Tax-Efficient Savings & Investments in France
By Spectrum IFA
This article is published on: 24th May 2016
Some of you reading this article have just completed your first French income tax return. Well done if you achieved this without difficulty – ce n’est pas facile!
Whether you are new to France or not, the annual tax return is an opportunity to take stock of your financial situation. In particular, if you had to declare interest from bank deposits (including ISAs), dividends from shares (even if these were reinvested), and perhaps also gains from financial assets, then your tax and social charges bill will be higher than necessary. No-one likes paying taxes and so now is a good time to consider alternative tax-efficient savings and investments, if you want to avoid reduce your future tax bills.
For short-term savings, France has a range of tax-free accounts. The Livret A for deposits up to €22,950 and the Livret Développment Durable (LDD) for deposits up to €12,000, both paying interest of 0.75% per annum. For households with taxable income below certain limits, there is also the Livret d’Épargne Populaire (LEP) for deposits up to €7,700, which pays 1.25% per annum. You have full access to your capital in these accounts at any time.
The interest rates for the tax-free accounts are set by the French government, taking into account average short-term interest rates and inflation – both of which are very low at present. Realistically, the current tax-free interest rates could be lower, however, even the French say that it would be political suicide for the government to reduce these rates now! Whatever the tax-free rates are, however, these are better than comparable standard deposit rates for other accounts with instant access. Hence, the tax-free accounts are very useful for depositing cash that you need for an emergency fund, or to meet other short-term capital needs. The accounts do not create any tax issues and earning some interest is better than none at all.
For medium to long-term savings, the most popular type of investment in France is the Assurance Vie (AV). This type of investment is very tax-efficient as there is no income tax or capital gains tax on any income or growth, whilst the monies remain within the AV. Annual deduction of social charges is also avoided, except when investing in fonds en euros, which are offered by French banks and insurance companies.
When you do take a withdrawal from the investment, part of this is considered to be a withdrawal of capital and this part is therefore free from any tax. For the taxable element, you can opt for a fixed withholding tax rate, in which case the insurance company will take care of the necessary deduction, declaration and payment of the tax and social charges. Alternatively, you can opt to declare the gain through your annual income tax return, in which case the company will not make any tax or social charges deductions and will provide you with notification of the amount that you need to declare. The taxable gain will then be added to your other sources of taxable income and taxed at marginal rates.
Over time, AVs become even more tax-efficient and after eight years, the gain in amounts withdrawn can be offset against an annual tax-free allowance of €9,200 for a couple who are subject to joint taxation, or for ‘one-person households’, the allowance is €4,600.
Millions of French people use AV as their standard form of savings and investment and many billions of Euros are invested in this way via French banks and insurance companies, which offer their own branded product. In addition, there is a much smaller group of companies that are not French, but have designed French compliant AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. However, before choosing such a company, it is important to establish that the company has complied with all the formal French tax registration procedures, so as to ensure that you will receive the same tax and inheritance advantages as the equivalent French product.
Some of the advantages of the international product, compared to the French product, are:
- It is possible to invest in currencies other than Euro, including Sterling and USD.
- There is a larger range of investment possibilities available, providing both access to leading investment managers, as well as capital guaranteed products and funds.
- Documentation is in English, thus helping you better understand the terms and conditions of the policy.
- The AV policy is usually portable, which is particular benefit if moving around the EU, since in many cases, the policy can be endorsed for tax-efficiency in other EU countries.
AV is also highly beneficial for inheritance planning, both as concerns freedom to leave your financial assets to whoever you wish, as well as providing valuable additional inheritance allowances for your beneficiaries and I will cover this in a later article.
Everyone’s situation is different and any decision to invest in assurance vie should only be considered as part of a wider review of your overall financial situation, as well as your plans and objectives for the future. Hence, if you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter.
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Are your investments tax compliant in Spain?
By John Hayward
This article is published on: 30th March 2016
Many UK nationals resident in Spain will have premium bonds, ISAs, unit trusts, and other vehicles which, although tax efficient in the UK, are not in Spain and are therefore non-compliant for tax purposes. Tax on the growth on these investments may need to be paid in Spain each year, whether withdrawn or not. The advantage of a Spanish Compliant investment, “wrapped” within an insurance policy, is that tax is only payable on gains when these are withdrawn. The gains are charged at SAVINGS TAX rates and NOT INCOME TAX rates. Tax savings can be significant when investments are organised in line with Spanish regulations.
