Why moving to southern Italy with a foreign pension could cut your tax bill

We've all heard about the shrinking Italian villages offering houses for a euro. Now it's the government's turn to offer a carrot to those considering a move to the depopulated rural south – specifically, pensioners.

Italy's Revenue Agency has released the details of the 'Southern Flat Tax', a new scheme introduced in the government's latest budget. 

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Whether you're a foreign national or an Italian citizen living abroad, as long as your pension is paid by another country, moving to a small community in the south of Italy could earn you a reduced flat tax rate.

Tempted? Here's what you need to know.

Why is Italy offering tax perks to move to the south?

Centuries of emigration, whether to northern Italy or abroad, have emptied out towns and villages across southern Italy. Historically deprived and without the opportunities that concentrate Italy's wealth in the north, the south ranks significantly worse on health, employment and poverty – thus fuelling the cycle. 

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Successive governments have tried all kinds of incentives aimed at drawing residents, investment and spending to the south. Last year the current administration was discussing a plan to offer pensioners a ten-year tax holiday if they moved to one of its three poorest regions; this flat tax scheme appears to have replaced that idea.

The government says it will use the revenues generated from foreign pensioners to invest in southern universities specializing in sciences and technical subjects, with the goal of improving opportunities for younger residents.

Who is eligible?

Both Italian and non-Italian pensioners are eligible, providing they meet three criteria:

• They aren't already living in Italy.
• They draw a pension outside Italy.
• They're currently resident in a country that has a tax cooperation agreement with Italy. 

To benefit from the scheme, you must prove you've been living outside Italy by showing tax returns for the past five years. And if you're an Italian national, you'll also need to have been enrolled on the AIRE, the Registry of Italians Resident Abroad, for the last five years at least.

Bear in mind that this is a tax scheme, not a visa: you must already have the right to live in Italy legally.

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Photo: DepositPhotos

Where do you have to move?

You'll need to become a resident of one of Italy's Mezzogiorno regions: Abruzzo, Molise, Campania, Basilicata, Puglia, Calabria, Sicily or Sardinia.

But you can't settle just anywhere. Only towns with fewer than 20,000 residents are eligible, which rules out all the best-known cities.

In popular holiday destinations like Puglia and Sicily, you're more likely to find a town that fits the bill inland. But there are still plenty of seaside options on the Adriatic Coast or the Ionian 'sole' of Italy's boot, as well as in Sardinia.

Consult the latest population data from national statistics office Istat to find out which towns you can choose from.

What tax benefits do you get?

You'll pay a single flat tax of 7 percent on all your overseas income, starting with your pension.

Taking up the scheme also exempts you from declaring your assets outside Italy or paying the IVIE and IVAFE, taxes on the capital value of real estate and other assets held overseas.

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Photo: Christophe Simon/AFP

How do you pay?

Pensioners taking up the scheme should file a tax return to the Agenzia delle Entrate (Revenue Agency) documenting the following:

• Proof of residence outside Italy for the past five fiscal years;
• Last place of fiscal residence;
• Source of foreign pension;
• Amount of overseas income to be taxed at 7 percent. 

Once the Revenue Agency has accepted your return and calculated your taxes, you can pay in a single lump sum using the standard F24 payment form.

How long does the scheme last?

You can benefit from the Southern Flat Tax for a maximum of five years after you transfer your residence, so long as:

• You don't move to the north of Italy or a bigger town (but you may be allowed to move between eligible southern towns).
• You don't move overseas.
• You pay your taxes in full and on time.

You can opt out at any time before the five years is up.

The Southern Flat Tax is effective from 2019 (i.e. starting with the tax return you file in 2020), but it's not yet clear how long it will be in place.

The government has indicated it will wait for 2021 to evaluate the take-up and value of the scheme, which presumably could be scrapped if it proves to be less of a boon than hoped.