"FINANZIARIA 2005"- The taxman strikes back on Italian properties.
a)
Increase of
Land Registry Values
b) Tax enforcement on property letting
c) Other measures affecting Italian properties
Dr Claudio Del Giudice
Rivington House
82 Great Eastern Street,
London EC2A 3JF
(United Kingdom)
Tel 0044 207 613 2788
Fax 0044 207 613 2799
The substantial increase in Italian property prices in the last few months, in
line with similar developments throughout Europe, hasn’t escaped the attention
of the Italian tax authorities. In this context, a few weeks ago some of the
highest officials of the European Central Bank have expressed their concern that
the joint availability of liquidity and credit in the economy may contribute to
an inflationary property price bubble which could later burst with disastrous
effects. At the same time the weapon of raising interests rates was considered
to be both rough and unwieldy. To date the national authorities have been left
free to decide how to tackle the problem.
In Italy action was taken at the end of December 2004 with the 2005 Finance Act
(Finanziaria 2005) mainly increasing taxes levied on properties.
a)
Increase of Land Registry Values
(Valori catastali) of Italian properties - The taxation of Italian properties is
based on a compromise that has always caused problems. Whereas the parties to a
sale of an Italian property should normally be taxed on the actual contractual
price, legislation was passed several years ago whereby provided the parties
declared in the Deed of Sale (Atto di compravendita) the local land registry
value (valore catastale) no further corrective assessments could be raised by
the Italian Revenue on the transfer of a property.
This legislation originally applicable to Italian Registration Tax (Imposta di
Registro), an Italian tax levied on the purchase of Italian property at the
rates of 10% (town buildings) and 17% (agricultural land), was later extended to
other taxes levied on Italian properties, such as income tax (IRPEF) and local
council tax (Imposta Comunale Immobili - ICI tax).
As the valore catastale was, and sometimes still is, far less than the market /
contractual price of the same property and tax is levied on the value declared
in the Deed of Sale, there is an incentive to declare and pay tax on the valore
catastale, thus reducing the parties` tax exposure. Conflict arises because
notwithstanding this legislation, technically Registration Tax should still be
paid on the actual price paid. Thus, if the Italian Revenue finds evidence of
the market price actually paid for any particular property then, although no
additional assessments can be levied, the Italian Revenue can still take other
steps and collect from the taxpayer both the full amount of tax avoided with
interest and substantial fines. Several judgements of the Italian Supreme Court
have indicated that, notwithstanding this accommodating legislation, the parties
are still under a duty to pay tax on the full contractual price of properties.
This conflict has caused the sale of properties to be shrouded in secrecy, which
sometimes leaves unwitting buyers without legal protection from the action of
fraudulent sellers.
With Finanziaria 2005 the Italian authorities have taken action to bring the
valore catastale more in line with commercial reality. The local authorities (Comuni)
have now been empowered to increase the valore catastale in areas where it is
substantially less than the corresponding actual market value. To achieve this
increase / update the owners of properties in the particular area selected, may
now be contacted by the authorities with an invitation to apply for a review of
the valore catastale of their properties. If no action is taken within the
following 90 days, then the local land registry authority (Agenzia del
Territorio) will automatically take all the appropriate steps to re-asses /
update the valore catastale of the properties with effect from the following 1st
January and fines will be levied.
These new provisions follow hard on other legislation introduced in August 2004,
which had increased by 20% the coefficients to be applied to the Valore
catastale in order to assess the statutory income accruing on Italian
properties, the “rendita catastale”, and inevitably will increase the tax burden
on property owners.
In the long term much will depend on the energy with which the local authorities
(Comuni) who stand to benefit the most from this legislation, will exercise
these new powers. However, this legislation is likely to result in both an
increase of the taxes actually paid on a sale of property and on an annual
basis, such as income tax (IRPEF), with dampening effects on the Italian
property market.
This increase of the land registry value of properties by bringing the statutory
value more in line with their commercial value, could put an end to the
dangerous practice of declaring only the land registry value in Deeds of Sale
solely to reduce tax exposure. The beneficial side effect would be to allow more
openness and transparency and less secrecy in Italian property transactions.
Every cloud has a silver lining.
b)
Tax enforcement on property
letting
One of the main stated purposes of Finanziaria 2005 was to enforce tax
compliance on income from Italian property letting contracts (Contratti di
Locazione), an area previously overlooked.
As a first measure, and in order to detect tax evaders and their properties,
Finanziaria 2005 provides that all the main utility suppliers (water, gas and
electricity) upon entering or renewing a supply contract must gather detailed
information from all their clients and their respective properties. This also
applies to local authorities upon receiving any planning application. This
information will later be passed on to the tax authorities who, with the
assistance of information from the local land registries and with computer
analysis, should be able to spot let / undeclared properties, fairly easily.
In Italy letting contracts are subject both to Italian Registration Tax (Imposta
di Registro) and to Income Tax (Imposta sul Reddito delle Persone Fisiche).
As far as Italian Registration Tax is concerned, Finanziaria 2005 provides that
where a letting contract (or otherwise any other contract resulting in the use /
benefit of Italian properties) is not registered and Registration Tax is not
paid, then the letting agreement in itself is void (nullo). This will have
serious consequences both for the landlord and the tenant, and will certainly
deter tax evasion. In addition, where no Registration Tax is paid, this tax and
any applicable Income Tax will be levied on the assumption that a letting
contract is in existence for a rent equivalent to 10% of the land registry value
of the relevant property (Valore Catastale), and has been in force for the last
four years.
On the other hand, Finanziaria 2005 brings into force a new provision which will
prevent corrective assessments to tax. There can be no further assessments to
Registration Tax where a property is let and tax is duly paid, if the rent
declared equals or exceeds 10% of the land registry value of the particular
property. A similar provision will also apply for the purposes of Italian Income
Tax.
c)
Other measures affecting
Italian properties.
Still with reference to all letting, sale contracts and any other contract
resulting in the use / enjoyment of properties, Finanziaria 2005 introduces a
duty on estate agents (previously on the vendors only) to report to the police
and the authorities all such new contracts. This is obviously an additional
measure to deter / detect tax evaders. Defaulting estate agents will be punished
with a fine, and in case of recurrent breaches can be suspended by the
authorities from carrying on their trade for up to one month at a time.
Finally the small fixed amounts of Registration Tax and other stamp duties (Imposte
ipotecarie e catastali in misura fissa) which are only due on transaction where
Italian VAT is payable, have been increased from the original amount of Euro
129.11 (formerly 250,000 Lira) to Euro 168.00 each. Similarly, the fees payable
on the registration of a transfer of property and the fees payable upon
effecting a land registry fee have also been increased.
Although these tax increases are certainly not good news to Italian property
owners, the writer believes that they certainly do not entirely cancel out the
benefits of the recent property prices increases. Two steps forward, and one
back....
Avv. Claudio Del Giudice
Copyrights reserved, April 2005