Italy is trying to attract foreign pensioners who do not reside in Italy and who have foreign pension income. Other European and non-European countries have been doing this for some time. Since 2019, our country offers people that retire to southern Italy a tax rate of 7% for five years, and limits the area of territory to which they can move for at least 183 days a year (184 if the year is a leap year).
Italy offers non-resident natural persons receiving retirement income from foreign sources an alternative to ordinary taxation. In particular, the right to opt for a substitute tax of 7% on all income produced abroad (not only on pensions) for five years, under the condition that they retire to southern Italy and transfer their residence to a municipality:
- Located in one of the following southern Regions: Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise and Puglia
- With a low-density population: less than 20,000 based on the data of the National Institute of Statistics (ISTAT)
The pensioners who exercise this option are not obliged to declare the assets held outside Italy (compilation of RW forms). They are also exempt from the IVIE (tax on the value of properties located abroad) and from the IVAFE (tax on the value of financial assets held abroad).
The option is valid for five years provided that conditions determining its revocation do not occur.
Requirements for benefiting from this option
Foreign pensioners interested in this substitute tax regime must present the tax return of the tax period during which they effectively transferred their residence to one of the Southern Municipalities mentioned above.
In particular, the taxpayer must report five items in the tax return:
- Non-resident status in Italy for at least five tax periods prior to the start of the option’s validity;
- Jurisdiction or jurisdictions in which they had their last tax residence prior to partaking of the validity of the option (should be among those where administrative cooperation agreements in the fiscal sector are in force);
- Foreign States or territories for which they intend to exercise the right not to avail themselves of application of the substitute tax;
- State of residence of the foreigner paying the income;
- Amount of foreign source income to be subject to the substitute tax.
How to choose the Municipalities of the South of Italy in which to transfer the residence
In order to choose a municipality with a population lower than 20,000 foreign pensioners should look at the data resulting from the Annual municipal survey of the movement and population calculation, published on the site ISTAT, in reference to 1st January of the year prior to the first year of the option’s validity.
Termination of the effects, revocation of the option, and forfeiture of the regime
The 7% reduced taxation ends after the five years following the tax period in which the option is exercised. However, the taxpayer exercising this option may revoke it during one of the tax periods subsequent to the one in which it was first exercised. This must be done with a revocation communication in the tax return of the last tax period of the option’s validity.
On the other hand, forfeiture of the benefit occurs:
- If the requirements set by the standard are not meet
- for omitted or partial payment of the substitute tax within the data set for payment of the income tax balance;
- in the event of transfer of tax residence to an Italian Municipality other than those indicated
- if the taxpayer decides to transfer their tax residence abroad.
The option remains effective even if, from the second tax period of its validity, the taxpayer moves to another Municipality in the South with the same characteristics required by the law. The option expires, on the other hand, if the existence of tax residency in Italy is shown to have taken place in the five years preceding the year in which it was exercised. And in any case, revocation of the option and forfeiture of the regime prelude the exercise of a new option.
How to pay the tax
For each tax period when the regime is in effect, within the date set for the payment of the income tax balance, the subjects who have exercised the option should provide for the payment, in a single payment, of the substitute tax due, calculated according to a flat rate of 7% on income produced abroad. Failure to pay the tax, or insufficient payment, will result in forfeiting the benefit and making any future request impossible.
This article was originally published in Tuscany’s Grapevine Magazine special edition about the tax attractions for foreign pensioners who move to Italy.