Buying Real Estate in Italy, legal advice rental lease agreement purchase

Real Estate Law

Buying & Selling Property in Italy

This memorandum is intended to provide information regarding the acquisition of real property in Italy, with a specific focus on business property. It is important to note that the Italian legal system, in consideration of its particular historical background, attributes to a notary (Notaio) a predominant role in drafting the purchase agreement of land or buildings.

Contrarily to what generally happens in common law countries, where the role played by the lawyer in real estate transactions is exhaustive, Italian lawyers are involved in such commercial transactions mainly in the preparatory phase which consists in the conducting of due diligence and negotiations between the parties.

In any event the following information will be applicable in both legal systems.

Acquisition of Real Property

A. The Preliminary Contract

A preliminary contract (contratto preliminare) is the document whereby the parties agree in writing to enter into a future final real property purchase agreement. This document must be signed by Notary and must be recorded in the official real estate register (Conservatoria dei registri immobiliari) in the jurisdiction where the property is located. The buyer may be required to guarantee that he does not have any type of financial constraints which may jeopardize payment of the property. Before signing the contract, it is advisable that the buyer obtains the following documents from the seller:

• a property deed (atto di proprietà).
• cadastral, or land registry, documents (scheda identificativa catastale);
• a report which indicates the size and dimensions of the real property;
• copy of lease and loan contracts, if any;
• agreements entered into with the local municipality such as administrative petitions, permits, licenses, etc., if any.

B. The Security Deposit

The security deposit (caparra confirmatoria) is a down-payment of the purchase price, made by the buyer upon the signing of the preliminary contract. It is intended to bind both parties to enter into the final agreement. If the buyer refuses to enter into the final agreement, the deposit will be forfeited, whereas if the seller refuses he is obliged to pay double the amount deposited by the buyer. The seller always demands payment of a security deposit.

C. The Penalty Deposit

A penalty deposit (caparra penitenziale) may be required by both parties and is intended as a pre-determined penalty to be paid by the party that does not fulfil the obligations provided for in the preliminary purchase contract. This system allows each party to refuse to sign the final deed, against payment of a pre-determined amount. It is advisable for the buyer to require a substantial penalty fee, in order to avoid that the seller changes his mind, or sells the property to a third party who places an offer that exceeds the original purchase price.

D. Final Purchase Deed

The last step in acquiring property is the signing of a final agreement (rogito). The deed is the legal instrument by which the property is legally transferred from the seller to the buyer. The deed will be drafted by a notary. Upon signing the deed the buyer shall present a personal identification document and his fiscal code (codice fiscale). Foreigners that are not domiciled in Italy can request an Italian fiscal code. The documents to be presented by the seller should be the following:

• the notarized deed of acquisition of the property which is being sold or the documents showing that the seller has inherited the property. Usually the inheritance tax return is utilized.
• the administrative licenses, permits and petitions;
• the property plans and the cadastral certificates;

It is customary that the buyer is granted the right to choose the Notary that will notarize the deed. The notary has the obligation of controlling (in the local property register and cadastral offices), prior to the signature of the deed, if the property is transferred to the buyer in the same legal status declared by the seller in the preliminary contract (free of mortgages, encumbrances, etc.). If nothing has been declared in the preliminary contract, the notary public has the professional obligation of making the buyer aware of any existing mortgages or encumbrances, etc.

E. Tax implications

It is necessary to note that residency is not the same as citizenship; in addition, when an individual has contacts with more than one country, it might happen that these countries consider the individual as a resident so that each of them can levy taxes on him/her. To resolve any conflicts there is usually a bilateral treaty between the two countries which will determine residency and how tax is to be imposed.

1.1 Determination of residency

In a case in which it is not clear if an individual has the fiscal residency, for example, in the UK or Italy, the conflict is avoided by Article 4 of the treaty between the UK and Italy (a similar treaty governs this situation between USA and Italy), which provides that residency will be determined by a number of criteria, set out below in order of importance, until it is determined unequivocally whether the individual is resident in one country or the other.

The criteria which go to determine the country in which an individual has residency are as follows:

• where the individual has a permanent house
• where the individual has their closest personal relationships and economic ties

1.1.1 the normal location of the person

• the nationality of the person.

It can be seen therefore that the determination of residency is not just based on formal criteria, but is very much based in fact.

1.2 Property taxes in Italy

When someone buys a property in Italy the first thing they must do is to ask the taxation authorities of the area (Ufficio dell’Agenzia delle Entrate) for a “Codice Fiscale” (taxation code) or, if the property is to be used for a business activity, a “Partita IVA” (VAT number). The property (buildings or land) will be subject to a series of taxes and impositions. Some are paid only at the time of purchase while others are regular payments.

1.2.1 Taxes imposed at the moment of purchase

1.2.1.1 When the vendor is a company or body which pays VAT (for instance a building constructor, or a development company which has carried out a restoration project in which they actually were owners of the property), in addition to the purchase price shown on the purchase deed, the buyer must pay:

• VAT of 10%
• Registration tax (fixed rate. The “fixed rate” is always equal to euro 168,00)
• Mortgage tax (fixed rate)
• Catastale tax (fixed rate)(this is the presumed income of land determined by a public office for the purpose of tax.).

