Investing from Italy

The Bogleheads® investment philosophy can be used by Italian resident investors, as long as they are aware of the specifics that come with their domicile. A main point that comes with investing from Italy, is that the taxation is different from that in other countries. On this page a few thoughts are shared that may be helpful when constructing an investment plan from Italy.

Please [My portfolio: seeking advice|see advice] in the Bogleheads forum or consult a professional advisor. The general guidance given in Bogleheads® investing start-up kit for non-US investors, Investing from outside of the US and EU investing is applicable.

This page is not intended for US persons, as their situation is very specific. See Taxation as a US person living abroad if you are a US person in Italy.

Investment options in Italy
In Italy, people are not able to invest in tax-advantaged accounts. Where Italians used to be able to retire early because of the relatively low retirement age and the possibility to receive a senior's pension early on, reforms have made it more important to build up your own investments.

An investor is able to buy index funds in the form of exchange-traded funds (ETFs) through a bank or broker and there are companies offering index mutual funds.

Taxation of investments in Italy
Since April 9, 2014 a new tax law (D.lgs 44, 4 March 2014 following EU Directive 2011/61/UE AIFM "Alternative Investment Fund Managers" ) simplified italian ETF taxation. According to the new law all profits (both dividends and capital gains) are considered investment income while losses are treated as "other income". Both profits and losses are calculated by subtracting the purchase price from the sale price, regardless of the ETF NAV value, which was used before. As a consequence tax profit/loss compensation is no longer possibile as profits and losses now belong to two different fiscal categories.

ETFs are legally equated to OICR ("Organismi di Investimento Collettivo del Risparmi") like common funds, and have been separated in two categories: harmonized (which follow EU UCITS directives) and non-harmonized ETFs. All the ETFs quoted on the Borsa Italiana - Italy's main stock exchange - are harmonized and so are most of EU-domiciled ETFs. Foreign ETFs (including US-domiciled ETFs) are non-harmonized.

All investment income (both dividends and capital gains) from harmonized ETFs is subject to a withholding tax of 26% to be applied at source directly by the broker, while income from non-harmonized ETFs should be included in the annual tax return and is taxed at progressive tax rates, which are often much higher. This is the main reason why italian investors should consider using only harmonized ETFs. Because the capital gains tax is only applied when selling, it is suggested to only use accumulating funds, as dividends are taxed when paid out, but not when reinvested.

Reduced tax rate for eligible bonds
Profits deriving from direct investment in eligible bonds (i.e., Italian government bonds and government bonds issued by foreign countries allowing an adequate exchange of information with Italy) are subject to a lower (12.5%) tax rate.

If a bond fund invests in both eligible and non-eligible bonds, the lower (12.5%) tax rate will be applied only to the percentage of eligible bonds in the fund while the rest will be taxed at the higher (26%) rate.

Usually the list of the eligible bond funds with the corresponding percentages of eligible bonds is available on the fund manager's website.

Fund domicile
As described in the Wiki page for Nonresident alien with no US tax treaty & Irish ETFs a non-US person is generally advised not to invest in US domiciled funds. For the Italian investor this is true as well, as US domiciled funds are required to distribute dividends, which is tax inefficient for the long-term investor. Besides all US domiciled funds are non-harmonized and their income should be included in the annual tax return and will be taxed at progressive tax rates, which are often much higher that the flat 26% tax rate applied to harmonized ETFs.

A good alternative may be accumulating Irish domiciled UCITS ETFs, also because Ireland does not impose capital gains tax or estate tax on non-residents. You can search for and compare EU domiciled ETFs on JustETF.com.

Fund choices
Many ETFs trade on the Milan stock exchange. If this is not the case other exchanges in Europe can be freely used.

Sample equity ETF index funds
Like many international investors, Italian investors could consider to approximate the global equity market.

Example funds (using the following selection criteria: all-cap, low costs, good AUM, full physical replication or a high amount of stocks relative to the index when using optimized sampling, accumulating):

Sample bond ETF index funds
There are many options for bond ETFs. However, to reduce interest rate risk and default risk the choice could be limited to short and intermediate-term duration bonds with high credit ratings. Typically each risk reduction also reduces the expected return.

Generally is advisable to hold Euro denominated bonds to avoid currency risk, which is a big part of short term volatility with bonds.

Another option is to hold a global government bond fund hedged to Euro. According to Vanguard research with currency risk hedged back to Euro, the global fixed income market can provide risk-reduction and diversification benefits.