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Italy tax-breaks could be ‘a costly flash in the pan’

UPDATED: Italy’s planned tax incentives risk being "a costly flash in the pan”, an economist told The Local, as the country’s finance minister said on Monday that the measures could create 800,000 jobs.

Published: 20 October 2014 15:42 CEST
Italy tax-breaks could be 'a costly flash in the pan'
Italy is planning €18 billion worth of tax cuts as part of its 2015 budget. Taxes photo: Shutterstock

Italy last week announced a raft of tax-cuts worth €18 billion as part of its budget for 2015, aimed at reviving the country’s sluggish economy.

€5.0 billion has been set aside to reduce an unpopular regional labour tax (Irap), while €1.9 billion will go towards tax breaks for companies hiring new staff on full-time, long-term contracts.

In an interview with Rai, Finance Minister Pier Carlo Padoan said the measures could create 800,000 jobs and encouraged companies to “now invest and create jobs”.

While tax cuts can have a positive impact on the economy and job creation, especially in times of uncertainty, “fiscal stimulus does nothing to resolve structural economic issues or raise the long-term growth potential of the economy," Christian Shultz, a senior economist at Berenberg Economics in London, told The Local.

"It does create public debt, which will need to be repaid,” he said.

The budget, which is awaiting EU approval, also included an extension of an €80-a-month bonus to people on low incomes and families with new babies.

“Instead of investing, companies and households may take the money and save in order to pay for the inevitable future taxes,” Shultz said. 

Italy’s President Giorgio Napolitano is expected to sign the budget bill on Monday, Ansa reported. It will then go to a Lower House committee to begin its procedure through parliament.

Shultz added: “If the tax cuts are not accompanied by reforms that improve the long-term growth potential, in Italy’s case in particular a serious labour market reform, and the long-term health of public finances, by reducing expenditure, the risks are high that fiscal stimulus will end up as a costly flash in a pan."

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TAXES

How does Italy decide if I’m a tax resident in the country?

Taxation in Italy is famously complex, often creating confusion about who's liable to pay taxes in the country and who isn't. But how do Italian authorities actually decide if you’re a tax resident?

Published: 17 September 2024 15:22 CEST
How does Italy decide if I'm a tax resident in the country?

Italy’s tax bureaucracy can be tough to navigate for Italians and foreigners alike, and situations such as frequent travel, vacation properties and remote work can all cause further confusion.  

Italian law defines a tax resident as anyone who lives in Italy for at least 183 days per calendar year (184 days in leap years). That includes anyone formally registered as a resident of Italy or simply residing here unofficially for more than half the year.  

Italian tax residents must pay tax on worldwide income, not just earnings generated in Italy. That’s why it’s especially important to know what the Italian tax office (Agenzia delle Entrate) considers when applying the 183-day rule – and how it knows how much time you spend in Italy.

The general rule  

For someone who splits their time among several places, the tax authority considers whether Italy is their “principal place” of business, economic interests and personal relations. According to a 2022 ruling from the Court of Cassation, Italy’s highest appeals court, officials look at whether the person owns property or businesses in Italy, has an Italian bank account, or has relatives here.

READ ALSO: Do I need to declare my foreign bank accounts to the Italian taxman?

If you don’t have European citizenship or an Italian immigration visa, you can only legally stay in Italy for 90 out of every 180 days. In that case, you probably won’t meet the 183-day rule.

Keep in mind, though, that the 183 days don’t have to be consecutive, and that short trips outside the country don’t necessarily count as not living in Italy for tax residency purposes if you have business and personal ties to the country.

Proof of residency

Tax authorities look at a variety of factors – some obvious and others less so – to determine how much time you spend in the country each year.

Anytime you enter or exit Italy directly to or from a non-Schengen Area country, your passport will be stamped, providing a record of how long you were in the country.

But given the EU’s open-border policy, tax authorities’ investigations go far beyond passport records.

Reports of wealthy Italians, especially celebrities, pretending they live in countries with a lower tax burden, like Monaco, have also forced the government to get creative.

In addition to property ownership and rentals, which are all registered with the government, tax authorities look at vehicle records, gyms and other club memberships, cell phone records, purchases for flights and train tickets to Italy, credit card use and postal records.  

In the case of celebrities, tax officials even use paparazzi photos and news stories to reconstruct a person’s movements; for the rest of us, social media posts and online activity can provide legally admissible clues about where we go and when.

Alternatively, if you’ve been accused of owing tax in Italy even though you spend most of the year in a different country, these are the types of records you can provide to show that you were actually living abroad.  

When in doubt, you can get a tax residency certificate from your home country stating you live and pay taxes there. If Italy has a double taxation agreement with the country, you will only be taxed in one place.

Paying tax on a holiday home

If you own a holiday home but live there for less than half the year, you will not become a tax resident of Italy simply by virtue of owning property here.

However, you’ll still need to pay any relevant property taxes and waste collection fees on the home.  

READ MORE: What taxes do you need to pay on a second home in Italy?

And any income that you earn in Italy – including from renting out a vacation home when you’re not there – is also subject to Italian taxation even if you’re not a tax resident.

Tax residency for digital nomads

In April, Italy introduced a new digital nomad visa for highly-skilled workers available to both freelancers and remote employees of international companies.

While the digital nomads will generally be legal residents of Italy who must pay tax in the country, some might qualify for a tax scheme for lavoratori impatriati (workers relocating to Italy), which only taxes 50 percent of their income.  

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