By Gareth Horsfall
This article is published on: 10th July 2023
Cittadinanza v Residenza – which to choose?
I decided to write this article because a number of people have asked me about the tax advantages of becoming an Italian citizen. My aim here is to give some clarification on the financial planning considerations if you are thinking about a permanent stay in Italy.
I opted for Cittadinanza as a result of Brexit. When my EU acquired rights were going to be stripped away from me I needed to make some decisions and for me cittadinanza was the right thing to do (with an Italian wife and child in Italian school, it seemed a no-brainer). Thankfully, as a resident in Italy married to an Italian my cittadinanza seemed to be right of passage rather than any decision that the preffetura took. I was lucky and I also managed to squeeze in before the language test was introduced…phew! (although I could pass that now).
If you are left wondering which option is best for you, I thought I would write this article to help lay out some facts. I hope it helps.
They are 2 very distinct definitions, often confused, but inherently connected from a legal and fiscal point of view.
As ‘stranieri’ living in Italy it is not unusual to get confused by some of the terminology regarding our legal status, and for Brit’s who were resident in Italy pre-Brexit, they now have additional legal implications which they have to deal with. For the rest of the non-EU world, you have probably been experiencing some of these issues that Brits are now facing. for some time, so you could probably tell us a thing or 2 about it.
The Universal Declaration of Human Rights 1948 states that every individual, in every part of the world, has a right to legal citizenship. No individual can be arbitarily stripped of their legal citizenship, nor of the right to change it.
Cittadinanza is simply defined as the condition of an individual belonging to a state with the rights and duties that this relationship entails; among which are political rights, i.e the right to vote and the possibility of holding public office, and the duty of loyalty to the state and the obligation to defend the state, within the limits and methods established by law.
Cittadinanza gives the individual the right to vote, access to public services, diplomatic protection and legal recognition. It can be acquired by birth (ius soli o ius sanguinis), by marriage or naturalisation and every country has it’s own different criteria for obtaining cittadinanza.
Advantages
Cittadinanza has some distinct advantages, such as the right to vote in national elections, unlimited travel with the passport, access to social and health services and protection by the government.
Requirements for application
In the case of Italy, a language test must be passed to level B1, declaration of prior residence in other countries is required, evidence that you don’t have a criminal record in other countries and income requirements etc. In addition, specific requirements may be needed depending on whether you are applying based on birth, marriage, or residency.
Residence is the place that an individual is considered fiscally resident.
Residence determines the obligation to pay taxes in a specific state or jurisidction. Generally speaking it is based on the period of time that one spends in a country but is also determined by other factors such as whether you are registered in a specific country and whether it is your habitual abode i.e the place where you spend most of your time. (Read on for more details on this).
Residence refers to the legal status of an individual in a country and guarantees the right to live and work without citizenship. Residenza, in much the samw way as cittadinanza has a number of advantages, such as the right to access health care the option to work, buy property and make investments in Italy. Residenza can be temporary or permanent and the permesso di soggirono comes in various forms. To obtain residenza an individual must satisfy various documentary requisities, financial criteria and possibly language competency (not necessarily)
Quick note 1. I am frequently asked whether being registered at the Anagrafe constitutes fiscal residency. The answer, in the main is YES. There might be situations for business people, for example, who have interests in Italy and other countries and who require residenza anagrafica but not ‘fiscale’, for their business needs. However, for the majority of people who are coming to live and reside in Italy there will be no doubt that your fiscal residency is in the country if you meet just ‘ONE’ of the criteria below.
(**US citizens can transfer their residency to Italy but will have an obligation to report in the US as well. This creates numerous tax and financial planning issues and so should be planned carefully**)
Quick note 2. Is it possible to be a resident of nowhere because you travel extensively and do not spend more than 183 days a year in any one country? This is absolutely NOT possible! By definition, every individual must have a place of habitual residency whether you spend 183 days a year there or not. You cannot choose your residency status. It is a matter of fact!
Definition of residenza in Italy
You must remember that the definition of residenza in Italy is defined through the income tax code and therefore residenza and taxation are intrinsically connected. An individual is considered subject to taxation and fiscally resident for the majority of a tax period (calendar year) if they meet one or more of the following requirements:
1. You are registered at the anagrafe
2. You spend more than 183 days a year in Italy, i.e it is your habitual abode.
3. You are domiciled in Italy. (Your domicile , by Italian definition, being the place where you have established your main centre of business and/or personal and affairs.