With “prima casa” benefit (see below para. 11)

• VAT of 4%
• Registration tax (fixed rate. The “fixed rate” is always equal to euro 168,00)
• Mortgage tax (fixed rate)
• Catastale tax (fixed rate)(this is the presumed income of land determined by a public office for the purpose of tax.).

1.2.1.2 In other cases (for example in a purchase from an individual or a business different from that set out above) the taxes that must be paid are:

• Registration tax of 7%
• Mortgage tax of 2%
• Catastale tax of 1%

With “prima casa” benefit (see below para. 11)

• Registration tax of 3%
• Mortgage tax of 2%
• Catastale tax of 1%

In purchase deeds relating to the purchase of building sites or agricultural land the registration taxes are 8 and 15% respectively instead of 7%, plus Mortgage and Catastale taxes.

The taxes (registration, mortgage and catastale) are paid to the notary at the moment of registration of the purchase deed.

• Periodic taxes

IRPEF (Imposta sul Reddito delle Persone Fisiche – Income tax). In Italy a house always produces income, even if the house is used solely as a residence of the owner, and also if the house is not used at all. The taxes are calculated on the basis of the reddito catastale (the presumed income of land determined by the local authority for the purposes of tax- similar to rateable value), to which you apply a rate which depends on the total or overall rate of the income of the person. If the property is rented, the tax will be based on the perceived rental value, which will also have an impact on the ICI (see below), while the tax for removal of refuse will in this case be paid by the tenant.

ICI (Imposta Comunale sugli Immobili – Local authority tax). This is a tax which has to be paid to the local authority in which the property is based (like the English rates or council tax). The amount will depend on the reddito catastale (rateable value- see above) of which 5% is calculated. This amount is then multiplied by a rate, from a minimum of 4 per thousand to a maximum of 9 per thousand, depending on a number of criteria (in addition to surface area, for example, whether or not the property has a swimming pool will be taken into account). The tax is therefore based on a mathematical calculation.

TARSU (Tassa rifiuti solidi urbani – Local refuse removal tax). This tax must be paid to the local authority in which the property is situated. The amount is a calculation of the surface area of the property multiplied by the rate used for that locality (for instance in Florence, the rate is 1.84 Euro per metre squared). Some local authorities provide discounts if the property is only occupied for short periods or if there is a sole occupier.

Foreign buyers and residence

If a foreigner buys property in Italy and intends for it to become his place of residence he can obtain what is called “prima casa” or “first house” discounts or relief.

These discounts can be substantial and, in many cases, can reduce both the VAT payable and the percentage used for the registration calculation by more than 50%.

The discounts will also apply to the periodic taxes. The local taxes will be applied at the minimum rate and will be discounted by an additional 100 Euro, the IRPEF is reduced to a flat rate, and the tax for refuse removal will also benefit from a reduction. The decision of residency needs to be carefully considered however, as the person will then very likely be subject to and integrated into the Italian tax system which will then exercise control over all income earned by the person, except that which is subject to a convention to avoid double taxation and in respect of which it is expressly provided that this will remain subject to the taxes in the country of origin of the income. As a result those foreign citizens who, in addition to buying a house, take residency in Italy and still receive income abroad (for example a pension, a business income or income from other property) must declare it on their income tax return to the Italian tax authorities. In this way the income received will only be taxed once (in Italy or in the country of the income) in accordance with the convention against double taxation.

The change in residency is achieved by a series of formal steps and adjustments between the old and new countries of residence.

To take advantage of the various tax discounts of “prima casa” the buyer must obtain residency in the area in which he has bought the property within 18 months of the date of the purchase deed. In addition he must not have other rights in property in any part of the country nor must he sell the “first home” within a period of 5 years after the purchase date, unless he buys another property as his principal residence within a year.

If the requirements necessary to qualify for “prima casa” reductions are not complied with, the relief will decrease and the tax authorities will seek to recover the relief that was given, together with interest, and the application of a further sanction equal to 30% of the tax.

In conclusion, it must be kept in mind that if residency in Italy is taken, the regulations make it very difficult to leave in the future!

2 Taxes of property in case of inheritance

The declaration of succession (the advice of an Italian lawyer will be needed in these cases) must be presented within 12 months of the date of death, at the Ufficio dell’Agenzia delle Entrate in which the deceased had his last residence. If the deceased did not have residency in Italy, the declaration must be presented at the Agenzia delle Entrate in Rome.

The taxation rate depends upon the size of asset. However the mortgage tax and the Catastale (see above) are at the rates of 2 and 1 % respectively, and are applied to the taxable basis according to the tax regulations on succession.

Please note that the information herein is of a general nature and should not be regarded as legal or professional advice. The subject matters covered in this document are complicated and you should seek advice on how they apply to your individual circumstances.

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Ambrogio&Gaetani Law Firm
Lungarno A. Vespucci 8 - 50123 Florence (Italy)
Phone number (0039) 055 23 81 442
Fax number (0039) 055 23 81 441
General Info E-mail info@italylawfirms.com

Dott. Michele Ambrogio m.ambrogio@italylawfirms.com
Avv. Riccardo Gaetani r.gaetani@italylawfirms.com