SearchTax residence and the taxation of pensions
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stevegwmonkseaton
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Tax residence and the taxation of pensions
by Panner Thu Feb 06, 2014 12:25 pm
This is an update of something I posted on the “other forum” some time ago
To consider whether a UK source pension is taxable in Italy in any particular year it is first necessary to determine whether the individual is tax resident in Italy or whether they are, in fact, tax resident in the UK for that year. The year for UK tax is the year to 5 April of the year for Italian tax is the calendar year to 31 December.
It should be noted that “tax residence” is not the same as “residence” and it is possible for a person to be living in Italy for sufficient time to require them to be registered as resident with the local commune but nevertheless, for tax purposes, for them still to be UK tax resident and not Italian tax resident. Conversely, just because someone has not registered as resident in Italy does not mean that they are not tax resident in Italy.
The question of residence for tax purposes in the UK is complex but has been made easier for periods after 5 April 2013 by a new statutory definition of residence in the UK for tax purposes. This sets out a number of objective tests to determine whether you are UK tax resident or not. In most cases it will be much easier to decide than the old system which was more subjective and based on various court decisions over the years.
It is not possible for someone to be tax resident in both the UK and Italy at the same time as the UK-Italy Double Tax Agreement (“DTA”) has a tie breaker if someone is tax resident in both countries under their domestic rules.
Whilst it is dependent on the facts of each case, and each case must be considered individually, for many people who have retired to Italy and spend most of their time there they are likely to be Italian resident for tax purposes and therefore not UK tax resident. However, where someone has a home (which has a wider meaning than simply owning a house) in both countries and spends time in both countries then it can get very complex. For the UK domiciled individual (usually someone born in the UK and/or having British parents), having a home available to live in in the UK can mean that under the DTA they remain UK tax resident and only pay Italian tax on their Italian source income. In most circumstances that Italian source income would then need to be returned on their UK tax return but would have the benefit of double tax relief and UK income tax would only be payable on that income if the UK tax liability exceeded the Italian tax paid on it. If there is any doubt about your tax residence status then it is essential to get proper advice as the consequences of getting it wrong can be very expensive.
So far as pensions are concerned, the general rule under the DTA is that pensions are taxable in the country of tax residence and not the country of source with the exception of Government and Local Authority type pensions (ie pensions paid by the State to someone who has been employed in government service or by a local authority or similar), which are taxable in the country of payment unless paid to someone who is both a national of and tax resident in the other country. To further complicate it, pensions in respect of services rendered in connection with any trade or business carried on by the State or a political or an administrative subdivision or a local authority thereof is taxable in the country of tax residence.
It should be noted that the UK state retirement pension which everyone usually receives is not treated as a Government pension for DTA purposes and is taxable in the country of tax residence.
Non-government service pensions (including the UK state retirement pension) received by a tax resident of Italy would, therefore, normally be taxable in Italy and not the UK. If in any doubt advice should be obtained in both the UK and Italy from a tax advisor/commercialista or from someone specialising in the interaction of taxes between the 2 countries.
It should also be noted that in the UK, if you have paid overseas tax on income then relief is given for that tax. But this only applies if the overseas tax is actually due. If the tax has been paid and no tax is actually due then no relief would be given as the individual would be expected to recover the overpaid foreign tax from that country’s tax authorities. I do not know if it is the same in Italy but I suspect it is.
Apologies for the length of this post but the position is not as simple as some people think and hopefully the above will at least give people a starting point to considering their position.
Whilst I can comment on the UK tax position, including the DTA, I do not have sufficient detailed knowledge of the Italian tax system to give other than very general comments on it.
The above is only a brief and general outline of the position. Advice on a person's individual circumstances should, if required, be obtained from a suitably qualified person.
To consider whether a UK source pension is taxable in Italy in any particular year it is first necessary to determine whether the individual is tax resident in Italy or whether they are, in fact, tax resident in the UK for that year. The year for UK tax is the year to 5 April of the year for Italian tax is the calendar year to 31 December.
