Editor’s note: There are many reasons why an American may seek to relocate to Europe, chief among them retirement, work opportunities or simply a better work-life balance. This is the fourth article of a four-part series in which we’ll discuss key financial considerations Americans should keep in mind when considering a move to Europe and zoom in on three countries in particular: France, Portugal and Italy. Part one, an introduction to the series, is Considerations for Americans Who Want to Move to Europe. Part two is about moving to France, and part three is about moving to Portugal.
Whether it be through personal heritage or simply an appreciation for beauty and cuisine, Italy holds a special place in many Americans’ hearts. And, in recent years, it’s become very possible to relocate to and live in Italy thanks to various immigration and tax schemes developed by the Italian government.
Although these schemes might turn heads for their headlines ($1 homes in southern Italy, anyone?), it’s important to keep in mind that moving to Italy is no easy nor simple financial feat, however technically affordable that countryside home in Sambuca may be.
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Below, we’ll break down key financial elements to keep in mind when planning a move to Italy, including common immigration pathways and what to keep in mind for your financial planning.
Traveling in Italy vs living in Italy
It seems obvious, but I’ve fallen victim to it, too: You visit somewhere and immediately think, “I could live here!” While Italy makes this easy to do, with its incredible cuisine, strong cultural ties to the U.S. and a lifestyle that prioritizes family and community, there are many aspects to life in Italy that are not apparent when you’re a visitor.
Cultural factors to understand when considering a move to Italy
Bureaucracy. Administrative processes abound as a U.S. expat, and the procedures associated with living in Italy tend to be slow and complicated, with in-person appointments frequently required.
Language barrier. While English is spoken in major cities, you’ll need to learn at least some Italian to live there. People who live in northern regions typically speak more clear Italian, while residents of southern and rural areas may have stronger dialects.
Outdated infrastructure. Like Europe in general, most residential buildings in Italy are old and ill-equipped to handle rising temperatures. Even if you have the financial means to make the necessary updates to accommodate your comfort level, doing so may take time and involve cumbersome administrative processes.
Driving in Italy. Unlike many other EU countries (such as France), there is no driver's license exchange option for U.S. citizens. In order to legally drive in Italy, expats must go to Italian driving school and pass tests.
Purchasing a property in Italy
Purchasing a property in Italy is also an extremely lengthy process by U.S. standards —according to the Bank of Italy, the average timeframe to complete a residential purchase is nine months, which is at least three months longer than homebuying in the U.S.
With respect to the country’s budget housing scheme, the scheme’s marketing and PR often mask more complex considerations when you’re deciding whether to move to a foreign country. The budget homes are part of a government initiative to repopulate certain regions, and there is a minimum restoration investment that must be undertaken on purchased homes within a set timeframe.
Typically, there is also a minimum amount of time you must reside in your new home. Personally determining whether Italy (and the specific region or city you are interested in) is a cultural and lifestyle fit will be essential before you buy one of these properties.
Who is best-suited financially for a move to Italy?
For Americans considering a move to Italy, the country is particularly attractive if you’re self-employed or a pensioner.
Self-employed individuals. Companies in Italy are classified as partnerships, private and public limited liability companies and cooperatives. There are structures that feel similar to American entities, such as the private limited liability company (SRL), which is most similar to an LLC in the U.S.
A primary advantage of being self-employed in Italy as a U.S. citizen is that, according to the Totalization Agreement between the U.S. and Italy, you may be obliged to continue to make Social Security contributions to the U.S. This can be at a lower tax rate than the equivalent contributions in the Italian system.
Of note to both self-employed and remote workers: Moving to Italy as a self-employed person or a remote worker is now possible via the one-year renewable digital nomad visa, which Italy officially launched this year.
Retirees. U.S. retirees to Italy may apply for the Elective Residency Visa (residenza elettiva). A key tenet of this visa is having passive income, e.g., pensions, rental income, royalties and so forth, sourced from outside of Italy.
Financial issues for Americans relocating to Italy
The circumstances under which you move to Italy will inform both your short-term and longer-term financial planning. This is ideally done in partnership with a cross-border tax specialist familiar with the needs of U.S. taxpayers residing in Italy. For their part, those with complex situations or a sizable amount of assets would benefit from a cross-border financial planner with the same specialization.
Taxes
Tax residency in Italy is based primarily on whether you are registered in the anagrafe (official registry) at your local commune — which all long-term residency permit holders are.
After you move to Italy and activate your residence, you may be entitled to apply for or claim certain beneficial tax regimes.
Depending on your eligibility, you may qualify for the:
- 200,000 euros flat-tax regime. For ultra-high-net-worth people generating income outside of Italy. The qualifying person would pay 200,000 euros to Italy each year in taxes, regardless of earned income or capital gains realized outside of Italy.
- Impatriati regime. Qualifying people benefit from a 50% tax reduction on income up to 600,000 euros. Available to anyone who has not lived in Italy for the preceding five tax years. This is applicable only to earned income.
- 7% flat-tax regime. Available to anyone who receives foreign pension income and has not been a resident for tax purposes in Italy for at least five tax years before the year in which they make the option for the tax incentive. There is a requirement to live in a southern Italian municipality with less than 20,000 inhabitants.
Retirement account taxation
Moving to Italy in retirement requires a careful assessment of your portfolio allocation. Also, the treatment of U.S. tax-advantaged accounts is not the same in Italy, nuances that are worth parsing well prior to moving.
Wealth, inheritance and estate planning
While Italy can be considered as having a wealth tax, it’s a bit of a misnomer. At a high level, there are small taxes on foreign investment accounts and foreign property. For example, investment accounts are taxed at 0.2% of their value, while foreign properties are taxed at 1.06% of their purchase price. However, wealth taxes do not apply to pension funds, such as 401(k)s and IRAs. Local, domestic property taxes can also be used to offset the foreign property tax in Italy.
Social Security distributions. According to the Double Taxation Agreement (DTA) between Italy and the U.S., Italy has the first right to tax your Social Security payments.
Taxation of Roth IRA or Roth 401(k). Italy does not recognize the tax-free nature of these accounts, and distributions can be considered taxable.
Capital gains on investment portfolios. These are taxed by Italy in the first instance. Mutual funds and ETFs that are not UCITS-compliant (usually those from outside Europe) are taxed at income tax rates rather than capital gains tax rates, so it’s very important to structure a taxable investment account taking this into account.
Inheritance and trusts. As with many European countries, Italy has a forced heirship regime known as the “reserved quota.” This means that even a will cannot specify the exclusion of certain claimants to an inheritance, specifically living spouses and children. Italy generally has very low inheritance tax rates and generous exemptions depending on the relationship with the deceased.
In conclusion
Italy has an intriguing number of viable immigration pathways available to Americans seeking a change. That said, ascertaining the best fit for yourself is actually the second step — the first is visiting and getting a sense of whether the rhythm of life there matches your own. Are you seeking the cosmopolitan bustle of Milan or a more laid-back experience in the Umbrian countryside?
In particular, high-net-worth individuals would be best served speaking with a cross-border financial planner who can help you understand why your current investment portfolio may need to be adjusted — as well as how to make sure you’re complying with cross-border considerations.
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