Business and tax planning for real estate purchases in Italy
The financial crisis caused by the Covid-19 pandemic and consequent lockdowns is the most severe worldwide economic recession in over 100 years. Considering the importance of tourism to Italy’s economy, these hardships have certainly been felt here and may linger for some time. Yet, surveys show that although industries such as hospitality, leisure, and entertainment have been hit hard, the Italian real estate market is showing very positive signs. Figures show a gradual upward trend in return on investments for both residential and non-residential properties, including those intended for rent.
Specific cross-market research shows that property intended for commercial use is the most profitable real estate investment in Italy right now. The research looked at sales price, rental prices, and quarterly indexes of homes, commercial premises, parking garages, and offices for the second quarter of 2020. The report’s results serve as a pragmatic basis for foreign entrepreneurs and companies interested in investing in Italy and purchasing real estate. The first quarter of 2020 showed the gross profitability rate of buying a house at 6.7%. This number increased to 7.4% in the second quarter of 2020. The first quarter of 2021 showed a soundly increasing trend for specific use properties, with the gross yield from the purchase of office for rent increasing from 8.2% to 8.4%, and a consistent profitability for car parks properties holding stable at 6.3%.
Although the studies show this to be an advantageous time to invest in the Italian real estate market, there are many business and tax planning aspects to take into consideration when acquiring property in Italy for commercial purposes. For example, companies with their fiscal residence outside of Italy who plan to acquire property in Italy should act cautiously. Whether the properties are instrumental to the company’s business or not, if they produce income, there is a risk that these real estate assets will be considered permanent commercial establishments (stabile organizzazione commerciale) by the authorities. In this case, the company would be required to establish an Italy-based branch and tax benefits would no longer be applicable. These types of circumstances make it imperative to have a reliable, on-site legal and fiscal advisor who understands the regulations and red tape involved. Careful and savvy actions, such as declaring the property not instrumental and only generating passive income, can avoid having to establish an Italian branch.
Another consideration is that legal entities running an Italy-based commercial business in the accommodation industry are required to comply with Italian and EU legislation. For example, the 1990 European Union Parent Subsidiary Regime’s directive eliminates tax obstacles in the area of profit distributions between parent companies and subsidiaries based in different EU states, aiming to remove the risk of double taxation. A company doing business in Italy may be able to apply for an exemption of Italian taxation on dividends and other financing the Italy-based subsidiary company gives to their parent companies based in other EU member states, or claim a refund if the tax is withheld.
In addition, companies that purchase a commercial property such as a hotel, bed and breakfast, farm holiday property (agriturismo), or holiday home are required to incorporate a business according to current Italian legislation, such as an Societa a Responsabilita Limitata (SRL or Limited Liability Company), an Societa Semplice in Accomandita (SAS or simple convenience company), or a Ditta Individuale (DI or Personal Company). This presents a comprehensive list of steps required in the formation of the company. For instance, an individual entrepreneur intending to open a hospitality accommodation would need to:
- Establish a personal company (Ditta Individuale) and abide by the regulations and timelines in doing so. For example, the company must open 30 days prior to the commencement of activity (rental/guest arrival) and must register with the Business Registers of the Chamber of Commerce.
- Submit a SCIA application (Certified Start of Activity Report) to the municipality. This entails going to the SUAP and providing all required documentation (the owner’s ID and tax code, the property’s location, the number of beds and their distribution, detailed information on toilets available for the guests, any complementary services offered).
- Communicate guest data for stays under 30 days to the authorities within required time limits, at the proper police headquarters, and using the necessary forms. Once the owner has established their credentials, they can submit this information via the internet.
- Register rental agreements with the Italian Revenue Agency (Agenzia delle Entrate) for stays over 30 days.
As the above example shows, understanding the legal and fiscal requirements and bureaucratic issues involved with owning commercial property and/or using it for hospitality purposes are vital and not necessarily straightforward. Having trustworthy advisors, efficient fiscal experts, and reliable corporate legal consultants at your disposal is crucial. Our extensive and long-practiced expertise in the fields of commercial property consultancy, legal and fiscal advisory service, and property management enable us to provide proficient advice, reliable information, and trustworthy assistance to foreign companies who plan to invest in the Italian real estate market. Specifically, we can help the foreign investor by:
- drafting the relevant business and tax plan to establish the most suitable commercial entity and optimize the costs of opening a branch in Italy;
- due diligence of the property and/or business if the purchaser intends to buy a standing business;
- informing the investor of all necessary documentation needed to establish a branch in Italy and carrying on the required legalizations and translations of the documents;
- assisting in incorporating the branch proceeding by signing all the papers on the client’s behalf;
- providing legal assistance to establish an Italian hospitality business, including transfer pricing, relocation of employees from the parent company, dealing with needed visas, and advisory consulting on payroll and salaries;
- assisting in establishing the startup, including training on the use of the necessary software required for electronic invoicing, brand design and creation, website creation, and web marketing services.