, you will need to generate gains that can be classified as redditi diversi in order to off-set the losses. This will likely involve investments in individual stocks and bonds, which may lead to an odd portfolio construction driven by tax considerations – generally not a good basis upon which to choose one’s investments.

Let’s turn now to directly-held, managed investments held with an Italian institution. In this case, taxation of 26% will be levied annually on any positive variation in the overall account value, with no distinction being made between the various sources of the income (this is known as the regime gestito). If the account suffers an overall decrease in value in the course of a given year, this loss can be carried forward and off-set against gains recorded over the following four years. Whilst this is a relatively simple arrangement from a tax perspective, it remains inefficient in the sense that it taxes you on unrealised returns (although at least the return is taxed net of fees).

It is worth noting that the asset management fees charged on this type of service attract Italian VAT at 22%, so an agreed cost of 1% per annum becomes a 1.22% cost for the client. Italian institutions will also generally favour investments in their “in house” managed funds, even when better (and cheaper) investments are available.

DOWNLOAD THE TAX GUIDE TO ITALY

Assets held outside of Italy:
There is nothing to prevent you from holding assets outside of Italy, but you do need to go into such a situation with your eyes open. You will find yourself essentially in the same situation as the person who opts for the regime dichiarativo which I described above, together with the added aggravation of having to comply with the foreign asset declaration requirements (Quadro RW), which mean that you have to declare not only the income you derive from your financial assets, but also their value and any changes in their composition from year to year. If you’d like to have an idea of the complexity of making these declarations, get in touch with me and I will send you the instruction booklet for the 2020 Italian tax return (Fascicolo 2, the section which deals mostly with financial income and asset declarations, runs to 62 pages this year, and no, it is not available in English). You cannot opt to have a foreign, directly-held, discretionary managed account taxed as per the regime gestito above, because this is only possible for accounts held with Italian financial institutions. This means that any account will have to be broken down into its constituent elements and the tax calculated appropriately. Please also note that accounts which enjoy preferential tax treatment in a foreign jurisdiction will generally not carry any such benefits for an Italian resident.

Italian-compliant tax wrappers:
There is a solution which allows you to maintain foreign assets whilst removing 99% of the hassle described above. This involves using an Italian-compliant life insurance wrapper, issued from an EU jurisdiction. There are a number of other important benefits that accrue to this type of solution for an Italian resident, the two main ones being deferral of taxation until withdrawals are made (or death benefits paid) and total exemption from Italian inheritance taxes. I am reluctant to present comparative numbers in an article of this sort, but it should be clear that if the investments and costs are the same under the various scenarios examined, tax deferral will lead to a higher final investment value, and so should always be the preferred solution.

DOWNLOAD THE TAX GUIDE TO ITALY

My goal with this article hasn’t been to make your head spin (although I can understand that this might have been its effect), but instead to make it clear that even apparently simple rules can hide a web of complexity which will ultimately lead to an inefficient outcome for the unwary investor. My goal is to cut through the complexity and make your life as simple as possible, whilst giving you access to quality underlying investments. Yes, it can be done, even in Italy.

Buying Property in Italy

By Andrew Lawford
This article is published on: 15th October 2020

15.10.20

If you’re reading this, you may well already own a property in Italy – in which case, you’ll know the ropes already.

But for anyone wanting to get serious about hunting for property in Italy, my latest podcast should be of interest. We cover not only the ins and outs of property transactions, but also look at how best to approach the task of finding your Italian home.

As usual, we conduct interviews with experts who offer their unique perspectives to help you to disentangle an otherwise confusing (and potentially insidious) process.

Available on
iTunes
Spotify
Google Podcasts
Stitcher

Please click on the above links to listen

Tax break for pensioners moving to Italy

By Andrew Lawford
This article is published on: 14th August 2020

Anyone like the sound of living in Italy and paying only 7% tax?

Generally speaking, if you are contemplating the move to Italy you will be thinking about many things, but saving on your tax probably isn’t one of them. So let me give you a nice surprise: if you are in the happy situation of being a pensioner considering moving to Italy, 7% tax on your income is possible, subject to a few rules, for the first 10 years of your residency in the bel paese.

