Living as pensioners in Puglia has benefits…tax benefits

If you bought or are thinking of buying a home in Puglia (or one of the other southern Regions of Italy), and you are planning to move your residence to Italy as a pensioner, you could also evaluate the application of the so called “Pension Holders” fiscal regime to your situation.

Indeed, the Italian Budget Law for 2019 (Law no. 145/2018) introduced a favourable regime which provides for the application of the individual income tax at a 7% flat rate on all non-Italian sourced income earned by individuals receiving foreign pension income and transferring their tax residence to certain municipalities of the southern regions of Italy, such as Puglia.

The 7% flat tax regime is optional and is available for the year in which the transfer of tax residence occurs and for the following 9 years (therefore, 10 years overall).

In order to opt for the special tax regime, you must meet the following conditions:

  • you must receive a “pension income” paid by a non-Italian entity;
  • you cannot have been an Italian tax resident for at least 5 years before exercising the option for the Italian flat tax regime;
  • the Country in which you were tax resident before the relocation to Italy must have an administrative cooperation agreement (“accordo di cooperazione amministrativa”) in force with Italy;
  • you must transfer your residence to a Municipality having no more than 20,000 inhabitants located in one of Italy’s southern Regions (i.e., Abruzzo, Apulia, Basilicata, Calabria, Campania, Molise, Sardinia, and Sicily), or in some earthquake-affected municipalities.

If you meet all these requirements, a 7% flat tax is applicable to all your non-Italian sourced income (i.e. not only non-Italian pensions but all types of non-Italian sourced income) while all incomes realized in Italy are subject to ordinary individual Italian taxation rules.

Moreover, the 7% flat tax regime also grants you exemption from the following aspects of Italian tax law: (i) reporting obligations in relation to foreign assets, (ii) payment of wealth taxes on real estate properties and financial assets held abroad (respectively, IVIE and IVAFE).

According to the afore-mentioned conditions, it is very important to verify if the foreign pension (paid or to be paid in future) could be eligible for the application of the regime. On this matter, if the public pensions are definitely included in that regime, the private ones have to fulfil some requirements.

From the Italian Tax Authorities perspective, what matters for the qualification of a foreign “pension income” is that:

  • the foreign pension income is liable to tax in Italy, due to the Double tax treaty;
  • the foreign pension (i) is connected to an employment relationship, (ii) the individual receives the pension income after the end of their working activity or after they achieve retirement age (or both), and (iii) the income is a public pension or, in case of private pension, is aimed at integrating the public pension.

If those conditions are satisfied the private pensions are considered as supplementary pensions (included in the favourable tax regime) and not a financial investment.

More in detail, as far as the requirement sub b) is concerned, the Italian Tax Authorities clarify that the individual can opt for the Regime also if he receives a one-off benefit (e.g. capitalization of pensions) paid on account of the payment of contributions and whose payment may be made irrespective of the termination of an employment relationship (Italian Tax Authorities, Circular n. 17/2020).

For example, with particular reference to UK “private” pension funds, Italian Tax Authorities, in Ruling Reply no. 150/2020, clarify that income related to UK workplace pensions, funded via employment, by employer and employee contributions (50% each) and liable to be drawn at 55 years old, should be considered as a “pension income”, eligible for the 7% Regime. In the afore-mentioned Ruling Reply, Italian Tax Authorities stated that such a “private pension” shall be taxed only in Italy, according to art. 18, par. 1 of the ITA-UK Double Tax Treaty (and levied at 7%, in case of option by the taxpayer).

On the other hand, it should be noted that with Ruling Reply n. 244/2021, Italian Tax Authorities stated that Approved Retirement Funds (ARF) and Approved Minimum Retirement Funds (AMRF) are not to be considered as “pension schemes” as they do not have a pension purpose since (i) the “subscription” to the scheme is voluntary, (ii) the provision of benefits to the member is not linked to an employment relationship and (iii) it does not require the attainment of any pension age requirement.

Furthermore, it is important to bear in mind that no tax credit is available if you opt for the flat tax regime for any tax levied in the Country of source of the income.

For this reason, it would be advisable to also check in the Country of source whether the Double Tax Treaty is applicable or not in the case of an Italian tax resident individual enrolled with a special tax regime such as the 7% regime.

Marta Ancona e Pietro Semeraro

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