Tax increase on pension funds
The lifetime allowance on pensions will reduce from 6th April 2016. For those who have pension funds over £1 million, 55% tax will be payable on the excess taken as a lump sum. A 25% charge will apply to income although, for a higher rate taxpayer, this extra tax could mean an overall rate of 55% as well. For every £10,000 of income, £5,500 would go in tax. There are people who have not reached this level of pension fund. However, let´s say that there is currently £800,000 in pension savings. With 5% increases each year, in 5 years´ time the funds will be worth over £1 million. There are ways to protect against this charge, up to certain limits and with restrictions. This is one of the reasons why a QROPS arrangement could be suitable for those living overseas as these additional tax charges do not apply to QROPS.
Source: https://www.gov.uk
Additional Spanish Succession Tax for non-EU membership
With effect from 1st January 2015, any non-resident who inherits a Spanish asset, and is an ascendant (parent or grandparent), descendent (child or grandchild), or a spouse of the deceased, will be treated in the same way as a Spanish resident, receiving the same allowances and benefits. The tax will then be dependent on the autonomous region in Spain where the deceased was resident or where the asset is situated. This treatment only applies to EU citizens. The EU referendum on 23rd June in the UK could have a serious impact on what future taxes could be due for residents of the UK who inherit Spanish assets.
Source: http://www.legaltoday.com
French Tax Changes 2016
By Spectrum IFA
This article is published on: 12th January 2016
During December, the following legislation has entered into force:
- the Loi de Finances 2016;
- the Loi de Finances Rectificative 2015(I); and
- the Loi de Financement de la Sécurité Sociale 2016
Shown below is a summary of our understanding of the principle changes.
INCOME TAX (Impôt sur le Revenu)
The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:
| Income | Tax Rate |
| Up to €9,700 | 0% |
| €9,701 – €26,791 | 14% |
| €26,792 – €71,826 | 30% |
| €71,827 – €152,108 | 41% |
| €152,109 – plus | 45% |
The above will apply in 2016 in respect of the taxation of 2015 income and gains from financial assets.
WEALTH TAX (Impôt de Solidarité sur la Fortune)
There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:
| Fraction of taxable Assets | Tax Rate |
| Up to €800,000 | 0% |
| €800,001 to €1,300,000 | 0.5% |
| €1,300,001 to €2,570,000 | 0.7% |
| €2,570,001 to € 5,000,000 | 1% |
| €5,000,001 to €10,000,000 | 1.25% |
| Greater than €10,000,000 | 1.50% |
CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)
Gains arising from the disposal of financial assets continue to be added to other taxable income and then taxed in accordance with the progressive rates of tax outlined in the barème scale above.
However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:
- 50% for a holding period from two years to less than eight years; and
- 65% for a holding period of at least eight years.
This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.
In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:
- 50% for a holding period from one year to less than four years;
- 65% for a holding period from four years to less than eight years; and
- 85% for a holding period of at least eight years.
The above provisions apply in 2016 in respect of the taxation of gains made in 2015.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
Capital gains arising on the sale of a maison secondaire and on building land continue to be taxed at a fixed rate of 19%. However, a system of taper relief applies, as follows:
- 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
- 4% for the twenty-second year.
Thus, the gain will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:
- 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
- 1.6% for the twenty-second year; and
- 9% for each year of ownership beyond the twenty-second year.
Thus, the gain will become free of social contributions after thirty years of ownership.
An additional tax continues to apply for a maison secondaire (but not on building land), when the gain exceeds €50,000, as follows:
| Amount of Gain | Tax Rate |
| €50,001 – €100,000 | 2% |
| €100,001 – €150,000 | 3% |
| €150,001 to €200,000 | 4% |
| €200,001 to €250,000 | 5% |
| €250,001 and over | 6% |
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.
The above taxes are also payable by non-residents selling a property or building land in France.
SOCIAL CHARGES (Prélèvements Sociaux)
To date, social charges have been levied to fund certain social security benefits in France, as well as the compulsory sickness insurance schemes.
Hence, if you are resident in France, these are charged on your worldwide investment income and gains, even though this does not give any automatic right to French social security benefits and health cover. The current rate is 15.5% and the charges are also payable by non-residents on French property rental income and capital gains.
As has been widely publicised, on 26th February 2015, the European Court of Justice (ECJ) ruled that France could not apply social charges to ‘income from capital’, if the taxpayer is insured by another Member State of the EU/EEA. Income from capital includes investment income on financial assets and property rental income, as well as capital gains on financial assets and real estate.
