Witholding tax on overseas money transfers to Italy

By Gareth Horsfall
This article is published on: 15th April 2014

I would like to bring up the subject of the 20% witholding tax on profit from investment, for Italian residents.  This piece of legislation that Italy was going to introduce in February and has now postponed until July. This seemed to be one of the main causes for concern amongst attendees at the recent Tour de Finance Forum events in Italy and so I thought I would write the little that I know of it to assist in preparation for its, possible, return.

To recap, the introduction of the law was aimed at automatically stopping 20% on any monies brought into Italy, from overseas, (for personal account holders only) on the assumption that this money was ‘profit from investment’ and not other types of income. Profit from investment can be clarified as rental income on properties overseas, sales of shares, bonds, or other types of financial assets.

Of course, stopping 20% on ALL transfers into Italy would also catch those who are legitimately bringing in pension income, income from employment, banks savings etc, and therefore to avoid the fiscal authorities automatically witholding 20% on these monies a self certification, in the guise of a letter, would need to be submitted to your bank to declare that this was NOT profit from investment. If you submitted the letter then your personal details would be passed to the fiscal authorities (who we can assume would then start to track your money movements through Internationally agreed exchange of information controls)

Now it is worth noting before I continue, that in essence the law itself was a smart move from the Italian fiscal authorities, in that it would force those who do not wish to be caught in the witholding tax to announce to the Italian authorities that they are bringing money in and out of the country. Hence, they are more easily trackable. In addition, and I think this is the more likely target, it would also force those who have not yet registered assets overseas with the Italian authorities, to do one of 2 things.

1. Carry on regardless and therefore run the risk that when they are found out they could be fined anywhere from 3-15% of the undisclosed assets, and should those assets be located in black list territories then those fines are doubled from 6 – 30% of the undisclosed value.  Not advisable!

2. They self certify with the bank and as such are submitting a legally signed statement of intent.  Should they then fail to report income from profit, when it enters the country, they have actually ‘knowingly’ broken the law.

Of course, all this is based on the assumption that someone is not declaring assets that they have overseas and for most this is not the case. So what about those of you who are doing what you should be doing?

Then, I believe, it becomes no more than another administrative headache.  What I mean is that with a self certification letter the bank will not stop the witholding tax and so income can move freely into the country as it had previously done. However, let’s assume that you do want to bring some money in from an investment overseas, which has already been declared through the correct channels. Does this mean that you have to go back to the bank and request that this one transaction is treated differently, just this time and what if this is a regular occurence?

Also, what if you fail to declare that money is coming in from overseas profits on investment but this money is, once again, already declared legally on your tax return? Are you in breach of rules and therefore subject to fines?

Finally, so as not to drag the point out too much, what if the bank mistakenly witholds the tax on pension income, for example, which you need to live on? Can you easily reclaim this back? Doubtful! Or do you have to wait up to 2 years for a tax credit?

As we can see the legislation had some trivial issues which they needed to iron out, but, fundamentally it was an interesting move. The first of its kind that I have seen in Europe, where a direct attack on profit from investment overseas has come under the spotlight. Until now the main focus has been on bank interest payments and rental incomes for homes overseas. On March 24th 2014 the 2nd phase of the EU Savings Tax Directives was submitted for final approval which will now bring monies held in overseas investments funds, OEICS, SICAVs, Unit trusts etc, in the EU and outside, into an automatic exchange of information agreement. Additionally, Luxembourg and Austria will now be subject to full exchange of information agreements as of 1st January 2015 and other dependants states, such as the Isle of Man, Jersey, Guernsey, Dutch Antilles, San Marino etc will be required to share more information with the EU.

Lastly, and most interestingly, the proposed 20% witholding tax in Italy will likely raise its head again in July this year. But, in what shape or form, I cannot say. The report from Brussels in the aftermath of the first proposals was not as you would expect, a damning of the law. But in fact they openly supported the idea and suggested different ways of looking at implementation. Can we expect to see this Italian model being the model that Europe will use in the future?

So, for those who are not quite ‘in regola’ yet, time is of the essence. The transparency agreements are effectively opening the doors to hidden assets, bank account interest is tracked, rental income on overseas properties is tracked, now investment in foreign investment funds is under scrutiny. It is only a matter of time before income payments from direct investment in shares and bonds are fully disclosed, Capital gains, i.e profit on investment, is now under scrutiny, as detailed above and that only leaves Limited companies and other more obscure and substantially more speculative investments.

It is worth noting that one of the speakers on our Tour de Finance Forum events was Andrew Lawford from SEB Life International. He was explaining how it is perfectly possible to keep assets outside Italy, but be compliant with the laws of Italy, and remove the need to keep abreast of these changes in Italian law by employing the use of an insurance wrapper in which to house your assets. It acts like a tax efficient account whereby SEB Life International, in this case, will act as a witholding agent to ensure you do not pay more tax than you need to and that they become legally responsible for reporting the assets correctly.

It removes the worry of reporting error, keeps monies out of Italy and most importantly, whilst the money is held in the wrapper, it is never subject to Italian income or capital gains tax. Only at the point of withdrawal (partial or full) would any Capital Gains tax liability only, (not income tax) occur, which would be paid automatically on your behalf.

Finishing up on the new legislation, in whatever form it takes, will likely be no more than an administrative headache for most, but for those who, as yet, may have undisclosed assets, then more difficult decisions lie ahead. If you think anyone else might find this article useful, please do feel free to pass the information on and if you would like to speak about this or any other financial matter as an expat living in Italy, then plese get in touch.