As part of a general process of devolution (Federalismo) of administrative and fiscal powers from central government to local authorities / local town councils (Comuni ), a new, simplified form of rental income taxation has recently been introduced in Italy.
The Italian private letting market is strictly regulated. Legislation restricts the freedom of landlords / tenants to negotiate their tenancy agreements. The term of an Italian letting contracts, the maximum amount of increase on rent reviews and some of the main clauses are all regulated.
There are two main forms of Italian letting agreements. “Free market rent tenancies” (Canoni a mercato libero ) where the parties are free to negotiate the amount of rent, and “Agreed” tenancies (Canone concordato ) where the rent is pre-determined and agreed with the assistance of local representative bodies of landlords and tenants. This is usually below market rent, in high demand areas.
Free market rent agreements apply to approximately 80% of all Italian tenancies. The term of tenancies usually being four years subject to the right of the tenant to renew for a further four years.
Italian landlords are also affected by a network of taxes, and administrative duties and obligations. Usually, granting a tenancy is a serious matter, as in case of default or disagreement, it may prove expensive and time consuming to evict a tenant.
On entering into a tenancy agreement, the Italian landlord is required to lodge a copy of the agreement with the tax authorities and to pay registration tax (Imposta di registro ). Italian stamp duty (Imposta di bollo ) is also payable. Registration tax is also payable on renewals / extensions of existing tenancies.
During the term of the tenancy a landlord is required to report annually to the tax authorities the rental income and to pay Italian income tax (Imposta sul Reddito delle Persone Fisiche – IRPEF ). Frequently there are also local versions / additions to this particular tax (Addizionali comunali e regionali ) to be paid on rental income. It is a quirk of the Italian tax system that income tax is also payable on rental income due but not actually paid by the tenant, until and unless an eviction order is issued by the Courts, subject to the taxpayer’s right to apply for a refund.
This is in addition to the normal “health and safety” requirements, which also includes the requirement for all landlords to produce an energy performance certificate (Certificato energetico ) to the tenant.
This new legislation was only passed at the beginning of April 2011, but in the case of Italian rental income will apply to rent due since the 1st January 2011, the beginning of the Italian tax year.
Italian landlords are now given the opportunity to cut through the “Gordian knot ” / complexities of Italian taxation, and basically to elect to replace all fiscal formalities and taxes with just one annual tax on rental income, at the flat rate of 21% on the rent from free market rent tenancies the “Canoni a mercato libero ” and at the flat rate of 19% on rents from agreed tenancies “Canone Concordato ” letting agreements.
In a nutshell, the new flat rate rental income tax will replace Italian registration tax (Imposta di Registro ), Italian Stamp duty (Imposta di bollo ) Italian Income tax (Imposta sul reddito delle persone fisiche ) with all its local additions / versions (Addizionali regionali e comunali ).
This simplification will only apply to individual landlords and individual residential tenants. Commercial tenancies, and commercial / professional landlords are excluded and left to cope with the existing network of taxation and administrative compliance obligations described above.
This election for the new “flat rate” tax involves complex calculations and is probably better left to experts and involves notification to the tenant.
The other side of this “simplification” is that landlords opting for the new system will, automatically, lose the right to renegotiate the amount of rent payable on renewal of their tenancies.
Such an option is in any case limited to 75% of increases in the Italian retail price index, under the pre-existing legislation. A landlord electing for the simplification of the flat rate tax system, will find that he cannot increase the rent at all, whatever may happen in the market, or whatever the level of inflation and will also have to consider this item of cost / reduced income, in making his choice.
The new flat rate rental income tax will usually (depending on the amount) be paid in two instalments. 40% is payable on the 16th June, the remaining 60% balance being payable on the 30th November of each year.
There is a very heavy stick coming with this carrot, for Italian tax evading landlords. Being aware of the high level of tax evasion in the Italian rental market, the Italian legislator has introduced a “conflict of interest” between landlords and their tenants, which is bound to operate in favour of the Italian taxman.
Where the landlord does not report the tenancy to the authorities and does not pay registration / income tax on the rent, the tenant is now given an opportunity to register the tenancy and effectively to report the tenancy to the authorities.
Several benefits will accrue to the whistle blowing tenant in this case. A new tenancy will start afresh by operation of law, as soon as the contract is reported, for a new four year term with an automatic right of renewal for a further four year term. The rent payable will also be automatically reduced to approximately 1/3 of the current market rent.
Accordingly tenants will be able to become informants to the tax authorities and stand to obtain substantial benefits from this activity.
The unfortunate, tax evading landlord, will suffer. Heavily. In addition to seeing his property “frozen” for an overall term of 8 years at a reduced rent, and being required to pay all tax previously evaded, defaulting landlords will have to pay penalties totalling 400% of the tax evaded.
Any defaulting landlord is now given time up to the 6th June 2011 to regularize his / her position…
Claudio Del Giudice
Copyrights reserved. 19.04.2011