It has been an interesting few years both in Italy and Portugal in terms of tax legislation.
In Italy, legislators have brought in a range of tax incentives to encourage people to move to Italy.
One of these regimes, aimed at foreign pensioners, has received much attention as it offers a 7% tax rate on foreign income and exemption from reporting and tax on overseas assets. In order to encourage foreign pensioners to move to the poorer regions and smaller towns of Italy, the regime is only applicable for new residents in certain regions and towns with a population of less than 20,000 within those regions.
This initiative is a response to the Non Habitual Residence (NHR) regime in Portugal which has attracted huge numbers of retirees from all over Europe over the last few years to the chagrin of Sweden and Finland in particular (which we will come to later). The NHR regime allowed new Portuguese residents to pay no tax on their pension and other foreign income for the first 10 years of residency. This regime for pensioners in Italy hopes to attract some of the high number of people who move to France and Spain to retire (by offering lower taxes) while also competing with the beneficial tax regimes offered in Portugal and Cyprus.
However, the Italian offer initially looked a little lacklustre in comparison to the Portuguese NHR scheme or Cyprus’s low tax environment which allows a 5% tax rate on foreign pension income over a €3,240 per annum tax free allowance. In response to a lower uptake than expected, the Italian authorities announced in May 2019 that they would be increasing the term of the flat tax to the first 9 years of residency.
While this extension to 9 years has been implemented in Italy, changes have also occurred to the NHR scheme in Portugal. Sweden and Finland are unhappy with the huge number of their nationals who have taken residence in Portugal over the last few years to then claim their generous state pensions from their home countries tax free. Sweden and Finland made a series of complaints to the EU and also insisted on re-writing their tax treaties with Portugal to tax their citizens pension income at source in their countries. Portugal, under pressure from the EU and looking not to become a tax pariah have consequently increased the tax rate to 10% on foreign income for the first 10 years of residence for those who apply for NHR from April 2020.
This recent development along with Italy’s efforts to counter NHR has, quite extraordinarily, made Italy one of the lowest tax jurisdictions for expat pensioners in Europe. This fact combined with low property prices in the regions where this regime is available and Italy being a great place to retire in terms of lifestyle (food, wine, landscapes, culture, weather etc…) we expect to see increasing interest and uptake of this regime over the coming years.
An important aspect of this regime, which could be as beneficial to some as the reduced tax on pension income is the exemption from wealth taxes on foreign assets and any reporting of foreign assets. This presents a very attractive tax planning opportunity for those who can draw pensions and have overseas investment assets or income streams.
If you’re thinking of making the move to Italy and want advice on organising your finances efficiently then please get in touch with us via the form below.