If you become a tax resident of Italy, you should be aware that the general principle is that Italy taxes residents on their worldwide income – including payouts from savings plans or pensions.
So before you take up residency in Italy and begin receiving your pension payments or withdraw from your 401k, you’ll want to consider how it impacts your taxes in Italy.
Tax residency is usually the first place where people get tripped up, says Laura Giacomini, Founder and CEO of ITA International Tax & Advisor.
A common misconception is exactly when you officially become a tax resident. Giacomini warns that it “should never be determined solely by an informal rule such as ‘183 days’”, pointing to Italy’s many criteria for determining residence, including but not limited to physical presence, domicile and civil-law residence – all of which are defined differently in Italy's civil law system.
While it may seem logical that foreign retirement funds – paid out from abroad and likely even held in non-Italian bank accounts – shouldn’t be within the scope of Italian taxes, that is often the case when you are considered a tax resident of Italy.
“One of the most frequent problems I encounter is that taxpayers underestimate the tax consequences of becoming resident in a new country”, Giacomini relates.
“People sometimes change country, register as residents or spend substantial periods abroad but continue to file and manage their tax affairs as though their tax residence had not changed.”
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That doesn’t mean that every dollar of a foreign savings plan or pension is taxed by Italy, however.
“As a general premise, cross-border taxation is highly fact-specific,” Giacomini says. "How your account is taxed isn’t about whether it’s called a 401k or an IRA but rather according to various factors."
These include, for example, the type and timing of distributions and whether it's connected to a past employer.
There isn’t a one-size-fits-all answer to how Italy will tax your retirement funds, and the general guidelines for US accounts are laid out in the US-Italy taxation treaty. (Article 18 covers private pension plans and accounts; see Article 19 for government or public sector pensions.)
The treaty prioritises the taxpayer’s country of residence as the one to which taxes are owed – as opposed to the country where the money originated, Giacomini explains, though notes this depends on the type of payment and how it's received.
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You’ll want to be careful about retirement savings accounts that have tax advantages in your home country, such as Roth IRAs in the US, from which distributions are ordinarily tax-free.
“Another recurring mistake is assuming that the tax advantages attached to a retirement account in the country where it was established will necessarily continue unchanged after the taxpayer moves abroad,” Giacomini says.
“A tax-deferred or tax-exempt product under US or UK law does not automatically receive an equivalent treatment under Italian law.
"Conversely, I would also avoid stating as a general rule that every distribution from a Roth IRA is necessarily fully taxable in Italy."
How exactly Italian tax rules apply varies case by case, depending on factors such as the account's history and tax treaties.
Taxation on such withdrawals may make you consider simply holding the funds to avoid them, but Italian taxes also extend to those funds, due to Italy’s foreign asset tax (IVAFE)
The current rate for brokerage and investment accounts is .2 percent of the value, while there’s a flat fee of €34.20 for simple currency accounts if the yearly average balance exceeds €5,000. Interest earned on money held in foreign accounts, such as an interest-earning savings account, is subject to a separate tax in Italy.
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“This does not mean, however, that every foreign account or every foreign retirement arrangement is automatically subject to IVAFE merely because it is held outside Italy”, Giacomini says.
Through bilateral tax agreements, such as the US-Italy tax treaty, Italy recognises many foreign retirement accounts, such as 401ks, as pension plans – thus not all instances will be subject to the IVAFE wealth tax.
“In particular, foreign pension arrangements need to be reviewed according to their legal characteristics in order to determine separately whether a reporting obligation exists and whether IVAFE is actually due,” Giacomini explains.
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The key to successfully navigating the complicated Italian tax system on foreign retirement funds is planning ahead, she says.
“International tax issues are generally much easier to manage through advance planning … I also frequently see people seeking cross-border advice only after they have already relocated, taken a large retirement distribution, sold investments or reorganized their assets."
Please note that The Local is unable to advise on individual cases. Find more information on the Italian tax office’s website or seek independent advice from a qualified tax professional.
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