Whilst different concepts they do coincide with each other. As we have already established, cittadinanza determines your citizenship whereas residenza determines that you are fiscally required to pay taxes in Italy. You can be a citizen of Italy but also reside in another country and visa versa. The principle differences however, are as follows:
This is a particularly pertinent question for Brits who lost their EU national status as a result of Brexit but which is also interesting to other nationalities who decide to live in Italy, and who may also want to obtain cittadinanza.
The simple answer is that your fiscal tax status will NOT change as a result of moving from residenza to cittadinanza. However, there are cases, which vary from country to country and therefore you will need to either refer to the double taxation treaty yourself or get a professional to look for you.
In general the main fiscal difference between cittadinanza and residenza is regarding government derived pensions (pensions paid by the state, which you worked for, and are directly linked to the type of employment i.e teachers, military, police, health care professionals from a public setting). If you are receiving a pension from a government derived service then with residenza it will normally be taxed ONLY in the state in which the pension is being paid. However, if you obtain cittadinanza then the same pension could become subject to taxation in Italy as well. Double taxation issues are dealt with in the double taxation treaty, but it may mean you end up paying more taxation in Italy on the same pension than you would be in your home country.
***Government service pensions are NOT social security or state pension payments***
State pensions and social security payments are, in nearly all cases, taxable as a fiscal resident in Italy. (Commercialisti often misunderstand these and assume they are government derived pensions from employment, as described above. They are not!
Knowing when to move can also make the difference between paying taxes in Italy in the year you move and paying them after the next fiscal year.
If you register after July 3rd then under the 183 day rule you will not be considered fiscally tax resident in Italy until the following full calendar year (only Italian sourced income will be taxable from the point of payment). Conversely, if you do register as resident before July 3rd in any year, then you will be considered fiscally resident for the ‘whole’ calendar year.
But don’t make the following mistake that I have seen many times:
If you make a request for residence before July 3rd and let’s say you don’t have all your documentation, so you delay the application until after July 3rd. Once everything is submitted and residenza is granted, it will be back dated to the original request. This might mean you are now considered fiscally resident for the whole tax year. Therefore, benefitting from the July 3rd rule means that you MUST NOT apply for residency before this date!
The period from July 3rd to Dec 31st is a HUGE financial planning opportunity because you potentially have the tax jurisdiction in which you are currently living to take advantage of and replan your finances for a tax efficient life in Italy. One simple move might be to sell some assets to benefit from capital gans tax reliefs that Italy does not have. Pre-planning and discussion is essential. When people contact me about a move to Italy, my first question is what date are you planning on registering, and is it flexible? It gives you time and opportunities, which could make a big financial difference.
Better the money in your pocket than in the Italian tax mans pocket!
By Gareth Horsfall
This article is published on: 1st February 2022
Well, well, what a start to the year – it feels like a repeat of winter 2021. As I write I am actually down with Covid again. I first got it in March 2020, right at the start of the pandemic and I have it again now. It is nothing more than a dry throat, cold like symptoms and feeling quite tired, but still it’s a bit annoying to have caught it again, although I think that given the transmissibility of Omicron it was a question of ‘when’ rather than ‘if’ I would get it. Anyway, I am now on day six and feel much better. However, I have just learned that since I only tested positive on day three of my illness, I now have to do another seven days quarantine before I will get the green pass……aaahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh.
Anyway, I wasn’t writing to update you on my health, but actually to update you on the health of the financial markets at the moment and provide you with some tax updates.
For anyone who has been brave enough to look at their investment portfolio account balance in the last few weeks, you will have noticed that it has probably taken a turn for the worse. I am not talking crash-like turn for the worse, (remember March/April 2020!) but merely correction territory.
In short, equity markets have started to pull back from their highs in 2020 and 2021. I can’t say for sure when the correction will end, but from the information that I have been reading from various asset managers in the last few days there is confidence that markets will rebound in the first half of this year.
It is important to remember that corrections of this magnitude happen in more years than they don’t and rarely prevent equity markets from delivering positive returns during the year!
So what is going on?
Covid related supply problems for goods and services are the biggest concern right now, which is feeding into consumer prices: inflation (microchips, freight and energy are the biggest contributors). I have written about this in a previous E-zine and so won’t delve into too much detail here, but inflation is likely to play a big part in discussions around financial markets in the first half of this year, even though most economic indicators are predicting a quick return to form for the second half of the year.
