Moving to Italy – But Wait, What About Taxes?

We’ve wanted to move to Italy for years.  In 2009, when we first set this goal, we looked for jobs that might take us there. At the time, we both worked for a Silicon Valley semiconductor company. So, we looked at jobs that needed filling in our Torino office. Unfortunately, they weren’t good fits for us. We sent resumes to other companies, but nothing seemed right. We resigned ourselves to waiting to achieve financial independence (FI) before moving to Italy.

FI, or Financial Independence, is achieved when invested assets exceed 25 times one’s annual expenses. In other words, $1MM in invested assets can support $40,000 in annual spending. $2MM can support $80,000 in annual spending, etc.

After setting our specific FI goal, which, at the time, seemed very far off, we wondered, “If not Italy, why not move somewhere else?” We discovered there were great jobs available in our Malaysia office. What the heck … we made the move. All the while, we focused on FI. With lucrative expat perks, we were able to save more than 50% of our income. I closely managed our investments, and put our savings to work as it came in.

Lo and behold, by the summer of 2014, we reached FI! After considerable deliberation, we ‘retired’ from our jobs. We then stayed put in Malaysia. For one thing, we wanted to prove to ourselves that we truly could live off of savings. Having already established a home base, it made sense to remain for at least a year. Plus, our son was attending an excellent international school, and staying put seemed the right thing to do for his continuity.

During this time, I turned my attention to writing a book about lessons learnt during my career, and I started a charity for local Rohingya refugees, as they seemed to have less-than-zero support from the Malaysian government. My husband started a unicycle business – selling and coaching.

After a year and a half, we discovered that our little experiment had worked! Not only were we able to live off of savings, but we’d increased our net worth by 8%.

By then, however, it was time to go. I’d come to the realization that I couldn’t stay in Malaysia permanently. The main reason may seem silly, but let me tell you, it’s a big deal both emotionally and psychologically; it’s the weather. I’m going out of my mind with the constant heat, and the lack of seasons. Malaysia is too much endless summer for me. Also, I’ve come to realize that it’ll never feel like home – for various reasons.

So, having proved we could live off of our nest egg, we decided it was time to move to the place that was our ultimate goal. We began planning the move to Italy.

Before booking tickets, shipping stuff, applying for elective-stay visas, and finding a school for our son, I first had to determine the tax situation. Here’s why: if the tax bill was too high, we’d stay put in mega-tax-friendly Malaysia, or move elsewhere (IDK where, though, my heart is set on Italy). Malaysian income tax applies only to income earned in Malaysia. Italy, on the other hand, taxes worldwide income.  Plus, Italy taxes overseas wealth. (O_o!) Moving to Italy would come with a tax increase. But by how much? That was the question. If it was a few thousand dollars, we could handle that. But if it was tens of thousands of dollars? Er, maybe not-so-much.

I started this tax evaluation a year ago. Now, I think I’ve got it. Well, for now. Here are my findings. There are four main taxes to consider

  • IRPEF (Imposta sui Redditi delle Persone Fisiche)
    • Italy’s income tax.
    • Rates range from 23% to 43%.
    • Pronounced ‘ear-peff’
    • High rates of 38% kick in after just 28,000€ in income
    • Applied to individuals; there doesn’t seem to be an option to file jointly.
  • Local taxes – range from 1-2% of income.
  • IVIE (Imposta sul Valore degli Immobili situati all’estero)
    • Italy’s wealth tax on all foreign real estate holdings.
    • .76% on the cadastral (assessed) value.
  • IVAFE (Imposta sul Valore delle attività Finanziarie detenute all’estero)
    • Italy’s wealth tax on all foreign financial assets.
    • Rates are .2% on the end of year market value.

Not one, but two wealth taxes? A 43% top marginal tax rate on income? Scary stuff, right?  At first, yes.  But having tangoed with US tax code on IRS.gov for years, I’ve learned that often times, deductions and exemptions take the bite out of what otherwise seem like hefty tax rates.

Before getting into details on the three main taxes, let’s take a step back. Months ago, I came to believe that by moving to Italy in August 2016, we wouldn’t be subject to taxes for 2016. Tax guides, such as this one from KPMG seemed clear; you need to be in the country for more than 183 days in order to be considered a ‘tax resident.’ So I set about learning all I could for 2017 tax planning.

Then, I stumbled across this article on justlanded.com. Regarding tax residency, it read, “If you’re registered as a resident ( residenza anagrafica) in your comune [sic], you’re automatically liable to income tax in Italy.”

WHAT? Uh oh. That meant that by living in Italy as residents from August through December, we’d be taxed like residents who lived there more than 183 days. Here’s the thing – we have to register as residents – that’s required in order to enroll our son in the international school we’ve reserved a spot in. All of a sudden, figuring out the tax situation became urgent.

The thing about Italian tax code, well, any tax codes actually, is that you can do a ton of research, think you have a solid understanding of how it works, and then the rug gets pulled out. You come to realize you were thinking about it all wrong.

