Tax deduction for mortgage interest does not apply to foreign real estate - Euroconference NewsTax deduction for mortgage interest does not apply to foreign real estate - Euroconference News

According to Article 15, paragraph 1, letter b) of the Italian Tax Code, the personal income tax (Irpef) can be reduced by 19% on the amount of passive interest (and related costs) and indexation fees paid to Italian residents (or citizens of another European Union Member State) or permanent establishments of non-residents of Italy, in connection with mortgage loans for the purchase of residential real estate intended for primary residence, within one year of its purchase, provided that the loan amount does not exceed 4,000 euros. The purchase of the residential property must be made in the year preceding or following the date of the loan agreement. The main residence is the place where the taxpayer (or his family) permanently resides.

It is worth noting that tax deductions related to passive interest from mortgage loans for the acquisition of residential real estate outside Italy as a principal residence are not available to Italian tax residents (response to request no. 524/2019). This conclusion of the Financial Administration Authority follows from the definition of principal residence, which, according to Article 10, paragraph 3-bis of the Tax Code, is defined as "the place where the natural person who owns it or has other valid right to it or his family permanently resides. A change of permanent residence due to a permanent stay in institutions for care or treatment shall not be taken into account, provided that the dwelling unit is not rented."

Regarding this regulatory definition, the financial management authority explained that:

• the right to a deduction is retained when the taxpayer's place of residence changes to another piece of real estate;
• the acquired real estate becomes the main place of residence for the taxpayer's family;
• if the taxpayer takes a mortgage loan for the purchase of real estate for his own principal residence and a loan for the purchase of real estate for the dwelling of a family member, the deduction should be applied only to the interest paid on the mortgage loan intended for his own principal residence (Letter No. 50/E/2002);
• in the case of a formal divorce, the spouse is also considered a family member until the divorce decree is registered (Letter No. 5/E/2001), after which, given that the former spouse is no longer considered a family member, the deduction is only available if there are family members other than the former spouse living in the mortgage-backed property, such as children (Letter No.

Thus, in the case of an Italian tax resident, according to the definition provided in Article 10, paragraph 3-bis of the Tax Code, the main residence is only in Italy. Furthermore, in the opinion of the Financial Administration (response to request no. 524/2019): the same principle also applies to individuals who are not Italian tax residents, for whom the tax is calculated in accordance with the provisions of Article 24, paragraph 3 bis of the Tax Code, which includes the deduction referred to in Article 15, paragraph 1, letter b) of the Tax Code; this deduction is also taken into account in determining the tax paid by the so-called "non-resident Schumachers". This applies to persons who:

• are tax residents of a state that ensures adequate exchange of information;
• have received income earned in Italy representing at least 75% of their total income;
• do not have similar tax benefits in their country of residence.

In relation to such individuals, paragraph 3-bis of Article 24 of the Tax Code (introduced by Article 7, paragraph 1 of Law No. 161/2014) establishes that the tax paid in Italy is calculated based on the provisions contained in Articles 1 to 23 of the Tax Code, and therefore, under the same rules and conditions provided for tax residents of Italy.

From the described regulatory framework, it follows that non-resident taxpayers in Italy, including the so-called "Schumacher non-residents," are granted a deduction for passive interest received from mortgage loans for the purchase of a primary residence, in accordance with Article 15, paragraph 1, letter b) of the Tax Code, under the same conditions as Italian tax residents, following identical rules and conditions for income tax calculation. This provision is also reflected in the instructions for filling out the tax return. In particular, the guide for individuals who are not tax residents states that interest paid on certain loans and borrowings, including mortgage loans for the purchase of a primary residence, entitles one to a deduction from taxes paid "related to property located in Italy."