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.