Fundamental to this decision was the fact that the ECJ determined that France’s social charges have sufficient links with the financing of the country’s social security system and benefits. EU Regulations generally provide that people can only be insured by one Member State. Therefore, if the person is insured by another Member State, they cannot also be insured by France and thus, should not have to pay French social charges on income from capital.
In the main, the ECJ ruling affects people who have retired to France and hold a Certificate S1 that has been issued by another Member State, as well as those people who work in another Member State, but live in France.
On 27th July 2015, the Conseil d’Etat, which is France’s highest court, accepted the ECJ ruling, which paved the way for those people affected to reclaim social charges that had been paid in 2013, 2014 and 2015. Happily, this also included residents of any EU/EEA State who had paid social charges on French property rental income and capital gains.
In order to circumvent the ECJ ruling, France has amended its Social Security Code. In doing so, it has removed the direct link of social charges to specific social security benefits that fall under EU Regulations. The changes take effect from 1st January 2016, which means that social charges continue to be applicable at the rate of 15.5% on income from capital.
EXCHANGE OF INFORMATION UNDER COMMON REPORTING STANDARD:
2016 brings a new era in global automatic exchange of information between tax authorities.
Close to 60 countries are ‘early adopters’ of the OECD’s Common Reporting Standard (CRS), including all EU States (except Austria) and the popular offshore jurisdictions of the Isle of Man, Guernsey, Jersey & Gibraltar. As such, these early adopters start collecting information from 1st January 2016 to share by the end of September 2017.
Other countries, including Austria, Switzerland, Monaco, Australia, New Zealand and Canada have committed to start sharing data in 2018.
In the EU, the CRS has been brought into effect through the EU Directive on Administrative Cooperation in the Field of Taxation, which was adopted in December 2014. The scope of information exchange is very broad, including investment income (e.g. bank interest and dividends), pensions, property rental income, capital gains from financial assets and real estate, life assurance products, employment income, directors’ fees, as well as account balances of financial assets.
No-one is exempt and therefore, it is essential that when French income tax returns are completed, taxpayers declare all income and gains – even if this is taxable in another country by virtue of a Double Taxation Treaty with France.
It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an ‘uncooperative State that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).
11th January 2016
This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.
The Law of Esterovestizione
By Gareth Horsfall
This article is published on: 19th November 2015
The Law of Esterovestizione.
You are probably wondering with such an elaborate title then what on earth the topic could be about? Well, this topic came about because in the last few years I have met people who are operating Ltd companies in the UK or in Ireland, but who are living as a tax resident in Italy. This could present some issues and so I thought I would explain the law of Esterovestizione to highlight the problems of registering a business in one European state but operating from Italy. (There may be other legitimate reasons for operating a Ltd company in this way, but I am aiming to explore the main issue for smaller businesses).
How does it all work?
If you own 100% of the shares in a Ltd company and your are the sole director of the same Ltd company then there could be issues if you are an Italian tax resident. The risk being that if the Italian authorities were to interest themselves in your business then they may consider that the business should fall within the Italian rules on ‘esterovestizione’.
What is Esterovestizione?
This is the Italian rule which finds that where an overseas company is controlled by an Italian tax resident it is treated as an extension of their personal assets and therefore becomes subject to the Italian fiscal system and is re-taxed in Italy in accordance with Italian tax laws for corporation tax purposes. What constitutes control is a matter of fact in each case but the authorities look in particular at the board of directors and the shareholdings. What they are looking for is the “place of effective management” of the company, where the decision-making of the company is carried out and if it is by an Italian tax resident it is likely that the rules of esterovestizione would apply.
The authorities look to the substance rather than the appearance, so that the fact that the registered office is outside Italy will not be considered relevant where it is clear that the decisions are in actual fact taken by a person who is resident in Italy.
If you own 100% of the shares and are the sole director of a Ltd company, then this has all the makings of a classic case for the authorities to argue that the Ltd company should be treated as if it were Italian.
If the company is deemed, through your control of it, to be an Italian entity, then the company would effectively be regarded as having failed to meet, for several years, all the usual obligations binding Italian companies, including registering for IVA, filing corporation tax and IVA returns, registering and filing accounts etc.
The fact that you had complied with all these obligations in the UK or Ireland would not be considered relevant.
