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Holding Italian Real Estate

DIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the direct holding of real estate. 

First, the impact for resident individuals and non-resident individuals is discussed. Thereafter, is discussed the impact for resident companies and non-resident companies. 

Resident individuals

Personal income tax (IRPEF)

Real estate income

Real estate situated in the State and held by a resident individual is treated for tax purposes to produce income, according to its cadastral income established by the tax authorities. Real estate income, as described above, has to be considered in addition to other incomes in order to form the tax basis subject to IRPEF.

However, in case of rental fees derived from the real estate, only the highest amount between the rental income previously reduced by 5% and the cadastral income increased by 5% is liable to IRPEF. The amount of rental fees is further reduced by 35% if the properties are classified as buildings of historical interest.

Rental fees may also be subject to a substitute tax of 21% pursuant to the optional tax regime ‘cedolare secca’ in case agreements are connected with properties rented for residential purposes (further reduced by 10% if rental fees received are related to facilitated rental agreements), in order to replace the ordinary IRPEF tax rate and all related registration taxes. Moreover, cedolare secca tax regime is available, as well, for short period agreements up to 30 days, if not connected with business income.

Income arising from properties held abroad by resident individuals is subject to taxation for IRPEF purposes in Italy, in accordance with the worldwide taxation principle, considering, alternatively, the net amount determined by the foreign State (cadastral value) and the rental fee reduced by 15%. In order to reduce the impact of the double taxation of foreign income, there will be a tax credit for income produced abroad in case taxation was carried out in the other state. 

Business income 

When the possession of the real estate is connected with the production of business income, such income is determined according to the same rules of the resident companies, except for the special provisions established.

Regional tax (IRAP)

If resident individuals produce business income, they are also subject to IRAP according to the same rules, except for the special provisions established.

Deductibility of costs, interest and depreciation

Costs and depreciation are generally deductible only if related to the production of the business income.

Interest costs are generally deductible as well, although shall be considered restrictions in the presence of exempt revenues.

Losses – Carry back/forward

Losses may be deducted against business income only if the individual runs a business (VAT subject). The surplus amount may be carried forward without temporal limits in the following years up of 80 % of the income amount.

Non-resident individuals

Income from a real estate property situated in Italy is taxed in Italy, even in case of existence of a Double Taxation Convention.

Non–resident individuals are treated the same as resident individuals. 

Resident companies

Corporate income tax (IRES)

Business income generated by limited liability companies are subject to IRES at a fixed rate of 24%. 

Trust entities are subject to corporate taxation as well if particular provisions are met.

In some circumstances, limited liability companies may be taxed as a transparent entity and are therefore not liable for corporate taxation.

Deductibility of costs, interest and depreciation

For the purposes of this guide, properties held shall be distinguished between ‘patrimonio’ assets (not directly connected with business income), assets directly connected with business income as instrumental properties and properties held for sale i.e. ‘immobili merce’.

The ‘patrimonio’ assets are classified by the tax law according to their residential use/non-instrumental relation with the actual activity of enterprise and with the corporate aim.

For the purpose of business income shall be considered subject to taxation the higher one between cadastral income and rental fee reduced by the amount of expenses incurred, (actually paid and supported by relevant documentation) up to 15% of their amount. Costs and depreciation related to these properties are not deductible.

The buildings held for the purposes of their sale or the buildings purchased or built and held for the sale (called ‘immobili merce’) will contribute to form business income.

The ‘instrumental properties’ are classified as instrumental assets according to their own nature (properties belonging to the cadastral categories A/10, B, C, D and E even when not leased or at free disposal of the taxpayer) or according to their own aim (assets used directly and solely to the enterprise activity, independently of their belonging to cadastral categories).

Related revenues, costs and depreciations (whose annual average is equal to 3%) must be considered on their accrual basis value as reported in the account books. Maintenance costs are deductible by 5% of their amount per tax year: surplus amount may be deducted in the following
5 years.

Interest costs are deductible up to the amount of the interest receivable. Surplus amount may be deducted within the amount of the Gross Operating Profit. 

However, in addition to the general rules described above, it should be remarked that interest costs related to ‘immobili patrimonio’ are not deductible for IRES purposes only in case they are connected with their ordinary functioning. Differently, interest costs concerning a mortgage financing aimed at purchasing a building to be leased may be entirely deducted.

A remarkable anti-avoidance rule, which may affect corporations investing in Real Estate, has been introduced in the Italian tax system, i.e. ‘Società di comodo’ fiscal regime. Such rule concerns a company set up just for tax purposes to avoid personal income tax. Fiscal authorities may subject to an additional penalty on taxation upon business income of the year if not capable to reach an established minimum amount.