This all came about in 2019’s budget and had the aim of encouraging people to move to underpopulated areas of Italy. Initially, the rules were that you had to take up residency in a town with fewer than 20,000 inhabitants in one of the following regions: Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia or Sicily. Subsequently, the criteria were extended to include towns in the regions of Lazio, Le Marche and Umbria that had suffered earthquake damage and which have fewer than 3,000 inhabitants.

Of course, being Italy, something had to be difficult in all of this, and indeed the law makes reference not to a list of towns but instead tells you to look at ISTAT data (ISTAT is the Italian statistical institute) for the population levels on 1st January in the year prior to when you first exercise the option.

Given the difficulty in finding out exactly which towns would be covered by this rule, I delved into the ISTAT data and also dug out the relevant references to earthquake-struck towns with fewer than 3,000 inhabitants in the other regions mentioned above. I have put all of this in an Excel file which gives a list of towns eligible for the

pensioners’ tax break in Italy divided by region and then further by province, so that you have a rough geographical guide as to the areas you could consider moving to Italy.

As I was sifting through the ISTAT data it suddenly dawned on me that if the cut-off is 20,000 inhabitants, then almost the whole of Southern Italy is eligible for this 7% regime, and you can include in that some truly delightful places such as Vieste in the Gargano (Puglia), or even the island of Pantelleria. This is possible because Italy is divided up into municipal areas that sometimes have more feline than human inhabitants. Obviously, if you are looking for raucous nightlife then you are likely to be disappointed by what is on offer, but if, on the other hand, you like the idea of not having too many people around, then you could do worse than the town of Castelverrino in Molise (population 102) or Carapelle Calvisio in Abruzzo (population 85). Perhaps one day you could even become mayor.

Flat Tax Regime

This new flat-tax regime comes amid a move by a number of European countries to attract pensioners to their shores. Portugal offered a period of exemption on income tax for foreigners (the benefits of which they are now reducing) and Greece has recently announced the intention to offer a 7% flat tax on foreign-source income for pensioners (I wonder where they got that idea from?), which is also promised for 10 years. There is some discussion about the fact that the EU is not generally well-disposed towards these preferential tax regimes, which could lead to them being phased out in a relatively short period of time – so for those looking to make the most of them, time could truly be of the essence.

The great thing is that the 7% rule applies not only to your pension income, but can be applied across the board to any foreign-source income and there is also a substantial reduction in the complexity of the tax declarations that must be made. There are further tax-planning opportunities in all of this, because much will depend on whether you are planning on being a short-term or long-term resident of Italy.

As always, the devil is in the detail as far as tax and residency planning is concerned, and the year of transition when you first establish residency in Italy is key to setting yourself up in the most efficient manner.

So if the above sounds interesting, please get in touch and I would be happy to send you the list of eligible towns and discuss how the rules of the regime apply to your situation.

Central Banks in Italy

By Andrew Lawford
This article is published on: 29th April 2020

29.04.20

Dear All

There is but one topic of conversation in these strange times, and as the crisis unfolds I decided it was worthwhile looking at how the Italian government is responding and considering where we might be heading.

I have decided to produce a pre-recorded webinar in order to provide you with some useful information on the support available to businesses and have even tried to bring a modicum of humour into the arcane world of central banks and economic policies.

Please see the link below for my latest (in truth, my first) webinar.

The debt situation in Italy

By Andrew Lawford
This article is published on: 25th March 2020

25.03.20

I’m not entirely sure if I’m writing my first Spectrum article at what amounts to an auspicious or inauspicious time. Certainly I didn’t imagine that I would be writing it in my current circumstances, which essentially amount to being under house arrest. Many of the people reading this will be in similar circumstances to me, and those of you who aren’t risk becoming so over the coming weeks.

Generally on these occasions we feel the need to say such things as, “I hope you are all safe and well”, but I think this goes without saying. All of us have some friend or family member who is in the high risk category, so what I will say is: for those of you at high risk, be careful. For the rest of us, let’s be aware that things could be worse for us personally and keep a lookout for people who may need some help.

