After years of discussion, it seems Italian property investors might finally see the flat property income tax reform pass in 2011. The Italian government is currently reviewing the details of the so-called “cedolare secca” (lump sum dividend) bill which would give private owners the opportunity to apply a flat tax rate to their rental income.
In particular, initially the Italian government talked about a 20% flat income tax to apply. Now they are talking about applying a range from 20% to 23% depending on the terms and conditions of the rental contract. Now they are proposing a range from 19% to 21% as stated in the most recent proposal amendment which was filed on 27 January 2011. The government is also discussing amendments on ancillary rental charges such as the rental contract registration fee.
The new flat rate rules would apply to private Italian property owners only.
The following is a comparison of the main aspects under discussion:
- Rate. Current rental tax: from 0% to 43% depending on the total aggregate annual taxable income. New flat tax: to be from 19% to 21% depending on the rental contract terms and conditions.
- Application. Current rental tax: default, i.e., this taxation system will apply if no action is taken by the property owner. New flat tax: elective, i.e., property owner elects to have the flat rate apply instead of the current rate automatically being applied.
- Property Type. Current rental tax: applies to all property types. New flat tax: only residential property is eligible. Not applicable to commercial property.
- Affected Taxpayers. Current rental tax: applies to all property owners with a few exceptions. New flat tax: applies only to private property owners.
- Taxable Amount. Current rental tax: applies to 85% rental income, given that a 15% flat deduction is allowed. New flat tax: applies to 100% rental income, no deduction is allowed.
- Who Benefits*. Current rental tax: taxpayers with total aggregate annual taxable income** LESS than 28,000 euro. New flat tax: taxpayers with total aggregate annual taxable income** MORE than 28,000 euro.
As a general comment on the above, it seems that the subjects who would benefit the most from this new flat rental tax rate would be private property investors whose Italian tax return reflects an aggregate taxable annual income of more than 28,000 euro.
However, if some of the most recently added options pass, taxpayers with any annual income would find more convenient the new flat rental rate.
This means that Italian property owners could save more than 50% on property income tax should the bill pass as per the terms currently being discussed by the government.
* Who benefits: Under the Italian tax system, several income tax rates applies, from 0% to 43%, depending on the total taxable income. In certain cases, a subject with low total taxable income might find more convenient the default taxation, rather than the new flat rental tax.
** Annual aggregate taxable income is given by the sum of all relevant Italian taxable income, of any nature (e.g., labour, property).
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