The case in which an expat resident in Italy receives a lump sum or an annuity from a pension fund or a foreign insurance company ( e.g. Traditional and ROTH IRA in U.s., Register retirement Saving plan in Canada) is now widespread.

However, it is not easy to understand what system of taxation has to be applied.

The practice on the system of taxation  of this kind of funds and schemes is very fragmentary and the rules that regulate the matter seem to refer only to the pension funds and other forms of the Italian supplementary pension schemes.

These provisions seem to be made on Italian supplementary pension schemes, not covering foreign ones. They generally provide for the application of substitute tax or withholding taxes in the same way as the pension fund (or, in the pension plans managed by insurance contracts, the insurance company) is resident.

The practice on the proceeds of foreign pension funds is extremely poor; as these are pension benefits which normally do not derive from work in public administrations, double taxation agreements do not help. As a rule, in fact, these are taxed in the recipient’s state of residence and exempt in the State of the source; sometimes there could be concurrent taxation with the tax credit.

Due to the lack of a clear interpration in both legislation and interpretation, taxpayers residing in Italy who are currently eligible to claim a social security  (in the form of lump sum or life annuity) from a foreign pension fund or who have redeemed their pension rights do not know how to operate.

A first solution is to apply generally the directions given by the  Note 2004/66566 by the  Regional Revenue office of Lombardy  2004 as follow:

Consider the lump sum or life annuity  paid as if it were derived from a life insurance contract regardless of the fact that social security benefits are not paid by an insurance company and not considering as well that the benefit does not derive from a financial investment, but from a pension plan.

A second solution is to apply the rules on supplementary pensions schemes of the Italian Tax Act and of Legislative Decree 252 / 2005 which, due to their generic statements, lend themselves to apply both to Italian and foreign source income, taking account of the fundamental principle according to which the discrimination of residents in Italy who have taken part in supplementary pension schemes of institutions resident in EU states would run counter to the principles of freedom of movement of workers, services and freedom of establishment.

1) when the management of the pension plan (defined with the criteria in Article 6, paragraph 1, letter d) of the aforementioned Directive 2003/41 / EC) is entrusted to a company or entity belonging to the EU:

–  the social security benefits paid in the form of lump sum (both the final benefits and the proceeds of the early repayments) should be taxed by making the difference between the capital received and the part that has not been deducted pursuant to Article 10, paragraph 1, letter e-bis) of the Italian Tax Act on the tax of 15% or 23% depending on whether it is applicable to Article 11 or Article 14 of Legislative Decree 252 of 2005; all the financial performance would therefore be taxed with these rates, without applying Article 17 of Legislative Decree 252 (taxation of the management results produced by the fund at 11% up to 2014 and 20% starting from 2015) which concerns literally only the taxation of Italian pension funds.

– The benefits paid in the form of financial income should be treated as the corresponding Italian income. The returns included in the aforementioned services would then be taxed by applying the aforementioned Articles 11 and 14 of Legislative Decree 252 of 2005 as well as Article 44, paragraph 1, letter g-quinquies) of the Consolidated Law and without applying Article 11 , on the taxation of the supplementary social security form. The generic regulation of life annuities constituted for pecuniary payment as referred to in article 50 paragraph 1, letter h, which entails the full taxation of ordinary tax income, would apply to other benefits.

2) when the management of the pension plan is entrusted to a non-EU company or entity, both the benefits paid in the form of capital and those paid in the form of financial income should be taxed at a progressive rate, unless – for the benefits paid in the form of lump sum – these forms of social security are considered as to constitute the use of capital; the principle of freedom of capital movements (which incorporates the right of residents not to be taxed according to place where they make their investments) operates not only for investments made in Europe, but also in the rest of the world.

Avv. Carlo Bottino

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