Tax planning for non-residents when purchasing real estate in Italy

Differences in legal and tax systems between the two countries can significantly impact your decision-making process, as they may differ from domestic practices and customs.

If your primary purpose in acquiring properties is for personal use rather than generating income, you may find it less appealing due to establishment and management costs, as well as anti-abuse provisions against shell companies. However, owning Italian real estate through a foreign company for the enjoyment of its shareholders generally does not trigger the issue of a permanent establishment of the non-resident company in Italy.

Using a simple partnership for estate planning and governance flexibility can be advantageous, but it is important to consider the potential tax implications in your home country where such a structure may not be recognised, or treated differently than it is in Italy.

Direct purchase by the non-resident should not be overlooked due to the peculiarities in the Italian system. In terms of direct taxation, capital gains from sales after five years are generally not taxable in Italy for non-residents. However, non-taxation in Italy will be offset by the tax typically levied in your own country, as recognised by the OECD model conventions. In terms of indirect taxes, direct purchases by non-residents, subject to legal conditions, can benefit from mechanisms such as the "price-value" method for registration tax, or the first home benefit for foreign residents with Italian citizenship.

When it comes to inheritance taxation, taxation based on cadastral value offers a certain advantage. However, it is also crucial to evaluate the method of valuing the Italian property according to the country of residence of the deceased person. The valuation method may either refer to the Italian taxable base or disregard it in favour of the more expensive market value criterion.

Furthermore, careful evaluation is necessary when considering possible purchase splitting, where full ownership is divided between the usufruct, and bare ownership allocated to different individuals. Some legal systems, especially Anglo Saxon ones, do not recognise such real rights of enjoyment, and there is a risk that events such as the termination of the usufruct and the reversion of full ownership to the bare owner may be considered taxable.

Lastly, the use of trusts should be evaluated, considering the ongoing interpretative evolution in Italy. Trusts, if structured soundly and solidly, can provide flexibility for appropriate estate planning. However, certain restrictions imposed by the Italian Revenue Agency regarding the application of the "price-value" method, and other benefits recognised to individuals, must be considered.

In summary, when purchasing real estate in Italy as a non-resident, it is crucial to navigate the differences in legal and tax systems between Italy and your country of residence. Understanding the advantages and disadvantages of different ownership structures and taxation methods will help you optimise your investment.

Roberto M. Cagnazzo, Founder and Partner, is a chartered accountant and statutory auditor with considerable experience in domestic and international taxation acquired as Head of Tax in some of Italy’s leading multinational groups, and as Professor of Comparative Tax Systems and of Tax Law at the University of Turin.