It would have been nice to have started out by writing something positive about Italy, but the current situation brings into sharp focus the vulnerability of the Italian economy to external shocks. The debt situation in Italy propagates a fragility that becomes disturbingly apparent at times like these. Put simply, when you are up to eyeballs in debt in normal times and a crisis hits, you don’t have any flexibility to withstand the shock.

Since I moved to Italy in 2004, this has been the
evolution of the debt situation:

I find it astounding that Italy has managed to accumulate almost 1 trillion euros of extra debt over the last 16 years, a period in which GDP has increased less than half that amount. Each and every initiative to realign the government accounts has failed miserably, as evidenced by the graph below (source: www.mazzieroresearch.com):

What this graph shows is the annual budget forecasts (and updates, when announced) for the evolution of the Debt/GDP ratio over the years following the forecast (these are the dotted lines), compared with what has actually happened (the solid red line). The bold blue dotted line is the current forecast, but it’s fairly clear that the current crisis will lead to a drastic change in this.

How much of a change is an interesting question…
Let’s consider that the latest declarations from the president of the Confindustria business lobby group, Vincenzo Boccia, estimate that roughly 70% of Italian productive activity is closing, so something like 100 billion euros a month of lost GDP for the duration of the current period of “lockdown”. All of this leads to the certainty that tax receipts will drop off a cliff, either because no tax is due (or some kind of “holiday” is given), or because companies and individuals simply don’t have the money to pay. This is happening at a time when the government will be called upon to increase spending, both to respond to the direct costs of dealing with the healthcare emergency and to give some support to businesses and workers (through cassa integrazione (temporary support for idle employees) or support payments).

So if we assume a drop of 70% in tax receipts and an increase of 20% in government expenditure compared with 2019 levels, you get an annual deficit for 2020 of 550 billion euros (in 2019 the deficit was 67 billion). So we are possibly faced with a 40 billion euro hole to fill each month compared to Italy’s normal situation. Almost 700 euros per capita, per month. If the whole year continues this way, we end up with a Debt/GDP ratio of around 165%, and this is on the generous assumption that GDP rebounds immediately to 2019 levels.

Given the above, it is not surprising to hear renewed suggestions that the EU should start issuing European bonds. Over the years, since the financial crisis of 2007/08, the weaker countries of the EU have sometimes tried to suggest that true European bonds should be issued by the Union, which would have the effect of explicitly making the more virtuous members (especially Germany) jointly and severally liable for debts of more profligate members such as the PIIGS countries.

This time, it is being suggested that these bonds carry the alluring although somewhat morbid title of a “Coronabond”. Good luck getting that one past the Germans, even if the proposal is only to issue such bonds as a temporary measure to generate support for those economies most heavily affected by the current crisis. Most politicians understand instinctively what economist and Nobel prize winner, Milton Friedman, once said: there is “nothing so permanent as a temporary government programme”. Once you’ve issued your first European Bond, how will you be able to say no next time?

So what does this terrible situation mean from a financial perspective for your average Italian resident with some savings and investments? Given that most of us have a bit more time on our hands than usual, it might be an idea to have a proper look at your situation and ask some of the following questions, although you must only do so without panicking and without jumping to hasty conclusions:

How are my investments holding up compared with the risk expectations that I had at the time the investment was made? If, as is probable, there are some unrealised losses in my portfolio, am I comfortable that the current situation isn’t putting my overall financial situation at risk?
Where and how do I hold my assets? If they are all deposited in one bank or in one country, is it worth looking at diversifying my country risk? Banks are generally only considered as strong as the country they are based in (and they generally hold piles of government debt), so credit-rating agencies will not give a higher rating to a financial institution than that given to the sovereign nation it is based in.
If I have been a cautious investor up until now or have hoarded cash, should I look at increasing risk given the falling values in the market?
If I have invested aggressively and am now sitting on losses, how are my nerves holding up and am I framing any discussion on the subject in the right way?

If any of the above questions resonate with you, then now might be the time to have a chat with me. At the minimum, it can be reassuring to discuss any situation in which you find yourself unsure of the consequences. My colleagues and I can help to bring focus to the important issues and cut through the noise generated by the crisis. Peace of mind can only come through analysis and understanding. Hope is not a strategy and neither is reacting on gut feelings or emotions generally.