It should be noted that “tax residence” is not the same as “residence” and it is possible for a person to be living in Italy for sufficient time to require them to be registered as resident with the local commune but nevertheless, for tax purposes, for them still to be UK tax resident and not Italian tax resident. Conversely, just because someone has not registered as resident in Italy does not mean that they are not tax resident in Italy.
The question of residence for tax purposes in the UK is complex but has been made easier for periods after 5 April 2013 by a new statutory definition of residence in the UK for tax purposes. This sets out a number of objective tests to determine whether you are UK tax resident or not. In most cases it will be much easier to decide than the old system which was more subjective and based on various court decisions over the years.
It is not possible for someone to be tax resident in both the UK and Italy at the same time as the UK-Italy Double Tax Agreement (“DTA”) has a tie breaker if someone is tax resident in both countries under their domestic rules.
Whilst it is dependent on the facts of each case, and each case must be considered individually, for many people who have retired to Italy and spend most of their time there they are likely to be Italian resident for tax purposes and therefore not UK tax resident. However, where someone has a home (which has a wider meaning than simply owning a house) in both countries and spends time in both countries then it can get very complex. For the UK domiciled individual (usually someone born in the UK and/or having British parents), having a home available to live in in the UK can mean that under the DTA they remain UK tax resident and only pay Italian tax on their Italian source income. In most circumstances that Italian source income would then need to be returned on their UK tax return but would have the benefit of double tax relief and UK income tax would only be payable on that income if the UK tax liability exceeded the Italian tax paid on it. If there is any doubt about your tax residence status then it is essential to get proper advice as the consequences of getting it wrong can be very expensive.
So far as pensions are concerned, the general rule under the DTA is that pensions are taxable in the country of tax residence and not the country of source with the exception of Government and Local Authority type pensions (ie pensions paid by the State to someone who has been employed in government service or by a local authority or similar), which are taxable in the country of payment unless paid to someone who is both a national of and tax resident in the other country. To further complicate it, pensions in respect of services rendered in connection with any trade or business carried on by the State or a political or an administrative subdivision or a local authority thereof is taxable in the country of tax residence.
It should be noted that the UK state retirement pension which everyone usually receives is not treated as a Government pension for DTA purposes and is taxable in the country of tax residence.
Non-government service pensions (including the UK state retirement pension) received by a tax resident of Italy would, therefore, normally be taxable in Italy and not the UK. If in any doubt advice should be obtained in both the UK and Italy from a tax advisor/commercialista or from someone specialising in the interaction of taxes between the 2 countries.
It should also be noted that in the UK, if you have paid overseas tax on income then relief is given for that tax. But this only applies if the overseas tax is actually due. If the tax has been paid and no tax is actually due then no relief would be given as the individual would be expected to recover the overpaid foreign tax from that country’s tax authorities. I do not know if it is the same in Italy but I suspect it is.
Apologies for the length of this post but the position is not as simple as some people think and hopefully the above will at least give people a starting point to considering their position.
Whilst I can comment on the UK tax position, including the DTA, I do not have sufficient detailed knowledge of the Italian tax system to give other than very general comments on it.
The above is only a brief and general outline of the position. Advice on a person's individual circumstances should, if required, be obtained from a suitably qualified person.
Panner- Elder
- Location : Puglia
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Re: Tax residence and the taxation of pensions
by stevegwmonkseaton Thu Feb 06, 2014 1:03 pm
Excellent post Panner,I knew there was some very knowledgeable member on here (and the other place). I'm sure it was you that pointed me in the direction of the DTA link I posted earlier today. Here is the LINK for anyone who missed it....
stevegwmonkseaton- Elder
- Location : Abruzzo
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Re: Tax residence and the taxation of pensions
by Panner Thu Feb 06, 2014 1:12 pm
Thanks Steve. It probably was me as there was a lively discussion early last year on the topic as there is a lot of confusion/misunderstanding of the position.
As an added point, once the strict legal position is clarified it then becomes a practical problem of dealing with the relevant tax authorities. UK presents me with no problems but the Italian side ..........