As the basis on which esterovestizione is applied is the effective control of the company in the hands of an Italian resident you can try and avoid these provisions by appointing trusted non-Italian residents as shareholders/directors – family members, for example – or alternatively to have nominee arrangements whereby a company or individual acts as nominee shareholder on your behalf. Family members and nominee shareholder arrangements of this type are still common, but the situation has become considerably more problematic in relation to both of these arrangements and it is now difficult (and very expensive) to find a professional prepared to accept the responsibility.
However, with the general tightening of the law in relation to nominee arrangements, this kind of structure is no longer effective. The current requirement is to be completely transparent – you need to declare any structure under which you are the beneficial owner – so even if there is a third party who nominally appears to be in charge, but in actual fact they merely operate on your behalf then you are under an obligation to declare your interests in the company in exactly the same way. Failure to do this amounts to making a false statement to the Agenzia.
What is the chance of being found out?
This surely represents a much more complicated area of information exchange than we have seen in recent years for a physical person. Individuals are for all intents and purposes already under the spotlight and financial information is being shared across European and other borders. Obviously, sharing information on underlying shareholders in a Ltd company is much more complicated. However, it is a plan for the EU to action in the very near future.
The EU have been very vocal about transparency of Ltd companies and I have also seen a number of documentaries on Italian TV in the last year, on exactly this subject. One that springs to mind was ‘Presa Diretta’ which focused mainly on Italian residents who set up Ltd companies in the UK and also Panama. If you would like to see the programme, you can watch it HERE (It is 1hr 27 mins long)
It is anyone’s guess how long a free flowing exchange of information on Ltd companies will take place, but planning to ensure you are not one of the people who are made an example of is probably a sensible long term business decision. That might be as easy as setting up an Italian Srl.
Impending changes to French inheritance laws
By Graham Keysell
This article is published on: 17th August 2015
In England, we are used to being able to decide who should inherit our assets when we die. However, once you are considered a French resident, the ‘Code Civil’ stipulates that a set proportion should go to your ‘protected heirs’ (i.e. your children).
For example, if you have two children, they are entitled to 2/3 of the value of your estate. It is only the remaining proportion that you have some control over. If you are not married, and there is no will, the entire estate will pass to the children.
Whatever your will might say (e.g. leaving 100% to your spouse or a friend), these ‘protected heirs’ can insist on receiving their percentage. It is possible to insert a clause in a will whereby your spouse has lifetime ‘use’ of the matrimonial home. They can also continue to receive income from any investments for life, but they cannot sell any assets, (or spend any money), destined to go to the children (e.g. money in a bank account).
Unmarried couples face a tax bill of 60% of any inheritance, after an allowance of the first 1,594 euros. The same applies to anyone you are not directly related to.
‘PACS’d couples have the same rights as husbands and wives and are not liable to pay inheritance tax.
Recent changes in legislation have improved the rights of the spouse to a certain extent, but the situation is still far from ideal.
The good news is that France has signed up to a recent EU law under which citizens of other countries will be allowed to opt for the inheritance laws of their country of birth. This is due to take effect from 17th August 2015.
Providing you have written a will stipulating that your estate should be disposed of under English law, you are at liberty to leave your assets to anyone you want (and in any proportion). This will take precedence over the Code Civil and completely eliminate the question of ‘protected heirs’.
It is worth mentioning that Scottish inheritance law has some similarities with the French ‘Code Civil’. Anyone born in Scotland would still have some restrictions on whom they could leave their estate to (although the limits are far more generous for spouses and it would almost certainly be preferable to take advantage of the new laws).
For reasons best known to themselves, the UK and Irish governments have not signed up to this EU legislation. Nevertheless, this in no way prevents UK citizens living in France taking advantage of the new rules.
If you have any assets (e.g. a bank account) in the UK, it is usually advisable for you to have both English and French wills. Whilst not compulsory, it does make the winding up of the estate far simpler (and cheaper!).
Wills do not need to be complicated and it is quite likely that a standard version for both English and French wills would suit your purposes. Anyone who would like to discuss this with me can contact me on graham.keysell@spectrum-ifa.com.
There are other factors to bear in mind before deciding whether it is in your interests to take advantage of the new legislation. If you have a ‘classic’ French will and are on good terms with your children, they can simply sign away their rights to the inheritance. Mentioning the new law may confuse the notaire in charge of winding up the estate.
Also, you could lose the valuable tax-free limits that your children would otherwise be able to take advantage of.
