How to Avoid “Unknown Surprises” When Investing for Life in Italy 

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| Fri, 12/24/2021 - 00:22
taxes in italy

Life in Italy conjures a lot of beautiful fantasies, all of which are typically centered around the enriching lifestyle, diverse cuisine, and stunning landscapes. But, when it comes to the financial side of things, life can be a little more complicated. 

Especially for those who are American citizens (or Brits etc.), it has never felt more complicated to call Italy home but also wonder if you are making 100 mistakes when it comes to how you register your taxes, your residency, juggling investments. It can be extremely overwhelming (and I have felt your pain too) especially if you are trying to figure it all out yourself. The first clue here is, well don't

To give you a better idea of the financial sector in Italy, consider that it is quite concentrated as a whole. Several large banking conglomerates frankly dominate the sector and the investment industry is very complicated even for seasoned experts to navigate. Truth be told, many local bankers and advisors are often unable to guide their international clients on how to invest in a manner appropriate for their circumstances especially considering whether a US national needs to take into account US tax compliance, or help British clients constrict a financial life in their newly-adopted country. 

It is not to say that investing in life in Italy has to be a red-tape nightmare, you simply need the right guidance and professionals who you feel comfortable with to help make this new life a reality in the way that makes the most sense for your own personal financial situation. To help avoid any sort of unknown surprises and painful investment pitfalls, we enlisted the help of one financial firm based in Italy that regularly works with international clients to share some of the things they often see when working with people from abroad. 

New life in Italy? Great! But Don’t Forget to File That US Tax Return! 

US citizens and green card holders are liable to file a US tax return regardless of where they reside no matter how many years they have lived abroad. As an American calling Italy home for 14+ years, it always surprises me how many people I meet fail to do this (don't be one of those people!). As a result, Americans also need to avoid investment structures that are considered unsuitable for the US tax code. For example, most European and Italian investment funds are considered Passive Foreign Investment Companies (PFICs) by the IRS and are treated as penal, thus most, if not all, Americans would do well to avoid these. Any income distributions or capital gains from PFICs are taxed at the highest marginal rate of income tax which is currently 37% instead of the long-term capital gains tax rate which is typically around 15%. In addition, any deferred gains within a PFIC get charged an interest charge for the entire time they are held within the fund. As a result, any failure to report gains on PFICs can also result in a very high tax bill. What can you do instead? Look more towards US-based investment opportunities. This means that US citizens and green card holders should be seeking specialist advice rather than investing with their local Italian bank or the post office. 

Social Security vs INPS 

Probably this is one of the most important, and yet confusing points. Each country has its own social security or national insurance system. These systems typically collect specific taxes that are used to pay for healthcare, disability, and the country's retirement plans. Many countries have 'Totalization Agreements' which outline that a resident/citizen of one country will not need to pay into both systems and credit from one system can be used for the other and luckily the USA and Italy have a totalization agreement. However, this agreement has a specific clause relating to self-employed individuals. If you are a self-employed US citizen (and not also an Italian citizen), you are liable to pay into the US social security system instead of INPS. This allows you to pay the lower self-employment tax rate of 15.3% instead of the Italian INPS contribution of over 25%. It is important to be aware of this distinction when moving to Italy to allow you to stay active within the US social security system and be able to benefit from a potentially lower tax rate.

For EU citizens and those that have worked in the bloc for many years, the European Union recognizes time served in each country. As an example, if you have spent most of your working life in France and have since moved to Italy to continue your career, your time served in the French system will count towards your eligibility for an Italian state pension. The calculation of your final pension amount may also be affected by where you have worked and the benefits under each national scheme. It is important to consider your entire working history when approaching retirement to ensure that you are receiving the full benefits that you are entitled to.

Many expats also worry about their entitlement to healthcare in their new country. This largely depends on their immigration status and their eligibility is based on how they have entered the country. While the Italian state healthcare system scores very highly worldwide, there are also many private health insurance plans available to supplement this coverage. The truth is, many Italians rely on the state system for certain facilities while using private doctors for more time-sensitive or acute problems. Ad-hoc private services are also significantly cheaper than those found in the United States, with a private visit to a GP costing as little as 60 euros.

Be Aware of How Your Existing Investment Portfolios May be Affected

While American citizens and green card holders require more USA domiciled investments, most American mutual funds and Exchange Traded Funds are considered ‘non-harmonized’ according to the Italian tax code. This means that capital gains on those investments are taxed at your income tax rate rather than the capital gains tax rate. This is similar to the American short-term capital gains tax treatment. It can mean a significantly higher tax bill for some investment portfolios. Keep in mind that capital gains on non-harmonized funds in Italy can be charged at as much as 43% versus the normal capital gains tax of 26% in Italy. This is much higher than typical capital gains taxes across the world and it may be worthwhile to consider some smarter investment planning and capital gains harvesting before a move to Italy and reconstructing your portfolio in a more appropriate manner. 

Consider How Your British Savings and Bonds Might be Affected

British savings instruments, like the National Savings & Investment Premium Bonds and Individual Savings Accounts (ISAs), may not be as tax-efficient in Italy as they are in the UK. Depending on your circumstances, this does not necessarily mean that you should liquidate your ISAs and invest elsewhere, but it should give you pause for consideration about the best savings instruments for life in Italy. Another important consideration is that ISAs are only eligible to receive contributions from British residents. Once you have moved abroad, you could no longer contribute towards your ISA as these are specifically for British tax residents. While you can maintain your ISA when living abroad, the same tax benefits likely no longer apply when in your new country of residence. If you have excess income and savings while living in Italy, then it is best to take financial advice on the most tax-efficient savings methods and portfolio construction. 

What About Taxes on Capital Gains? There May Be Options!

There are savings programs and tax breaks in Italy that can help defer capital gains taxes and that provide financial planning advantages. Many of these would not be suitable for most US citizens, but each person’s circumstances are unique and require careful consideration, and there are many things to consider when establishing a new life in Italy. The number one is considering how becoming an Italian tax resident will affect your income and lifestyle. However, it is equally as important to consider how moving to Italy will impact your existing assets and savings. In order to implement the optimal solutions for your circumstances, speak to a specialist financial advisor about how best to structure your assets and invest your portfolio before making your move.

Framont & Partner's Management is an Italian and Maltese financial advisory and investment management firm. Their founders have over 30 years of financial services experience in Italy. Established in 2015, and with offices and professionals throughout Italy, they work with a diverse range of Italian and foreign clients. Their core competencies include financial planning for Italian tax efficiency and discretionary portfolio management.