A recent ruling of the Italian Constitutional Court has repealed with immediate effect anti avoidance regulations aimed at tax evading Italian landlords dating back to 2011. Because of the immediate effects of this ruling and the operation of the abrogated legislation over the past three years, complex issues are now left open for interpretation.
Following legislation issued in 2009 by the Italian Parliament, in March 2011 the Italian Government issued implementing regulations (Decreto Legislativo 23/2011) introducing, among other things, a new form of rental income taxation (“Cedolare secca “). Italian landlords were given the choice to pay tax at a flat rate of 21% (or 15% in some special cases) as an alternative to normal taxation under Italian Registration Tax, Income Tax and associated taxation.
As part of this “2011 package” anti-avoidance provisions were also introduced. The problem is that these sanctions were not provided for by the original delegating legislation and were fairly drastic.
Where a tenancy contract was not registered as provided for by Italian law, and 2% Italian Registration Tax was not timely paid, the term of the tenancy was automatically extended to four years, plus another four years, at the tenant`s discretion.
In addition, these sanctions also provided for an automatic reduction of the agreed rent to a total not exceeding 3 times the Local Land Registry Statutory Income of the relevant property. This meant an overall rent reduction of well over 50% of the commercial rent originally agreed in the tenancy.
Basically an errant landlord ran the risk of a triple whammy. First the tenancy would be extended to a potential overall term of 8 years, secondly the rent was reduced to less than 50% of the amount originally agreed in the tenancy. Thirdly all other normal penalties associated with tax evasion would apply.
The purpose of that legislation ( article 3, paras 8 and 9 of Decreto Legislativo23/2011) was to create a “conflict of interests” between the landlord and tenant, so that any form of landlords` tax evasion would immediately be reported by the tenant, who stood to benefit from these sanctions, to the authorities. A drastic solution to the high rate of tax evasion (“Fitti in nero ”) in the rented accommodation sector of the Italian economy.
As frequently happens, disputes were taken to court, mostly by landlords who were not prepared to accept the consequences of this new legislation. Under Italian law all legislation and Government action must comply with the Italian Constitution, the highest formal law in Italy, introduced at the end of the last war. Pending legal proceedings, landlords petitioned the local courts to bring to the attention of the Constitutional Court issues with the new landlords` anti-avoidance legislation, which could potentially breach the Italian Constitution.
Reports against that legislation were filed with the Constitutional Court by the local courts in Salerno, Palermo, Genoa, Florence and Rome. These reports were joined together and the Italian Constitutional Court eventually issued a judgment on 14th March 2014.
Under this judgment, the former, March 2011, landlords` anti-avoidance legislation has been declared null and void, because it was not provided for / covered under Parliament`s original delegation to the Government, the legislation dating back to 2009.
This new judgment has been greeted with enthusiasm by Italian landlords representative bodies (Confedilizia and UPPI ). It will now enable landlords to evict tenants where the original tenancy had lapsed and had been compulsorily extended for a further term of up to 8 years.
The problem, however, is that it is not clear what will happen where the tenancy is still within the original term or where a reduced rent was paid. The Italian Constitutional Court can only strike out legislation which is in breach of the Italian Constitution, but has no legislative powers. Litigation is expensive and time consuming. Also, there is nothing stopping the Italian Parliament immediately re-issuing the abolished legislation or granting the Government new appropriate powers, in the face of this recent ruling of the Italian Constitutional Court. Watch this space !
At the end of the day, even with this new ruling of the Italian Constitutional Court, the safest course for an Italian landlord must be to comply with current tax legislation, register Italian tenancies within the statutory deadline and pay any applicable taxes. If necessary a foreign landlord should use an Italian lawyer and make sure he gets the appropriate advice. Anything else, could prove rather disappointing.
Avv. Claudio Del Giudice
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