Personally, I believe the people most likely to benefit from the change in legislation are those who have children from previous relationships, those who want to leave money to their beneficiaries in unequal shares and those who want to leave money to people other than their direct descendants.
You should bear in mind that this new ability to leave your money to anyone you wish in no way affects the inheritance tax rates. As previously mentioned, there is no inheritance tax between spouses. However, after an allowance of €100,000, children will pay a sliding scale of tax (usually with the majority of the excess being taxed at 20%). If you leave your money to third parties, or charities, they can expect to pay 60%.
Assurances Vie policies are frequently used to avoid inheritance tax. Providing these are set up before age 70, each named beneficiary can inherit up to 152,500 euros, totally tax-free, and it is not considered part of the estate. Any sum in excess of this is taxed at a flat rate of 20%. This is particularly beneficial if you were leaving money to an unmarried partner, a charity, nieces and nephews, etc where they would avoid paying the 60% tax!
This is one of the reasons that these policies account for the majority of the investments in France (as well as being the nearest thing the French have to a UK ‘tax-free ISA’).
This report is intended simply as a summary of some aspects of French succession law and inheritance tax. It is based on my understanding of current legislation, which may be subject to change. No liability can be accepted for any change of interpretation or practice relating to any tax or legislative measure that may affect the accuracy of the content.
A rough guide to submitting your tax information in Italy
By Gareth Horsfall
This article is published on: 8th July 2015
It is around June each year that your Italian tax bill should have been presented and been paid for. If it is more than you had expected then hopefully this article can explain some of the ‘how’ that came about and ‘what’ solutions are available.
One of the main questions I am asked on a regular basis is ‘what are my obligations in terms of declaring foreign income and assets in Italy?”.
Of course, your commercialista may be doing it for you, but what exactly are they reporting, or should they be reporting? With the help of Andrew Lawford at SEB Life International, I managed to go through the instructions on how to fill in an Italian tax return (interesting reading I can tell you).
What I want to look at in this article is how financial assets, (excluding property) i.e funds, managed portfolios at the bank or with an asset management group, ETF’s, shares, Bonds, Money market accounts etc should be declared properly in Italy.
Tax treatment of diversified financial assets.
The first, and most obvious point is that foreign investment income is taxed in Italy due to the principle of worldwide taxation. The basis of the Italian tax system. Once you have established residency in Italy, you must declare all of your income, wherever in the world it was produced.
Dividends and interest
Typically, an investment portfolio will produce periodic income in the form of dividends and interest, especially if you are looking to live from the income stream generated from the very same portfolio.
These need to be declared by converting any foreign currency amounts into euros at the exchange rates designated by the Banca d’Italia for the day the dividend or interest was paid.
The amounts received, duly converted into euros, are taxed at a rate of 20% (up to 30th June 2014) or 26% (from 1st July 2014 onwards).
The relevant section in the Modello Unico is the RM.
***You should declare the net amount received (after withholding taxes) and pay the 20/26% income tax on that. The amount which should be taxed is commonly called the “netto frontiera”.***
Capital Gains
Capital Gains are taxed at the same rates as dividends and interest income (see above), but with the complication that the amount of the capital gain must include the variation in foreign currency over the holding period.
So, what does that mean? As an example, if a fund was purchased on 1st March 2010 and sold on 15th November 2014, it will be necessary to have both the purchase and sale prices (information you will need to provide to your commercialista) and to convert these into euros at the exchange rates for those days (as established by the Banca d’Italia).
This gets relatively complicated when you have a portfolio of assets that are managed by you, the bank or an asset manager and multiple trades have taken place over the year. Checking annual statements to find purchase costs for every trade can become quite onerous. In addition there may have been corporate actions, such as share splits, demergers, capital returns etc, which compound the issue.
Where partial sales and purchases have occurred, the LIFO (Last-In-First-Out) principal needs to be applied.
It is also the case that when you become a resident in Italy you cannot simply use the value of the investments on the day when you arrive and become tax resident, you must use the historical cost from when the asset was bought for the purposes of capital gains tax. (This actually makes a lot of sense if you think about it, because it would mean disposing of any historical tax liability when moving countries and a lot more people would move if it were possible).
