As promised, I thought I would discuss the complicated issue of trusts, with a less complicated issue of the tax treatment of pensions / retirement funds in Italy.
The majority of my clients are nearing, or in retirement, and so pensions and retirement plans are very much at the forefront of your minds. For the likes of me, (I am 44 years old this year), I am in the accumulation phase and I need to concentrate on building as much capital as possible for when I get older when I need to convert my earning power into an income for life. There isn’t much to say about the accumulation phase, other than how the actual fund is treated for taxation in Italy, which I will touch on below.
What I aim to achieve in this article is to explain the tax treatment, in Italy, on the income from the various types of overseas pensions / retirement funds which we are mostly familiar with. This information is taken from and I will be expanding on articolo 18 del Modello OCSE which states:
“fatte salve le disposizioni del paragrafo 2 dell’articolo 19, le pensioni e le altre simili remunerazioni pagate ad un residente di uno Stato contraente in relazione ad un passato impiego sono imponibili soltanto in questo Stato”
I will not be going into the more complicated area of taxation of Italian pensions since that is best dealt with by a commercialista. I also want to share some of the various tax stories that I have heard of in the past and clarify the situation.
WHAT IS A PENSION AND WHO OFFERS THEM?
A pension is a type of retirement plan that provides an income in retirement. Not all employers offer pensions. Government organizations usually offer a pension, and some large companies offer them and in the likes of the UK and USA you can have a personal retirement pension / plan. Most people, throughout their working life, will also be making National Insurance / Social security payments which go towards a national state pension as well.
WHAT IS THE ITALIAN TAX TREATMENT OF EACH?
The state pension / social security:
I have sometimes been asked if the state pension or social security is non-taxable because it is covered under some kind of double taxation treaty. I remember this being a common question some years ago and wondered if a rumour was going around. Thankfully it hasn’t raised its head for a while but for the record the state pension /social security of another country, payable to you as a resident in Italy, is taxable in Italy at your highest rate of income tax. If you have other sources of income in retirement then they are added together and the banded rates of income tax applied.
Remember that the income types which are subject to IRPEF (Italian income tax) are retirement income, employment income and rental income.
A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persone fisiche)
|0 – €15000||23%|
|€15000 – €28000||27%||(€3450 + 27% on the part over €15000)|
|€28000 – 55000||38%||(€6960 + 38% on the part over €28000)|
|€55000 – 75000||41%||(€17220 + 41% on the part over €55000)|
|Over €75000||43%||(€25420 + 43% on the over €75000)|
The Italian pension credit…….it’s not an allowance!
This is another one of those misunderstood Italian tax benefits. (It would make sense that it is misunderstood because ‘Italian’ and ‘tax benefits’ are not words that often go hand in hand). However, if you are a pensioner (that means a pensioner at state retirement age and not someone who has retired early), then you might be eligible for a tax credit on pension income up to €8000 per annum. At this point I would like to say that this is NOT a tax allowance. It is not the first €8000 of pension income which is non taxable for everyone. That would be nice and has been proposed by some of the possible incoming political parties, but for the moment, not everyone is eligible to receive it.
It means that where you have €8000pa retirement income and below, that you could be eligible for a full tax credit on that amount. i.e the tax is calculated at 23% and then that is given back in your tax return.
The catch is that if you have more than €8000 in total retirement income per annum, rising to €55000pa then the credit is reduced (according to various quotients) to zero. The higher your TOTAL income is the less of the credit you will receive. A total income of more than €55000 per annum means no tax credit.
Government / Local Government / Armed Forces / Police / Teachers pensions etc
This next category is a catch all for any kind of Government or Local authority pension, including Teachers, Police, Firemen, Nurses, Local Authority etc. In effect, where the local or national government of the pension in question is the administrator of the fund.
In this case, if you are a non-Italian resident in Italy, then the pension is not taxable in Italy under the double taxation treaty but only taxable in the state of origin. So, for example. a British Fireman retired and resident in Italy will only have to declare the pension and pay any tax due in the UK under UK tax law. It would not be subject to Italian tax, UNLESS..
…., you are an Italian citizen, i.e have Italian citizenship.. An Italian national living in Italy would be subject to Italian income tax on their overseas local or national pension in the other state. So, in our example above the British fireman, after being granted Italian citizenship would then become liable for Italian taxation on his UK pension. This is something to consider when applying for Italian citizenship. Equally this would apply to anyone who has dual nationality, for example an Italian who has lived and worked abroad for many years and returns to Italy, or someone who has dual nationality through birth right.
Private pensions / Retirement plans / Occupational / Employer pension schemes
Private pensions do not, unfortunately, benefit from the same tax treatment as national or local authority schemes as described above and so they have to be exposed to the full wrath of the Italian income tax rates. They are added to your other income for the tax year and taxed at your highest marginal rate of income tax.
However, I want to expand on this subject slightly.
Definition of a private pension / retirement plan
Before we can accurately define how a pension is taxed we first have to understand its structure. In the case of a UK personal pension, occupational pension and/or retirement plans they are mostly set up as irrevocable trusts. This gives limited powers to the holder of the pension because although you can instruct the trustees to do whatever you want within the tax rules of the country in which it is operated, ultimately the trustee has the final say in what you can do. They wouldn’t normally refuse your instructions to withdrawal capital, for example, but theoretically they could. This is a technical point but one which helps define the taxable liability in Italy.
Essentially, since the pension is a non-resident irrevocable trust, then the rules state that the fund itself is not taxed but any withdrawals would be taxed at your highest rate of income tax. An interesting point is that the fund itself needs to be declared for ‘monitoraggio‘ purposes and specifically your share in that fund. That creates a difficulty in something like a large pension fund e.g. Standard Life, when you need to express your share in that fund. To do that you need to know the value of the total company pension fund in which you are invested and express your fund value as a percentage of it. The truth is that this is almost impossible to find out accurately and so expressing a very low percentage is probably acceptable.
I have heard stories from various people over the years that their commercialisti declare their UK pensions as ‘previdenza complementare‘, which loosely translated means complementary pension. However, the definition does not accurately complete the story here. The reason for declaring it in this manner is that it is taxed at a preferential tax rate of 15%.
I must admit here that I don’t think is the correct way of declaring income from an overseas pension / retirement plan. The ‘previdenza complementare‘ is a vehicle used in Italy to complement the pension which is offered through Italian social security (INPS). You may argue that this has the same purpose as that of an overseas pension fund. However, this is where the similarities end.
In the case of a UK pension fund your contributions would attract tax relief during your contributory life. In the ‘previdenza complementare‘ (PC) the fund is taxable during the life of the fund. The UK scheme is also not linked to the state scheme in any way and you can withdraw money from age 55 (personal pension) or scheme retirement age (occupational pension). The PC is linked to the Italian state retirement age. Lastly, since the contributions into a UK fund are tax relieved, then income paid in form of a pension is subject to income tax at the normal rates. The Italian PC has a preferential rate of taxation starting at 15% and reducing to 9% depending on how many years you have been contributing to the fund, once you reach state retirement age. In short there are some distinct differences which lead me to believe that declaring a pension fund / retirement fund (which is a trust) as a ‘previdenza complementare’ in Italy, in incorrect. If you are in doubt then speak with your commercialista.
That is a basic review of the various types of pension / retirement incomes but is not an exhaustive list and various countries may apply different rules. You may need to check the double taxation treaty of your country for further details. However, all in all pensions are treated like other income, once in retirement and the fund needs to be declared, but not necessarily taxed in the accumulation phase.