With an eye for what matters to foreigners living and investing in Italy, the firm’s head of international case work, partner Nick Metta, highlights the economic results of 2012 and key legal changes for 2013.
Here we are just over one year since Mario Monti entered office as Italian prime minister in November 2011. After some good steps toward putting Italy’s fiscal house in order, Monti resigned from that post in December 2012 and he is now running for president in the upcoming elections. Before leaving office, Monti signed final measures through the “Salva Italia” (Save Italy) and “Decreto Stabilità” (Stability Decree) that bundled together several initiatives aimed at collecting funds to pay down the immense Italian debt and stimulate domestic growth.
In this article I have highlighted key aspects of Monti’s recent decrees that pertain to expats living in Italy, foreigners who own an Italian business or property, and those who are considering such plans.
2012 In Review
First let’s start with a look at some of the positive results achieved in 2012.
Growth Industry – Bed and Breakfasts
Despite the fact that it was a recession year for Italy, i.e., the Italian economy had negative growth, not all businesses suffered. Farmhouse bed and breakfasts (such as theAgriturismo) grew 4% (Sole 24 Ore 30/12/12). I personally know several non-Italians who own Italian properties and are successfully running such businesses, thus my compliments to them and hopefully 2013 will be another good year for the sector.
Top Regions for Expat Property Purchases
It seems Apulia (Puglia) was the place of choice for expats to buy a home in 2012 (perhaps to run a bed and breakfast?) as 22% of non-Italians purchasing in Italy chose it. Apulia was followed closely by Lazio with 21%, Tuscany 16% and Le Marche with 15% (La Repubblica Economia 16/12/12).
Italian Exports
Great news for those who are working in the Italian product export sector: 2012 showed substantial growth and in 2013 Italian food and product exports are expected to grow further, from 5% to 15% for food, fashion and made in Italy products in general (Sole 24 Ore 3/1/13). It seems that this growth can be traced back to the emerging market economies as they are growing much faster than Italy, love Italian products, have money to afford Italian prices and, in many cases, pay less in taxes than Italians do to buy the same products. In many countries Italian imports are sold without the 21% VAT overcharge, soon to be 22% from 1 July 2013 (see below).
Investment
Another very good result came for those who believed in the Italian economy in 2012 and invested in Italian Treasury Bonds (BTP). In spite of critical international opinion of the Italian economy, 2012 Treasury Bond sales were a success and investors benefited from extremely high performance at 22.27% in a year (Sole 24 Ore 28/12/12).
Unfortunately 2012 was a very terrible year for many Italian industries. One of the ones hit the worst was the automobile industry with car sales dropping 20% to the point where they were in the ‘70s. The annual 2012 average was negative 19.9% and the month of December reported negative 22.5%. Inflation went up 3%, with grocery costs seeing an increase of 4.3%.
2013 – What is to Come?
Europe’s key leader, German Chancellor Angela Merkel, has recently said that the economic crisis will get worse in 2013. Hopefully not. Below is a brief summary of changes to come in 2013 that I compiled based on aspects pertinent to foreigners living and investing in Italy.
Taxes
In general, the total taxation in Italy will rise from the 2012 level of 44.7%, to a new record level of 45.3% in 2013 (Corriere della Sera Economia 1/1/13). Monti declared that, if elected, one of his goals will be to reduce this tax rate by 1%. Also, those who have an income lower than 7,000 euros must file an income tax return starting this year.
Rental Income
As of 1 January 2013 the flat cost deduction applicable to property rental income, formerly 15%, drops to 5%. In Italy, private property owners are not allowed to deduct specific costs incurred in order to produce rental income, except for this flat rate. Owners opting for the flat rental tax “cedolare secca” cannot deduct any cost, not even the 5% above. All property owners can still deduct renovation work within the parameters set for the 36%, 50% and 55% deduction (see “Property Renovation” below).
Property Renovation
It is still very beneficial to carry out renovation and maintenance work on Italian properties. The extraordinary cost deductions established last year are still applicable up to 30 June 2013. The key is to make payments via bank transfer by such date to deduct 50%. From July forward a more limited 36% deduction will be allowed. Do not forget the 55% deduction allowed for energy efficiency improvement work, which will apply throughout 2013. Also remember that the deduction cannot be used all in one year, but shall be spread equally over the following 10 years.
