We often help foreign clients to clarify taxation and declaration of properties and earnings held abroad. Many people decide to live and take up residency in Italy while maintaining property investments and financial activities abroad, or they choose to receive their foreign pensions from the country in which they worked. In theory, this doesn’t seem to involve any special difficulties. But in practical terms, tax matters should not be taken lightly. We explain in this article the Italian taxation of foreign pensions.
Considerations range from the type of foreign earnings to the country of origin. Each of these has particularities that we will try to address. First of all, regarding earnings from foreign sources, we need to consider the question of foreign pensions paid by to persons physically residing in Italy.
Persons residing in Italy should file a declaration and be taxed in Italy for all earnings, wherever these are produced. Article no. 3 of TUIR (Testo Unico delle Imposte sui Redditi, or Single Text regarding Taxation and Earnings) defines the principle of “worldwide taxation” as follows: Taxation is applied to a person’s total revenue, which for residents means all earnings possessed, less deductible expenses.
A person’s fiscal residence in Italy is recognized when, for most of the year (more than 183 days), at least one of the following requirements is met:
- Enrollment with the Registry Office (Anagrafe) of the Town’s Resident Population;
- Domicile in Italy;
- Residence in Italy.
Types of foreign pensions
Foreign pensions paid to Italian residents are generally declared and taxed in Italy. But like all earnings from abroad, pensions too have agreements against double taxation, established between Italy and the various foreign countries. Agreement against double taxation generally establish that pensions paid to non-resident citizens be taxed differently according to whether these are public or private employees.
We can distinguish two types of pensions paid by the Foreign country and perceived by residents in Italy:
- Pensions for public functions: paid by a foreign country or by one of its political or administrative subdivisions or by a local entity, for services and work carried out on behalf of these entities; these are taxed in the foreign country;
- Private pensions: paid by entities, institutions or insurance organizations of foreign countries appointed to handle the pension payments related to the termination of employment in the private sector; these are taxable in Italy.
UK and USA
Pensions for public functions are subject to taxation only in Italy if the contributor resides in Italy and has Italian nationality (or dual nationality Italy-UK/USA). On the other hand, pensions for public functions earned by a contributor who is resident in Italy but has exclusively UK or USA nationality are subject to taxation only in the UK or the USA.
Private pensions received by contributors resident in Italy are, on the other hand, always subject to taxation only in Italy.
Public and private pensions for Italian residents are taxed only in Italy.
Earning from old-age and survivors insurance (AVS earnings) or SUVA earnings are taxed only in Switzerland and need not to be declared in Italy (art. 76 Law no. 413/1991).
The new Italian- Canadian Agreement calls for a unique rule limiting the amount of double taxation applicable on pensions. As a general rule, there is no distinction between “public” and “private” pensions and taxation is called for not only in the country of residency (in our case, Italy), but in some circumstances, there may be a concurrent taxation also in the country (Canada) of taxation. Under certain conditions, the pension can be taxed in both countries, however with a credit for the tax paid in Canada that discounts (and within the limit) of the IRPEF due in Italy.
In conclusion, the general principle of Italian taxation of foreign pensions is that these are taxable in Italy. However, there can be exceptions granted by specific agreements against double taxation between Italy and other countries. In any case, considering the various circumstances facing foreign contributors who are resident in Italy, it is always wise to consult the agreements against double taxation in order to avoid problems with the Italian tax system.
This article was originally published in Tuscany’s Grapevine Magazine with title “Foreign Pensions”. August 2017’s issue covered the topic of foreign pensions paid to individuals physically residing in Italy.