One of the most important points is that with rising inflation, the central banks (mainly the Fed in the USA) do not start tightening monetary policy too quickly or harshly. There is no indication that they will take extreme measures in this regard and so companies will still have access to capital and will be able to invest. As long as company profits continue to grow and inflation does not start to spiral out of control then there should be a rebound, probably in the first half of the year.
Of course various themes will also continue to play out during the course of the year, namely: cloud computing, green buildings and construction and digital health and wellbeing. This provides us with well needed diversification in our portfolios. Big tech and smaller disrupting companies across many more sectors will play a big part in returns.
Inflation will likely cause some collateral damage along the way. Depending on how fast and high it moves, the biggest sector to be affected could be the residential housing market. It might cause a cooling down of the price rises we have seen in recent years, or may have a more long term and severe impact. A lot of that depends on whether this bout of inflation is ‘temporary’, and caused merely by Covid issues, or is ‘structural’ which means that it will be more bedded in for a long time.
Most of the information I am getting from money managers is that it will be temporary and that things will return to normal much quicker than we expect (think a couple of years!), but I am not so sure. I think it may run a little longer. But regardless of who is right, we need to protect the money that we have. There are plenty of excellent investment opportunities out there whether we are living in an inflationary or non-inflationary environment. The money managers we work with are on top of these and we can rely on them to seek out those returns where possible.
If you are a client then all you need to know is that we have been planning for inflationary rises for some time and so despite the current correction in investment markets, you really have nothing to worry about.
Tax matters – ‘residenza‘
During my Covid days sat at home in front of the computer, I receive a lot of pop-ups from various fiscal websites and from Sole24Ore (the Italian version of the Financial Times).
One that caught my eye the other day was an amendment to decreto Dl 146/2021, which clarified the fiscal treatment of the ‘family nucleus’ (nucleo familiare) who have established their residence (residenza) in two separate comuni.
The crux of this is that the courts ruled that two family members ‘cannot’ establish their residenze and claim 2 x prima case in the same nor different comuni.
This would seem to be a simple case of trying to avoid paying IMU on second (or third etc) properties. But the new law decreed that it would no longer be possible where members of the same family are living under the same roof. Apparently the law had not been clear enough…. until now.
I am mentioning this change in the law because it also has implications for people who may be registered in Italy as resident but may have a spouse who is claiming residency in another country. In my experience, the main reason for this is to try to save tax and whilst there may be some logic to it, where one member of the couple is working for a foreign company and maybe travelling to and from Italy rather than being permanently based here, it does still raise the question of how the fiscal authorities view the idea of the ‘nucleo familiare’ and what impact this has on our tax liabilities and where they lie. If spouses are registered as living in different places then there is some legal implication of separation and to benefit from any tax breaks, separation must be legally registered somewhere! If not, then the tax authorities will generally consider you as one family living under the same roof, hence both resident in Italy.
It raises some interesting questions, but might be a useful discussion point with your commercialista if you think you might fall into that net.
Fiscal treatment of Bitcoin
More and more people I meet are starting to dabble with the idea of buying some Bitcoin to add to their portfolio. I have been an investor for a few years, but my experience is not particularly a great one. It tends to go through phases of stratospheric prices rises and then complete collapse. As things currently stand I don’t see much value in the application of the buy and hold investment philosophy in relation to Bitcoin. It would appear to be something for the active trader, and then we are getting into speculative territory!
Anyway, the point of this article is to help you understand the fiscal treatment of Bitcoin in Italy, and to remind you that you will need to declare it in your tax return.
To understand the correct application for tax purposes, we need to remember that it is actually a currency and can be traded in much the same way as any other currency. In fact, since it is a registered currency (through the blockchain) then the Italian tax authorities treat it like any other bank account you might have. Hence, the tax treatment falls into that very simple law of €34.20 ‘bollo’ on any account that has an average annual balance of more than €5,000 in any tax year (less than €5,000, it does not need to be declared).
However, living in Italy would not be the same without some complications. This brings us back to the article that I wrote back in April 2021 on the same issue. Where you hold the value of Bitcoin (or any other currency) of more than €51,645.69 for a period of more than 7 days, any transfers of that currency into another from the 8th day would be considered speculative and capital gains tax would have to be calculated.
I wrote a long article on this subject, which you can read about here: spectrum-ifa.com/do-you-have-non-euro-based-cash-deposits/
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