Piano Casa: the 2009 Berlusconi law named “Piano Casa” will expire at the end of 2013 in several Regions. The Piano Casa law was aimed at stimulating the economy by entitling home owners to enlarge their houses in spite of restrictions established by local zoning parameters. At the end of 2013 this law will expire in Apulia, Basilicata, Liguria, Lombardia and Le Marche.
Building Bureaucracy
From 12 February 2013 it should be easier and less bureaucratic to handle building matters as each municipality shall open a municipal building permit front desk “Sportello Unico per l’Edilizia” for residents, businesses and professionals to address all building matters. A unique office should make it easier to address a building matter through a sole place, but there is the risk of some processing delays.
Property Common Areas
On 18 June 2013 the new common area rules (“Riforma del Condominio”) will come into force. Finally it will be mandatory for the condominium association to have a bank account, which will result in fewer issues and risks related to handling cash payments. This comes after too many instances that condominium managers (“amministratore di condominio”) collected cash condominium payments from residents and then ran off with the funds. Also, different thresholds have been established for crucial decisions affecting the condominium community as well as more rights being established, such as to discretionally disconnect a unit from the central heating system.
IMU
Many subjects must file their IMU payment by 4 February 2013, such as spouses living in separate homes in the same municipality, owners renting a place with a contract registered prior to 1 July 2010. Also, the first payment by 17 June 2013 shall comply to different rules than those that were applicable in June 2012; the entire IMU amount shall be paid to the municipality instead of being split with the National Revenue Office. It is important to remember the mandatory IMU report filing duty. All subjects who own a property whose IMU status changed in 2012 (e.g., purchased or sold a property in 2012) shall file a IMU return by 4 February 2013. Click here for the Instructions and IMU Return Form.
Land Tax
The land tax will increase to 15% for all who are not professional farmers.
Italian Residents Owning Abroad – IVIE
All Italian residents who own a property abroad shall pay the IVIE (l’Imposta sul Valore degli Immobili situati all’Estero), i.e., property tax on property abroad. The good news is that this is no longer applicable to the 2012 fiscal year, as had been initially established. The IVIE rate is, in general, 0.76% of the most recent sale price. A lower rate of 0.4% has just been approved which is applicable to properties abroad that qualify as a primary residence. This means that the property is personally used by the owner or members of his/her family, even if just for holiday purposes. Foreign estate tax applicable abroad on the same property might imply a tax credit in Italy which might partially or totally compensate the IVIE.
Capital Gains – Good Opportunity
It is once again possible to update the value of land and companies on record to avoid or minimize capital gains taxes. Taxpayers pay 4% on the updated value (in some cases 2%). This option was introduced for the first time in 2002 as a temporary measure and has been reopened many times. It is currently available until 30 June 2013. Subjects who have already updated the asset value in the past are allowed to do it again and only pay 4% on the difference. This is a great opportunity. Some of my U.S. clients have used it to update the value on record of land zoned for residential development. When they sold the land, not only were they then not required to pay Italian capital gains taxes, but they were furthermore able to use the Italian 4% payment to legally neutralize any U.S. tax otherwise applicable to the profit.
Business
Mandatory benefits rates for small individual businesses and traders increase 0.45% per year starting in 2013, to progressively go from the current rates of 21.75% and 21.84%, respectively, to 24%.
Energy and Communication
From January 2013 natural gas will cost more (+1.7%) and electricity a bit less (-1.4%). Mobile communications and roaming costs should slightly drop in 2013, the year in which 4G technology will be operative in Italy.
Transportation
Driving on Italian highways will cost more, an average of 3.91% increase in toll charges. In some areas however the tolls will increase to 14%. Fuel price increased 14% in 2012 and hopefully will not go much higher in 2013. As always, better watch your speed since from 1 January 2013 driving fines will be 5.7% higher as per the inflation rates of the past recorded two years since the fines had not been adjusted during that time.
Postal Changes
Regular mail and registered signed delivery mail in 2013 costs more, respectively 0.70 euro and 3 euros 60 cents. New for 2013 along with a stamp for your postcard you can buy gold bars at the Italian post office! Stamp duty on postal bonds and investment accounts go up from 0.10% to 0.15%, except for postal bonds under 5,000 euros.
Court Dispute Costs
From 30 January 2013, if you appeal a verdict and are unsuccessful you will be asked to pay double Court taxes (“Contributo Unificato”).
