Taxation for expatriate pensioners

Transferring one's pension abroad may seem an attractive option for many Italian pensioners seeking more favourable taxation than in Italy. However, it is important to know the linking criteria for the taxation of pension income from Italian sources for expatriate pensioners. Furthermore, there are differences in treatment for public and private pensions, such as in the case of INPS and INPDAP pensioners.

To plan appropriate taxation and minimise the risk of errors, it is important to claim the gross pension and the crediting of the same abroad by INPS. In this way, it will be possible to evaluate the different taxation options and choose the most advantageous one for one's needs.

It is also important pay attention to the precautions to be taken before moving abroad with one's Italian pension. Often, in fact, incorrectly disseminated information can lead to errors and risks of tax penalties. For this reason, it is advisable to rely on experienced professionals in the field of tax planning for expatriate pensioners and to obtain personalised advice.

Many Italian pensioners find themselves struggling to make ends meet, whereas elsewhere, as ina AlbaniaCanary Islands or Thailand, with a thousand euros a month you can live comfortably. If you are considering moving abroad as a pensioner, it is important to pay attention to the procedure to be followed in order to avoid unpleasant tax consequences.

In this article, we will analyse the procedure to be followed to transfer one's residence as a pensioner abroad, the tax advantages that can be achieved and the risks involved if the correct procedures are not followed. Furthermore, examine the findings which can be carried out by theInternal Revenue Service.

In order to avoid risks and complications, it is advisable to rely on experienced professionals in the field of transferring residence as a pensioner abroad and to obtain personalised advice. At the end of the article you will find the link to contact me directly for advice tailored to your needs.

 

The Taxation of Pension Income of Expatriate Pensioners

When deciding to move abroad, one must bear in mind the important tax consequences. Presidential Decree No. 917/86 (TUIR), Article 3, establishes taxation rules for Italian residents and non-residents (exemption for those moving to Albania).

Persons tax resident in Italy must declare all income, wherever produced, according to the principle of 'worldwide taxation'. On the contrary, non-residents are only required to declare income generated in Italy (except as provided for in bilateral double taxation conventions concluded by Italy with various foreign countries). Therefore, it is important to understand how to be considered tax resident abroad.

To be considered resident abroad for tax purposes, the following conditions must be met (pursuant to Article 2 of the TUIR):

• Not having been registered in the registry of persons residing in Italy for more than half of the year (i.e. 183 days in normal years, 184 in leap years), with simultaneous registration with A.I.R.E. (Register of Italians Resident Abroad);
• Not having been resident in Italy for more than half of the year;
• Not having been habitually resident in Italy for more than half the year.

If even one of these conditions is missing, one is considered a tax resident in Italy. In addition, under Italian law, one is considered resident in Italy, unless proven otherwise, if one is an Italian citizen who has been removed from the registers of the resident population and emigrated to States or territories with a privileged tax regime (Article 2, co. 2-bis of the TUIR). These territories are identified by the Decree of the Minister of Finance of 4 May 1999 and subsequent amendments and additions.

 

 

Taxation of Pension Income Under National Law

Italian legislation regulates the taxation of pension income paid by Italian entities. In general, such income is subject to taxation in Italy, regardless of the pensioner's tax residence. Taxation takes place through the application of a withholding tax, which is levied by the pension institution when the pension is paid.

However, there are exceptions provided for by law which allow exemption from Italian withholding taxes on the pension paid to an expatriate. To benefit from this facilitation it is necessary to follow the procedures provided for by Italian law and the Double taxation conventions entered into by Italy with various foreign countries. In this way, you can avoid paying taxes in Italy and have your pension taxed exclusively in your foreign country of tax residence.

Italian law provides as follows:

• Pensions paid to persons not resident in the Italian State, by entities resident in the territory of the State or by permanent establishments in that territory, are generally taxable in Italy.
• Persons not resident in the territory of the Italian State are also obliged to pay the regional and municipal additional IRPEF. This is if, in the year of reference, IRPEF is due after deducting all deductions due and tax credits for income produced abroad that has been subject to final withholding.

In general, a pensioner who receives a pension from Italy and moves abroad is subject to income taxation in Italy (source state). Subsequently, this income is also subject to taxation in the state of tax residence. This is the general principle of concurrent taxation of pension income which is why it is important to proceed quickly with the Register of Italians resident abroad (A.I.R.E.)

The taxation of private sector pension income for the expatriate pensioner in a convention country with Italy is governed by Article 18 of the double taxation conventions concluded by Italy according to the OECD model. This article establishes the connecting criteria for the taxation of private pension income, which derives from the exercise of work activities on behalf of 'private' entities. In the case where a pensioner who has moved abroad permanently receives private pension income from an Italian source and has verified the requirements for foreign tax residence, Article 18 of the OECD Model Convention provides as follows:

Art. 18 OECD Model - Private Pensions
"Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State."

