Finanziaria 2008” or the latest Italian budget is a complex, condensed and sometimes confusing raft of legislation which came into force last month. In an attempt to combat tax evasion in Italy, it has introduced a potential new trap for unwary buyers. Because of the way it operates, this new risk is difficult to ascertain and to avoid.

The provisions in question relate to the evasion of Italian VAT (IVA – Imposta sul Valore Aggiunto), which is usually payable on a sale of property, where the vendor is an Italian corporate or commercial builder / developer. IVA is levied at a flat rate and almost entirely replaces all other taxes, when it is levied on a property transactions.

It may happen that Italian developers will try and avoid / reduce the burden of IVA by convincing buyers to under-declare the property value in the Deed of Sale. To avoid at least part of the IVA payable, a value is declared which is lower than the actual sale price. Because IVA is levied at a flat rate, if the overall declared price is artificially reduced, then tax on the undeclared difference is evaded. This criminal fraud is frequently compounded by the vendor insisting to be paid the balance of the sale price in “black”, in cash to avoid detection. In this case the buyer will breach Italian exchange controls regulations which expressly forbid cash payments in excess of £ 12,500, and additional penalties will apply.

Previous legislation had already made this kind of fraudulent transaction very risky for Italian property buyers. All buyers are now required by law to declare the full sale value of their Italian property under oath in their Title Deed (Atto di Compravendita) . A false statement could now result in a criminal prosecution (perjury).

However in these cases the main target of the Italian Revenue used to be the commercial builder / seller, the party responsible for charging and paying over IVA to the Authorities with all his assets. Italian legislation recently introduced “normal values” (“Valore Normale“) for most Italian properties and where the value declared in a Title Deed is artificially low, the Italian Revenue was empowered to levy assessments to IVA, interests and fines on the defaulting vendors, without requiring further evidence. There was no tax sanction against the fraudulent buyer.

Finanziaria 2000” has now changed all this, by shifting some of the tax evasion burden on errant buyers. Under this new legislation, both the commercial builder / developer / seller and the buyer are now jointly liable for any IVA evaded, fines and interests. Both the parties to the fraudulent transaction are now jointly liable for their actions.

Under this new legislation however, the Italian Revenue will also acquire a charge over the property being sold where IVA tax has been evaded, both for the actual tax evaded, interest and penalties.

Because arrears of IVA tax, interests and penalties can be claimed for up to 10 years from the date a fraudulent value understatement was made, both the developer and the buyer will be at risk for a very long time. In addition (and this is the new “risk”), tax evasion will also affect the Italian property in subsequent years, as it will operate as an undisclosed, potential charge over the property. Thus the “risk / tax charge” will follow the particular property over the years in the hands of subsequent, unwitting, innocent buyers. Whoever is the registered owner of the property at the time the fraud is discovered, may now be effectively called to pay up the tax evaded, interest and penalties, even if he has absolutely nothing to do with (earlier) tax evasion, as he will risk losing his property.

Because this legislation may now result into a (substantial) claim against a subsequent innocent property owners it may not always be fair in its operation. Also, because it is almost impossible for a subsequent buyer of the same property to spot the risk of a charge associated with earlier IVA tax evasion, this “risk” will hang over the fraudulent parties and any subsequent innocent buyers… as the sword of Damocles for up to 10 years.

Caveat Emptor” (Latin for “Buyer beware !”).

Dr Claudio Del Giudice
February 2008, Copyrights reserved