Rental income tax – a more favorable rate applies from 2016 on

In the STABILITY LAW 2016, a new Flat-Rate Tax Scheme favors landlords

taxThe flat-rate tax scheme, first introduced into the Italian tax system by Stability Law 2015, has been modified and made more practical and favourable in the 2016 Stability Law.
The government’s aims for introducing the flat-rate tax scheme are to boost employment, steer Italy’s economic recovery in a positive direction, reduce undeclared taxable income and employment irregularities.

The reformed tax scheme applies to individuals operating in what are classified as, ‘the arts and independent professional activities’ sector. This includes individuals generating income from the rental of investment properties and second homes.

The reformed tax scheme:

Establishes a tax replacing Irpef, Irap and additional taxes of 5% for the first 5 years and of 15% from the sixth year onwards: neither VAT nor other taxes are due.  Represents an opportunity to regularize compliance on any activity that has not previously been declared to the Italian Tax Authority. Foreign property owners may not realize that they need to
declare this type of income, even if it is seasonal and infrequent. Owners may be subject to heavy penalties in case of an audit by the Italian tax authority.
Taxable income in the flat rate – tax scheme is determined by applying profitability coefficients. These codes vary according to business activity. Accommodation, lodging, lettings and B&B activities are determined by applying a profitability coefficient of 40% of revenues.

Let’s make an example:
Mr. Smith owns a property in Puglia and decides to start running a (seasonal) business by renting out the property for holiday letting.
Mr. Smith decides to apply for the flat rate-tax. Taxable income : Euro 16.000 (coefficient of profitability 40% of 40.000)

Tax to pay: 800 (tax rate 5% of 16.000). With the ordinary tax scheme Mr. Smith would pay approximately Euro 4.300 on the same profit. And he would pay much more if eligeable costs to offset generate a higher profit. As an example, if the annual revenue are Euro 40.000 and the deductible cost are 15.000, the taxable profit will be Euro 25.000 and the
taxation will be around Euro 6.500.

As you can see from the example above, in the “5% tax scheme” for the purposes of calculating income tax, expenses are not included – the basis for the calculation of taxable income is exclusively based on revenue. Only social security contributions (INPS) can be deducted from revenues; it is worth a reminder here that any Italian resident taking advantage of the flat-rate scheme, must have social security cover. Social security contributions are calculated as a percentage of revenues, a reduction of up to 35% of contributions is available. Up to a profit of 14.000 euros the social security contribution is fixed at approximately Euro 1900. Looking at the example above – where the maximum profit is 16.000 – the social security/insurance contribution costs will be 1900 + 20% * 2000 = 2.700. These money will not be lost; after 5 years of contribution you will accrue a (small) pension.

An Individual planning to start-up a business activity in Italy qualifies for the flat-tax scheme, provided that the individual has not (officially) carried out the same activity in the past three years and that revenues will not exceed €40.000 per annum.

Foreign residents and non-residents, who generate an income from letting their property in Italy, wishing to benefit from the flat-tax scheme, must notify the Italian tax authorities through a Notice of Business Start-Up.

If you need help to understand your personal situation, please contact me or seek advice from a qualified accountant registered with the ODCEC, the Italian professional accounting association of certified public accountants, auditors and advisors.

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