The relevant section in the Modello Unico is the RT
Foreign Asset Declarations and IVAFE
The fun really starts in the Italian tax return when the Quadro RW is contemplated. This section has more to do with a monitoring requirement than it does to do with taxes, although the changes brought in for the 2013 tax year mean that the Quadro RW is also used for calculating the foreign assets tax (IVAFE), which is currently due in the amount of 0.20% on the year end market value (with a difference for bank accounts, which are generally taxed at a flat rate of 34.20 euros).
The Quadro RW requires the Italian resident with foreign assets to declare their value each year; this doesn’t sound too bad, as you would think that you would only have to list your assets at year end as per the statements provided by your bank or broker. However, the Quadro RW actually requires you to declare exactly for what portion of the tax year you have held each asset and then to apply the foreign assets tax on that basis.
e.g. calculate the number of days the asset was held for in the year and then pay 0.20% on a pro rata basis. Once again this becomes onerous with multiple trades in the year.
***And unfortunately an end of year tax statement will not provide you with the information needed to accurately complete the tax return. You would need to go back through a year’s worth of trading statements to identify book cost and when they were traded. ***
WHAT I THE SOLUTION TO THIS HEADACHE?
Very simply, it’s the humble Italian compliant Investment Bond. It allows you to do everything you want to do without the fuss. All of the tax is worked out for you, your asset manager can make as many trades as he needs without immediate liability to tax and there is no need to track movements of money in the portfolio or declare when dividends and interest were paid. In addition, when monies are withdrawn from the Bond and a tax liability is incurred then the tax is paid at source on your behalf.
There isn’t even a need to declare the portfolio, trades, interest payments or anything else to your commercialista each year.
Life couldn’t be simpler
If you have found collating your tax information a little ‘heavy’ this year, or you think you may not have been submitting the right information based on what you have read above, and youwould like to make financial life in Italy a bit easier then contact me directly by the link below or fill in the contact form.
Offshore Disclosures Facility
By Peter Brooke
This article is published on: 25th May 2015
This month I had the opportunity to sit down with Patrick Maflin from Marine Accounts for a Q&A session on the Offshore Disclosures Facility.
Patrick, Firstly what is the Offshore Disclosures Facility?
The Offshore Disclosures facility is an amnesty for UK citizens who have undeclared offshore earnings. It is directly aimed at targeting offshore tax evasion. The G20 have now opted similar schemes such as the Offshore Disclosures Program (ODP) in the US & Project Let’s Do It in Australia.
What is offshore evasion?
Offshore evasion is using another jurisdiction’s systems with the objective of evading UK tax. This includes moving, not declaring or hiding (via complex offshore structures) any income, gains or assets out of the site of HMRC.
When does the amnesty end & what happens if I do not declare?
The UK disclosure facility ends on 30th September 2016. Individuals who choose not to declare their earnings can face fines of up to 200% of the tax evaded and possible imprisonment as it is now a criminal offence. Project Let’s Do It in Australia came to an end in December 2014 and the IRS have not stated when ODP will end.
How can I declare my earnings through the facility and what are the benefits?
UK seafarers can declare their earnings under the Seafarers Earnings Deduction (SED) providing that they spend more than 183 days out of the UK and work onboard a ship. If you declare now before becoming subject to investigation you will not face fines and will not have to pay tax on your earnings. However if you owe tax through work days in the UK or not qualifying for the SED exemption you will only pay 10% on top of your tax bill as opposed to 200%.
What happens if HMRC contact me first?
If they do contact you first you are faced with possibility of a tax investigation into your financial affairs and will not qualify for any penalties at the lowest rates and will have to pay the taxes you owe for up to 20 years. You could also face criminal prosecution.
What if I move my funds to the Cayman Islands, surely it is safe there?
The UK signed ten more automatic exchange agreements in 2014 including many of the classic ‘offshore centres’. The new global standard developed by the OECD has been endorsed by the G20 and now 44 jurisdictions in total. This will lead to greater tax transparency and the ability for governments to clamp down on those who evade tax.
What exactly will the new global exchange mean? What type of information will the G20 access?
The 44 jurisdictions are going to share if you have a bank, investment or custodial account and will be able to see your name, address, account number, balance and income.
When I browse the yachting forums I still see crew asking where the best place is to open an account to avoid paying tax! What do you think of this?
It surprises me that people choose to openly broadcast that they are looking to avoid paying tax and that they believe that today with the open exchange of information that this is still possible and the right course of action.
HMRC contacted over 20,000 people in 2013 about their offshore assets. In 2014 offshore banks in the 44 jurisdictions started collecting information about UK & US residents. This information will reach HMRC by the start of 2016.