In summary, Article 18 of the OECD Conventions provides that the private sector pensions are only taxed in the state of tax residence of the pensioner, irrespective of the country in which he/she worked and fulfilled the pension requirements. In order to be able to apply this rule, certain prerequisites are necessary:

1. The pensioner must transfer his residence abroad.
2. The pensioner must receive a 'private' pension from Italy.
3. The pensioner must move to a country with which Italy has concluded a double taxation convention that provides for the provisions of Article 18 of the OECD Model.

Only if these requirements are met can the pensioner be credited with the gross pension abroad and enjoy exemption from Italian taxation on pension income. It is therefore essential to follow the procedure for transferring residence abroad correctly in order to obtain this important tax advantage.

 

 

Taxation of the Italian Public Sector Pension for the Retiree Expatriate in a Convention Country with Italy

The Italian pensioner who receives a public pension must in general tax this income in its country of origin (Italy). However, if the pensioner resides in a convention country with Italy, Article 19(2), of OECD Convention provides that state pension income is taxable only in the state of the pensioner's tax residence.

Furthermore, the article includes a safeguard clause, according to which if the public pension is taxed in the State of tax residence at a rate lower than the one applicable in Italy, the pensioner will have to pay the difference to the Italian Treasury.

Therefore, even in this case, the pensioner must check whether the conditions of the agreement are met in order to benefit from the exemption or reduction in taxation of the state pension.

Art. 19(2) OECD Model - Public Pensions
"(a) Pensions paid by a State or a political or administrative subdivision or local authority thereof, (in the case of Italy), or by a territorial entity thereof (in the case of France) either directly or by withdrawal from funds created by them, to an individual in consideration for services rendered to that State or subdivision or entity shall be taxable only in that State.
(b) However, such pensions are taxable only in the other State if the recipient is a resident of that State and has the nationality of that State without having the nationality of the State from which the pensions are derived".

Pensioners who have worked for the Italian public administration (ex Inpdap pensioners) and moved abroad cannot benefit from taxation exclusively in the country of residence, as is the case for private sector pensioners.

In this case, ex-Inpdap pensioners are subject to double taxation: that of their country of residence and the taxes withheld in Italy.

This difference in treatment should be resolved by the government, as it could be considered discriminatory.

However, since this is a conventional provision, the change would require action at the OECD level, which makes a change without collective action very difficult.

 

Procedure to be followed for obtaining the Italian Pension Defiscalisation

The INPS private sector pensioner who moves abroad can claim exemption from withholding tax in Italy on his pension. In this way, he avoids double taxation and can claim tax relief on his Italian pension. Article 18 of the OECD Model provides that such income is subject to exclusive taxation in the country of tax residence, or that the most favourable tax treatment applies, e.g. taxation in Italy only if certain exemption thresholds are exceeded.

To obtain the application of Article 18 of the OECD Model, the Italian pensioner must transfer his residence abroad and receive a 'private' pension from Italy. In addition, must move to a country such as Albania with which Italy has a double taxation convention which follows the provisions of the OECD model. Finally, he must submit a special application to INPS to request the crediting of his gross pension.

The application for the credit of the pension before Italian taxation can be submitted to the INPS office that manages the benefit paid, using the form available on the INPS website. The module is available in four versions, Italian and foreign, which can be consulted in the section Forms > International Conventions of the INPS website.

Refund Request Address

The addresses for requesting a refund of Italian taxes relating to previous years depend on the country in which the pensioner resides. Generally, the request must be submitted to the tax office of the pensioner's country of fiscal residence. However, it is always advisable to check the specific procedures for the country in which you reside by consulting the local tax authorities or the INPS website. Furthermore, it is important to bear in mind that the timeframe for Italian tax refunds may vary depending on the country of residence and the relevant administrative procedures.

OPERATIONAL CENTRE OF THE REVENUE AGENCY OF PESCARA, VIA RIO SPARTO 21, 65100 PESCARA

The application for reimbursement must be made by the forfeiture period of 48 months from the date the tax was withheld (Articles 37 and 38 of Presidential Decree No 602/73). The application for reimbursement of the withholding applied must necessarily contain:

• L'certificate of residence for tax purposes in the foreign country, issued by the competent tax authority as well as
• The declaration of the existence of any other specific conditions provided for in the Convention.

 

Conclusions And Online Tax Advice

As we have already seen, you can enjoy your pension abroad without paying tax in Italy, but only by complying with the specific regulations. If you are planning to move abroad and want to carry out targeted tax planning, I advise you to consult an accountant experienced in this field.

The risk of making mistakes is high and you may be subject to penalties that could be avoided. The Internal Revenue Service has intensified its controls in recent years, especially to identify those who have not correctly applied the regulations on the transfer of residence abroad or who have made the transfer for the sole purpose of evading taxes. In particular, irregular situations are often linked to maintaining strong ties with Italy, such as owning real estate in Italy, transferring money from abroad to Italy or spending significant periods of the year in Italy.

It is important to know the regulations and to rely on experienced consultants who can direct you towards the right solutions according to your personal situation. In the event of an Agency audit, it is essential to have a personal file containing all the information necessary to prove the goodness of your choices and tax compliance. If you need further information, do not hesitate to contact us via the online tax advice service.