I investigated further into IVIE, the annual wealth tax levied on the foreign real estate. I read expat forums and online articles. Exasperated by conflicting opinions mixed in with proclamations from people standing atop Mt. Stupid*, I did what I’d learned to do in the US – go to the source. I sought out the actual tax code on agenziaentrate.gov.it, the Italian equivalent of irs.gov. It’s difficult enough to read tax code in English, much less Italian. But I persevered, and found a clause that said, “Dall’Ivie è possibile dedurre l’eventuale imposta patrimoniale versata nello Stato in cui è situato l’immobile.” In English:

“By IVIE it’s possible to deduct any property tax paid in the State where the property is situated.”

Yes! If I could offset IVIE with property taxes paid in the US, the effective IVIE due would be 0. In 2016, in 2017, and forever ( or at least until the tax code was changed, which, apparently, happens quite often in Italy). All of a sudden the tax situation seemed reasonable.

To make sure of this, and other conclusions I’d come to, I emailed my Italian tax buddy, Mauro, to hire him to give me final answers to all my questions. It’s been a couple weeks and he still hasn’t confirmed whether this assumption about IVIE is correct. In his latest email he said something about determining whether the property taxes are paid to valid patrimonial taxing authorities. What does that even mean? Oh – another phrase he asked about: “Are your stock holdings harmonzed assets.”  … What? So I we have more work to do on those two items.

The thing is, when the rug is pulled out, it’s not always bad news. Remember that residency issue about whether we’ be taxed in 2016? The issue I thought I’d determined once and for all – because the article on justlanded.com sounded so darned certain? Turns out I was wrong in believing what that author wrote.

Mauro emailed, “Under Italian tax Law you will be a tax resident if you spend more than 183 days in Italy in the solar year. So if you come in Italy after July 7, you cannot become Italian tax resident till 2017. You will be subject to tax starting 2017.”

Wait, what? Could he be wrong? Could he be right? I had to be sure, so I did some more research. I’d looked at articles before, like this PDF tax guide from KPMG, and online discussions. They had all confirmed Mauro’s assertion. In fact, that one sentence I’d read on justlanded.com seemed to be a lone anomaly. But I couldn’t be sure. So I went to the source. It took a while, but at last I found, article 2 of the tax code.

God bless it, it’s tough to make sense of tax law is written with double negatives. Even so, this seems to confirm what Mauro wrote. Note: it’s a google translate version.

“For the purposes of income tax they are considered non-residents who are not registered in the municipal registry of residents for most of the tax period, ie for at least 183 days (184 for leap years), and have not, in the territory of Italian State nor the domicile (principal place of business and interest) or the residence (habitual residence). If there is even one of these conditions the taxpayers concerned are considered residents. Non-residents who have received income or own assets in Italy are required to pay taxes to the Italian State, subject to certain exceptions provided for by any agreements to avoid double taxation concluded between the Italian State and that of residence.”

But see – the way it’s written, I’m still not 100% sure. However, I’m going to go with our tax advisor on this.

Goodness. What a wild, time-consuming, ride.

Here are the main considerations for each of the four taxes.

  • IRPEF (Imposta sui Redditi delle Persone Fisiche)
    • Italy’s income tax, rates range from 23% to 43%.
    • Interest income is taxed at a flat 20% rate
    • Qualified capital gains and dividends: half (actually 49.72%) of these are taxed at ordinary rates, the other half are not taxed. This only applies if the income derives from an asset held in a non-tax-haven jurisdiction (which the US is).
    • 4800€ deduction for each tax payer (9600€ for two)
    • 950€ deduction per dependent child over 3 years old.
    • 19% deductions – from health care to disability costs. You can deduct 19% of your expenses against income.
  • Local taxes – range from 1-2% of income.
  • IVIE (Imposta sul Valore degli Immobili situati all’estero)
    • Italy’s wealth tax on all foreign real estate holdings.
    • .76% on the cadastral (assessed) value.
    • Property taxes paid in the local municipality can offset the tax due.
  • IVAFE (Imposta sul Valore delle attività Finanziarie detenute all’estero)
    • Italy’s wealth tax on all foreign financial assets.
    • Rates are .2% on the end of year market value.
    • There’s really not much you can do to get around this.
    • I believe it applies to 401ks and IRAs as well :(.

In the end, I estimate our total Italian tax bill, for 2017, will be between between $5,000 and $8,000. That’s accounting for IRPEF, IVIE, IVAFE and local taxes, and considers all deductions, and allowances. It’s a steep price to pay. Fortunately, our FI math will just barely allow for it.

Mauro tells me he has an office in Verona, where we’re moving. He wants me to come work for him. After our latest exchange, he was emphatic: “Definitely I want enroll you in my Office !!!!!!!!!!!!!”  I dunno Mauro. As much fun as I’ve had wringing my hands over taxes these last few months, I’m not sure it’s something I want to do full time. But … I’m getting pretty good at it. Well, I can think that until the rug is pulled out the next time.

*Full disclosure, I’m still ascending Mt. Stupid as far as I can tell.