Property acquisition taxes in Italy for foreign buyers
At closing, the foreign buyer pays three indirect taxes that together define the fiscal cost of the operation: the registration tax, the mortgage tax and the cadastral tax. The amount of these items varies significantly depending on who the seller is and on the nature of the property. If the seller is a private party, the registration tax regime applies, computed in standard form on the cadastral value of the property and not on the agreed price; mortgage and cadastral taxes are due in a fixed amount. If the seller is a developer or a company that disposes of a property within five years from completion of the works, the operation falls within the scope of VAT, with different rates that apply to the sale price rather than to the cadastral value, and with an overall effect on the cost of the purchase that is appreciably different.
Rental income taxation for non-resident foreign owners
Those who lease an Italian property while residing abroad have two main options for the taxation of the rents collected: ordinary IRPEF, with progressive rates applied to the taxable income from the lease, and cedolare secca, a substitute flat tax regime that the taxpayer may elect upon registration of the contract. Cedolare secca provides for two rates: twenty-one per cent on open-market leases, and ten per cent on agreed-rent contracts, that is contracts entered into pursuant to territorial agreements between owners’ and tenants’ associations in those municipalities that provide for them. Cedolare secca exempts the taxpayer from the registration tax on the contract, from stamp duty and from the ISTAT inflation adjustment of the rent, but entails the waiver of such annual increases for the duration of the regime.
The choice between ordinary IRPEF and cedolare depends essentially on the marginal rate applicable to the taxpayer on the aggregate of his Italian income: for those with no other taxable income in Italy beyond the lease, progressive IRPEF may, in some cases, prove more fiscally efficient than cedolare; for those with additional Italian income placing them in higher brackets, cedolare at twenty-one per cent becomes the more efficient regime.
The presence of a double taxation treaty between Italy and the investor’s country of residence introduces a further variable: the treaty, as a rule, leaves Italy the right to tax real estate income as income from property situated in Italy, but allows the country of residence to tax the same income while granting a foreign tax credit for what has already been paid in Italy. The calculation of the overall tax burden must therefore be made on both sides. For investors with portfolios articulated over several properties, individual ownership with cedolare secca may not be the most efficient structure: the corporate option, which we describe below, allows the deductibility of costs and a more professional management, against higher compliance and governance costs.
Capital gains tax and exit planning for foreign investors
The capital gains tax, upon resale, is one of the items most frequently underestimated by foreign investors, and one of those that best illustrates why fiscal planning must precede and not follow the acquisition. The basic rule, contained in article 67 of the Italian Income Tax Code, is that capital gains realized on the sale of a property within five years from the acquisition are subject to taxation as other income. The taxpayer, including non-residents, may elect at the deed for a substitute tax of twenty-six per cent applied to the capital gain, computed as the difference between the sale price and the purchase price, increased by documented acquisition costs and any costs of works on the property. Alternatively, the capital gain contributes to the formation of the IRPEF aggregate income with progressive rates, an option that becomes disadvantageous when the taxpayer falls in the higher brackets.
There are two relevant exemptions that close the door to taxation: the first concerns properties used as primary residence by the seller or by a member of his family for the greater part of the holding period; the second concerns properties received by inheritance, which fall outside the scope of capital gains taxation regardless of the time elapsed. After five years from the acquisition, the sale exits the scope of application of the capital gains tax in any event, save for specific cases provided for by law.
The operational point we wish to underline is that exit planning must be set before the acquisition and not at the time of the disposal. The acquisition structure, the holding horizon, the documentation of capitalizable costs and the choice of fiscal residence have a decisive impact on the final capital gains tax Italy property liability. Decisions taken after the fact, in view of an imminent sale, have very limited margins for optimization. Planning beforehand means designing the operation in line with the expected exit, and not only with the entry.
Double taxation treaties and cross-border tax coordination
Every Italian real estate operation undertaken by a foreigner potentially activates two tax systems: the Italian one, where the property is located, and the one of the investor’s country of fiscal residence, which generally taxes its residents on income wherever produced. To manage this overlap, most States have entered into bilateral double taxation treaties, the double taxation Italy framework, drafted on the OECD Model and adapted to the specific relations between the two countries. The general principle of the OECD Model, incorporated by almost all treaties signed by Italy, is that immovable property is taxed in the country where it is located: Italy therefore retains the right to tax real estate income of Italian source, even when the owner is resident abroad. The investor’s country of residence, while in many cases retaining its own right to tax the same income in the hands of the resident, is required to recognize a foreign tax credit mechanism for what has already been paid in Italy, in order to avoid duplicating the fiscal burden on the same income.
Studio Legale Internazionale Boschetti accompanies the foreign investor along the entire cycle of the Italian real estate operation, integrating in a single direction the legal and the fiscal dimension, in coordination with the tax advisors of the client’s country of residence. The starting point is pre-acquisition analysis: a simulation of the overall tax burden that includes acquisition taxes, expected recurring taxation in the first years of holding, the regime of rental income and the impact of the capital gain in the most likely resale scenario.
On the basis of this simulation the firm supports the client in the selection of the acquisition structure, comparing the three main configurations described above in light of the country of residence, of the holding horizon and of the composition of the client’s portfolio. In the notarial phases, the firm coordinates relations with the notary in charge of the deed, verifies the fiscal aspects of the deed, manages the issuance of the foreign client’s codice fiscale and the exercise of any tax options, such as the prezzo-valore system or the cedolare secca on the lease that will follow the purchase.