As an added point, once the strict legal position is clarified it then becomes a practical problem of dealing with the relevant tax authorities. UK presents me with no problems but the Italian side ..........
Panner- Elder
- Location : Puglia
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Re: Tax residence and the taxation of pensions
by Vicino Thu Feb 06, 2014 1:16 pm
Panner. I agree, the UK stuff I fully understand and pay whatever, here is MUCH more difficult, primarily because of my poor language skills (my fault I know !)
V
V
Vicino- Elder
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Re: Tax residence and the taxation of pensions
by Admin Thu Feb 06, 2014 3:42 pm
Excellent explanation Panner. Thank you. Sadly the Italian side is much, much harder to deal with.
Admin- Admin
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Re: Tax residence and the taxation of pensions
by Flying pigs Thu Feb 06, 2014 6:07 pm
Thank you Panner. This is the clearest explanation I have seen and confirms what we had thought. However, where does the six month rule come in? We have homes in the UK and Italy but our 'life' is totally based in the UK both financially and family wise. We have an Italian bank account but only for the money we need while we are in Italy. My husband has residency in Ostuni as he spends more than three months there, but less than six months. We have always considered ourselves UK tax residents and complete our tax returns in the UK. However, we are always mindful of the six month rule - do we need to be?
Flying pigs- Moderator
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Re: Tax residence and the taxation of pensions
by stevegwmonkseaton Thu Feb 06, 2014 6:32 pm
Have a look at THIS LINK and search for "What counts as 'UK resident' " Think your situation is clear. However check out what Modi and Admin have said as to the Italian Tax Authorities it might not mean a jot!!!
stevegwmonkseaton- Elder
- Location : Abruzzo
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Re: Tax residence and the taxation of pensions
by Vicino Thu Feb 06, 2014 7:10 pm
Superb link Steve, I THINK I have seen this before, but it isn't (as always) black & white !).
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Re: Tax residence and the taxation of pensions
by Gala Placidia Thu Feb 06, 2014 7:26 pm
The big problem is that the Agenzia has the capacity to rule who is and who is not a fiscal resident and it is up to the individual to prove that he/she is not. As it has been mentioned, free circulation within the EU has its advantages... and disadvantages. No border control can make it difficult to prove your movements. Having said that, my advice would be to gather as much evidence as possible of your travels(i.e. hotel bills, payment slips (credit card payments are easy to trace and if you have made a purchase , or several payments ,say in France or Switzerland, or any other country, on a certain date or period of time, you cannot be in Italy at the same time. It will be a pain, but it may become very, very handy.
Certainly, if you fell for the "prima casa" trap... It may be difficult to prove that you do not reside there. Sometimes, "savings" are not worth the trouble that they can create for you.
Certainly, if you fell for the "prima casa" trap... It may be difficult to prove that you do not reside there. Sometimes, "savings" are not worth the trouble that they can create for you.
Gala Placidia- Moderator
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Re: Tax residence and the taxation of pensions
by stevegwmonkseaton Mon Feb 24, 2014 11:58 am
A friend sent me THIS LINK "OECD Model Tax Convention on Income and on Capital"
which might be of interest/help to some. I'm not too sure where it stands as a legal document, but others (Panner?) might know. Both the UK and Italy have signed up to it...
which might be of interest/help to some. I'm not too sure where it stands as a legal document, but others (Panner?) might know. Both the UK and Italy have signed up to it...
stevegwmonkseaton- Elder
- Location : Abruzzo
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Re: Tax residence and the taxation of pensions
by Panner Mon Feb 24, 2014 12:55 pm
The OECD Model is simply a recommended basis for Double Tax Agreements. Most agreements follow the model to a greater or lesser extent. The model has no legal effect as it is the actual agreement between the 2 countries that applies and should be referred to when necessary.
The main use of the model (apart from as a basis of individual treaties) is as a reference when commenting on double tax issues that are not country specific.
The main use of the model (apart from as a basis of individual treaties) is as a reference when commenting on double tax issues that are not country specific.
Panner- Elder
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