Tourism has always been a major source of income in Italy. Once upon a time, tourists arrived in Italy and stayed in hotels, sometimes they would rent a holiday cottage for a few months. Over the years the Italian tax system had adapted to this form of tourism.

The advent of the internet and, more recently, of foreign websites where it is possible to let an Italian residential property for a few days only, on an informal basis directly from the local Italian “hosts” completely changed the rules. The short letting of homes, by owners directly to passing tourists, through foreign websites like “Airbnb” and “Booking” has grown at an impressive rate in Italy. It is estimated that there are currently 83,000 potential Italian short let “hosts” in Italy with a Euro 2,300 average “short rental income” each.

In total this means an annual income of approximately Euro 191 million from informal short letting in Italy, which must be good news for the Italian economy.

Unfortunately, it was not equally good news for the Italian revenue (Agenzia delle Entrate) .

This is a new cottage industry, organised by private individuals through international websites that do not have a permanent establishment in Italy. This flourishing new short let income was rarely declared or taxed. Most Italian private owners who let their homes for a few days /weeks to passing tourists through international websites, would not declare this income.

This new “short term rental” trade has a high degree of tax evasion. Previous Governments had turned a blind eye to this problem which, left to itself, kept growing. Hotels and other “normal” Italian tourist accommodation providers complained against this unfair (effectively tax free) competition.

In fairness, the Italian tax system itself did not lend itself to compliance. Geared to “ordinary” tenancies running for a statutory minimum term of four years, sometimes to be extended by a further four years, it provided that Registration Tax (Imposta di Registro) would have to be declared and paid within 30 days from the commencement of each tenancy, at the rate of 2% on the annual rental income.

Most of the new short term letting business has a much shorter term. By the time Registration Tax was to be declared and paid on an “annual basis”, the short let would have already come to an end. A new tenancy might have already commenced, and certainly there would be no “annual” rental income from such tenancies. Faced with tax complications, many Italian tax payers are reputed to have evaded taxes. Because there would be no registration of the new, on-line short lets, it was almost impossible to detect errant taxpayers.

Steps have now been taken to deal with this issue.

On 1st June 2017, new legislation will come into force in Italy dealing with short let taxation (Regime fiscale delle locazioni brevi). It is aimed at the private individual who lets their home / residential property on-line to passing tourists and to informal bread & breakfast in Italy.

On-line short let income will be taxed under the “Cedolare secca” system. This is a form of alternative property taxation in Italy, where tax is levied at the flat rate of 21%.

Cedolare secca” replaces Italian income tax (IRPEF), local income taxes (Addizionali Comunali e Regionali), stamp duty (Bollo) and Registration Tax (Imposta di Registro) which would otherwise be payable on the same rental income.

In order to supervise compliance, this new legislation also introduces new obligations on international websites acting as intermediaries between Italian property owners and passing tourists.

These online portals are now required to record full details of all Italian short lets entered into by Italian hosts (meaning, any taxpayer of whatever nationality, who offers his / her Italian property on-line as stated above). Even if these online portals have no Italian permanent establishment, they are required to co-operate with the Italian Authorities, to collect data and to report it on a regular basis to the Italian Revenue (Agenzia delle Entrate). Substantial fines are introduced for any failure to comply / delay. Sanctions are reduced in cases of short ( up to 15 days) delays.

To ensure that “Cedolare secca” will be duly paid, this new legislation also provides that where on-line portals collect the rent on behalf of Italian “hosts”, a 21% tax withholding must be effected by the on-line portal and paid directly to the Italian authorities.

A tax deduction certificate will then be issued to the “host” / owner of the Italian property, who will have the option of electing to be taxed on the “normal” basis, rather than accepting “Cedolare secca” as full and final payment of Italian tax on their rental income.

Italian hosts are given the option of paying Italian income tax and other property taxes on the “ordinary” basis. However, considering that the lowest rate of Italian income tax itself (without the other taxes that are normally also applicable) is currently 23 %, while “Cedolare secca” is only 21 %, it is not expected that there will be many requests to be taxed on the normal Italian property taxes, basis.

This legislation will be reviewed and subject to adjustments in the near future, but it is clear that it is here to stay. On 1st June 2017 a new dawn will arise on the uneasy relationship between taxpayers (in the shape of “on-line hosts”) and Revenue Authorities, in Italy.

Dr Claudio Del Giudice

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