Are Offshore accounts still permitted under the Offshore Disclosures Facility?
Of course, there is nothing wrong with having offshore accounts & investments as long as you declare the income and gains on your tax return. This is not designed to stop people banking offshore, but to allow individuals to bring their tax affairs up to date if they have worldwide undeclared income. The principle benefits of using an offshore account is currency flexibility.
This article is for information only and should not be considered as advice.
Residency and Tax Residency in Italy
By Gareth Horsfall
This article is published on: 24th March 2015
2012 was a turning point in Italian politics and the way that we, as expats, live and could continue to live in Italy. It was the start of the New Norm (as I like to call it).
It started with the moment when Berlusconi was ousted as Premier and was swiftly followed by the non-elected Mario Monti. What was once accepted as the norm suddenly went under the spotlight. This was seen most dramatically in new tax legislation imposed on domestic and foreign assets and incomes and the sudden drive to track down and prosecute tax offenders.
There was no longer the option to live between two residencies, but the subject became much more matter of fact (see rules below for details)
It made a lot of expats question what their Italian residency meant since residency, by definition, means you are subject to Italian tax law. For some the additional financial burden was unaffordable. For the majority it was period of consolidation, understanding their tax reporting liabilities and looking at ways that they could plan more effectively to live in the country in which they wished to remain.
It is at this point that you may need to ask yourself the question:
What are the rules determined by Italian authorities in relation to being a resident or not?
Well, the law is clear, as follows:
An individual is considered resident for tax purposes if, for most of the calendar year (i.e. 183 days) he/she is:
* registered with the Registry of the Resident Population (Anagrafe)
* or has his/her residence or his/her domicile in the territory of the Italian state, as defined by Section 43 of the Italian Civil code.
According to Section 43 of the Italian Civil Code:
* The place of residence is taken to be the place where the individual has habitual abode.
* The place of domicile is taken to be individual’s principal place of business and interests.
In fact, residency has never been a choice. It has always been a matter of fact and a tax agency would always see it that way. If you spend the majority of time in Italy then you will be deemed tax resident as defined by the rules above.
Obvious problems occur when well-meaning estate agents suggest that you purchase your house in Italy as a resident to pay the lower VAT rate of 2% on the value of the property, versus 9% as a non-resident. But this in itself then determines that a tax return is required. If you then decide that non residency is preferable there is the question of having to pay back the difference.
The key, as always, is in the planning.
If you are a holiday home owner then you should rarely take residency if your clear intention is to maintain your principal residence elsewhere.
But if you want to enjoy Italy all year round and pay the lower rate of VAT on the property purchase, benefit from the good health care system, be able to buy a car here (non-residents cannot purchase a car legally in Italy), and benefit from lower utility rates then residence is required and certain legal obligations apply.
As I always say, you will pay more tax by living in Italy versus other Northern European countries and the USA. How can we expect to pay the same for all this sunshine?!! But a rural life, for example, should see your costs fall and maybe, like me, you are searching for the lifestyle that Italy offers.
Despite all this and having lived in Italy for years, I can tell you that there are tax-reduction and financial planning strategies that can lighten the burden somewhat. I should know! I was the naive foreigner who moved to Italy looking for ‘La Dolce Vita’ and didn’t pay much attention to the complicated financial and legal systems here. I failed to plan adequately and have had to pay the tax man for it. But failure to plan sharpened my senses and I now aim to help others not to fall into the same traps.
Income Tax Rates in Italy
By Gareth Horsfall
This article is published on: 23rd March 2015
You may wonder what is so significant about the number 28000 in Italy. Well, I will enlighten you in a moment.
The majority of expats I meet who decide to relocate to Italy are either Northern European or from Anglo Saxon’ countries (certainly those of you reading this E-zine) searching for some hot weather or wishing to sample the Mediterranean lifestyle. Whatever the motivations, it doesn’t really matter! Money-matters are the purpose of this E-zine.
It is often the case (but not always) that countries in the North of Europe and the USA have financial systems which encourage saving in tax-incentivised pensions, in savings or in retirement plans. Equally they often have preferential tax rates to encourage businesses/entrepreneurs to prosper in their early years when revenues are lower. The simple idea being that if you are incentivised to make provision for yourself and/or invest back into your business, then you will be less of a burden on the state in the future. Selling a business can also act as a kind of pseudo retirement plan in itself. This means that you lock a large part of your life savings into schemes/businesses which will provide you with an income later on in life. This would seem to be a sensible strategy for both government and individuals.