SIIQ tax rules 

The corporations which are classified as Società di. Investimento Immobiliare Quotate (SIIQ) may represent a remarkable option for real estate investors for fiscal purposes as well. Basically, we are dealing with a SPA resident company quoted on the Italian stock exchange whose properties held are aimed to be rented for 80% of their amount, as well as the revenues arising from. For the tax purposes the business income obtained by applying the IRES rules, is taxed directly to shareholders with a 26% substitute tax.

Losses-carry back/forward

Losses may be deducted against income of the following years without temporal limits up of 80% of the income amount.

If losses are related with three early tax years their amount may be fully deducted against business income of the following years.

Regional tax (IRAP)

Companies are subject also to IRAP regional tax, in the amount of 3.9 % (ordinary rate may be increased in measure of 0.92% by regions) whenever existing the requirement of the ‘autonomous organisation’ established by the Decree n. 446 /1997. IRAP basis of tax is formed upon the value of the ‘produzione netta’ determined by the gross margin as reported in the financial statement, except the ones related to the employees engaged with open-ended contracts, and all the ones of financial nature.

Moreover, Italian partnerships are as well subject to IRAP, but taxable basis may in some circumstances differ according to special rules established by tax law.

Non-resident companies

Income from a real estate property situated in Italy are taxed in Italy, even in case of existence of a Double Taxation Convention.

When the non-resident company does not fulfil the requirements for a permanent establishment in Italy, the rental fees are taxed separately as real estate income with the same rules for individuals (generally taxed on 85% of revaluated cadastral value).

Non-resident entities and companies are subject to IRES and IRAP taxation upon the business income arising from a permanent establishment in the Italian jurisdiction pursuant to the provisions of art. 162 Tuir and are treated in the same manner discussed above for resident companies.

Real estate solely held as an investment asset will not qualify as a permanent establishment.

INDIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the indirect (shares) holding of real estate. 

First, the impact for resident individuals and non-resident individuals is discussed. Thereafter, is discussed the impact for resident companies and non-resident companies. 

Resident individuals

Personal income tax (IRPEF)

Dividends distributed by Italian entities are subject to a substitute tax at 26%. 

Deductibility of costs, interest payments and depreciation

Interest costs are generally deductible solely if related to the production of the business income.

Dividend substitute tax at 26%, cannot be offset against the amount of the tax amount due for the year.

Losses

The loss arising from a shareholding in a transparent entity can be offset in the tax basis against the same business income. Surplus may be carried forward without temporal limits in the following years up of 80% of the income amount. 

Non-resident individuals

The dividends distributed to non-resident individuals, are subject to a substitute tax at 26%, independently of the qualification of the shareholder, if not differently established by the provisions of OECD treaties to avoid double taxation.

Resident companies

Corporate income tax (IRES)

Income derived from shareholding is always qualified as business income for companies and subject to IRES at a fixed rate equal to 24%. In the case when the income is related to participation in a partnership shall be considered integrally on an accrual basis. At the other hand if related to a share in another IRES subject is excluded from the tax basis for the amount of 95%.

Deductibility of costs, interest payments and depreciation

Interest costs related to loans in order to buy a share in another company are deductible in accordance with the general provisions. Depreciation, as a decrease in value of the asset, deriving from the detention of shares cannot be deducted.

Distribution of income and gains

Dividends distributed by another company subject to the corporate tax are excluded from the tax basis for the amount of 95 %. Moreover, dividends derived from the participation in companies which are resident in a jurisdiction with privileged tax regimes, shall be considered integrally to the formation of the tax basis.

Anti-tax avoidance directive. 

The anti-tax avoidance directive (ATAD) as transposed into the Italian law jurisdiction has amended partially some of the general rules concerning the interest deductibility. Such new provisions may in some circumstances potentially decrease the amount of the deductibility of the interest costs.

Non-resident companies

Dividends paid from an Italian company to another foreign company are subject to a substitute tax at 26%, or the lower percentage established by OECD treaties to avoid double taxation.

However, if a foreign company derives income in the Italian jurisdiction through a permanent establishment will be treated in the same manner as resident companies as described above. Otherwise, if the provisions of EU Directive 2011/96 are met, dividends will be taxed only in the country of the parent company.

Real estate solely held as an investment asset will not qualify as a permanent establishment.

 

How can we help you?

Contact RSM Studio Palea Lauri Gerla by phone at

Milano: +39 02 89095151

Torino: +39 011 561 32 82 

Roma:  +39 06 5754963 

or email your questions, comments, or proposal requests.

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