VAT Rate Increase
On 1 July 2013 the VAT rate will go from 21% to 22%. This rate applies to the majority of the purchases made by an average family (excluding food) such as appliances, electronics, clothing, professional services, etc. It can be reasonably expected that the VAT increase will not necessarily imply an increase on products and services costs; some businesses will keep the same prices and absorb the 1% VAT increase. If you have outstanding bills subject to 21% VAT rate, better to settle them by 30 June 2013.
New Business Incentives
Start-up innovation: there will be a tax credit for 2013, 2014 and 2015 for investments in a new business, up to 500,000 euros per year. The credit rate ranges from 19% to 27%, depending on factors such as if the investment is done as an individual or a corporate entity, if it is an energy efficient or socially oriented project, etc. Many expats residing in Italy (especially those 55 and older) start innovative businesses, often quite successfully. This might be a further incentive to do so.
Shares and Stocks
A new tax named the “Tobin tax” applies to company shares and public stock trades. The tax application will start in March 2013 and the rate will slightly drop in 2014, respectively 0.12% from March 2013 and 0.10% from 2014 for shares and 0.22% and 0.20% for public stocks. The beneficiary pays the Tobin tax. Exceptions apply.
Professional Insurance
By 15 August 2013 all regulated professionals (e.g., lawyers, architects, doctors, surveyors, geometras etc.) must have professional insurance for damages caused to clients due to their negligence.
24 Hour Health Care Services
By May 2013 basic medical services such as those provided by pediatricians, general practitioners and specialists must comply with the new public full time assistance program making services available 24 hours per day, every day of the week.
Public Health System
The governments of regions with deficits in their public health system budgets are allowed to increase the regional income tax to 2.33% (current average 1.7%). Regions that likely will need to raise the regional income tax are Apulia and Piemonte (Milan), Lazio (Rome), Calabria, Campania (Naples) and Molise. The last four on the list seem to be in a graver situation, and the last three are entitled to raise the regional income tax rate to 2.6% to try to recover the deficit. This is probably not good for local taxpayers who, as patients, typically get a lower quality service compared to regions with better public health accountancy (La Stampa 13/9/12).
Car Insurance Competition
From 1 January 2013 car owners will no longer be subject to automatic liability car insurance renewal, even if previously agreed to and signed on an insurance contract. Car owners can change insurance at any time and have up to 15 days of grace period coverage after the policy expiration to shop around and switch to another insurance company.
Business Hours
In 2013 stores shall be allowed to establish their business hours as per their preferred strategies. It should soon be possible to buy a cellphone or shoes at the times most convenient for customers, rather than for unions. This might help competition and lower prices.
Pensions Increase
Italian pensions up to €1,486.29 will be increased by 3% to compensate the increased cost of living.
Pension Requirements
Pension age is slightly but progressively increasing and in 2018, in order to receive a pension, you must be 66 years and three months old, having accrued at least 20 years of paid benefits. This seems to give more fuel to the stereotype of Italian kids staying home with their parents until they are 45 and finally getting a job to put together 20 years of benefits to then claim their pension at 66!
What about lawyers’ pensions? The minimum pension age for lawyers goes up along with life expectancy for our pension system’s sustainability. To retire and claim a pension in 2027 lawyers shall be 70 years old with at least 35 years of paid benefits. This doesn’t work in the favor of those who started early, like me who started at 25. I will be 70 in 2045, with 45 working years of accrued benefits. However, I bet the minimum pension age will keep rising before I reach it, along with our life expectancy. Perhaps I should have stayed home with my parents until I hit 45!
I often have discussions with my clients about the high taxes on professionals in Italy and specifically how it works in my firm. To give readers an idea, based on the above changes for 2013, when I receive 400 euros for my work I pay 4% pension tax, 14% mandatory benefits, 22% VAT, 38% national income tax, 3.9% business tax, 2.33% regional income tax and 0.8% municipal income tax. After taxes, I am left with 129 euros, a “nice” 32% of what I was paid. Oh, and then there are my costs! Office bills, salaries, accountancy, computers, professional insurance, annual lawyer association fee, etc. Annual costs range between 70% and 80% of revenue. As they say in Italy: “mamma mia!”.
The information above represents a topline summary of changes for 2013 without considering many exceptions applicable to each aspect. I would be happy to go into further details that readers find interesting. Please click here to let me know your thoughts.