The problem we have is that when you move to Italy, there are few incentives to prepare for your future in the same way. In fact, the Government takes control of the majority of your life savings (either through INPS or other mandatory pension contributions) under which you have little or no control. In addition, there are few non-taxable income allowances which have the effect of reducing disposable income for individuals and reducing capital available for reinvestment just when a business needs it the most (more on tax rates in a moment).
My interpretation of this mechanism (I am sure there are much more complex political and social issues at hand here but I am merely trying to simplify elements of the system which affect you and I) is that by locking future savings into Government controlled systems, ie. INPS, the Government can charge income tax on these monies as “earned income” in the future and hence the Government provides itself with a guaranteed income stream on which it can calculate future spending plans (dubiously…. one might add)!
Which brings me on to income tax rates in Italy and the significance of 28000…
For expats in Italy, income tax is mainly applied to the following incomes:
- Gross income from employment
- Gross Pension income in Italy and from overseas
- Net rental income from overseas property
- 72% of dividends from Ltd. Company ownership
Now, in my experience, a lot of expats living in Italy have a property in their home country which they are renting out, have income from pensions or employment in their country of origin and, in some cases (but not many), are taking dividends from a Limited company which they may own abroad.
The financial planning issue here is that when all of these are added together they can often start to breach the higher levels of income tax (IRPEF) in Italy. The rates being as follow:
| EUR | 0 – 15,000 | 23% |
| EUR | 15,001 – 28,000 | 27% |
| EUR | 28,001 – 55,000 | 38% |
And so on…
And here lies the significance of 28000 in Italy.
The average income tax rate on income below €28,000 per annum GROSS is approximately 25%. This would seem reasonable but there are no non-taxable income tax allowances and so therefore tax starts from Euro Number 1. Once you start to breach the 28,000 EUR GROSS band and enter the more punishing 38% income tax band (if you add on regional taxes and others), then you are realistically into 40-42% on income over EUR 28,000 p.a.
So what is the solution?
Well, once again it all comes down to the planning.
The first and most obvious solution is to spread your income. Where possible, spread your income as a couple – for example, putting houses into joint names and spreading the income tax burden. By spreading the income you are moving a part of it into a partner’s tax bracket. If one of you has a lower taxable income than the other, then it makes sense to utilise some of the lower earning partner’s income tax bands.
Also, think about how you might be able to release money from pensions. As a resident in the UK, you can withdraw 25% of a pension plan tax free. It makes sense to do that before you move. That same withdrawal as a tax resident in Italy would be considered taxable income and added to your other incomes in that year.
In the UK (from April 2015) and in the USA you may be able to cash in some or all of your retirement plan. This particular scenario might be more complicated if there is a tax charge involved, but if you are serious about planning to reduce tax liabilities in Italy, then taking a lower tax charge in your home country before you move might be better than being subject to higher ongoing income tax rates in Italy (This would need serious consideration before a decision were made, but it could be a possibility).
And lastly, move as much of your money to unearned income sources, ie. income from directly held investments/savings. In this way you are subject to a flat tax of only 26% on the capital gains and/or the income from those investments.
As a general rule if you can split a couples’ income, generate income from investments (not from retirement plans), and some from property rental you can bring your overall tax rate down to approximately 26-30%. A level which I think is more acceptable to most (a lot depends on your income requirements as well).
Of course, I have simplified the situation here and everyone’s circumstances are different, but the methodology is the same. How can you take advantage of the lowest tax rates possible by restructuring and spreading your finances to make them more effective in Italy?
Which brings me nicely back to my initial point: The magic number is EUR28,000.
Italy does not, presently, seem to incentivise its residents to invest in long term retirement savings plans (in fact, in the Legge di Stabilita 2015 they are discussing taxing them even more!) and so a move to Italy breaks with Anglo Saxon/Northern European mentality, when thinking about how to plan for the future. Some of the best laid long-term plans can be scuppered when those decisions include a move to another country with a financial system based on totally different principles and systems.
If you plan on waiting for tax reductions or the EU to force changes, you could be waiting a long time. Planning your way around the system/s seems to be the optimum choice rather than waiting for the Government to do anything about it for you.
If you are already a resident in Italy and want to plan more effectively or are considering moving and wondering how you might plan things before you arrive, you can contact me directly on Tel: +39 333 649 2356, or please use the form below.