CROSS-BORDER REAL ESTATE CAPITAL GAINS: TAX IMPACT AND RESPONSES FROM THE REVENUE AGENCY

Cross-border real estate capital gains are generally subject to the provisions outlined in Article 13, Paragraph 1 of the international conventions for the avoidance of double taxation, which states that “profits derived by a resident of a contracting state from the alienation of immovable property situated in the other contracting state may be taxed in that other state.”

The Revenue Agency, in response to inquiries numbered 110/2023 and 122/2023, provides the opportunity to make some brief considerations regarding the taxation of cross-border real estate capital gains. The two inquiries centered around the question of whether the capital gain arising from the sale of property located in a different country from the seller should be subject to taxation.

In the first mentioned inquiry, a taxpayer residing in Spain sold a property located in Italy and requested clarification on the proper tax treatment of the resulting capital gain. The Revenue Agency, while discussing the correct interpretation of Article 13 of the international treaty between the two states, reiterates that the taxation of the capital gain is concurrent and therefore subject to taxation in both contracting states (with a deduction of taxes paid in Italy from Spanish taxes to prevent double taxation). The Agency extends its response by applying Article 67, Paragraph 1, Letter b) of the Italian Income Tax Code, thus exempting the capital gain from Italian taxation since the sold property had been owned for more than 5 years.

In the second mentioned inquiry, a taxpayer residing in Italy sold a property located in the Netherlands and realized a capital gain already taxed in the location of the property. The taxpayer was uncertain whether the capital gain should also be taxed in Italy and, if so, what the applicable tax treatment should be. In line with the clarification provided in response 110/2023, the Revenue Agency reaffirms that cross-border real estate capital gains are subject to the provisions of Article 13, Paragraph 1 of international double taxation treaties. Like the Italy – Spain treaty, the Italy – Netherlands treaty also stipulates concurrent taxation in both Italy and the Netherlands for gains realized from the alienation of immovable property situated in the other state. Regarding Italy, the Agency reminds that our regulations, particularly concerning capital gains realized by individuals from real estate, include an exemption under Article 67, Paragraph 1, Letter b) of the Income Tax Code. This exemption, the Agency explains, is not limited to capital gains from the sale of properties within national borders but also encompasses gains from the sale of properties abroad.

The two inquiry responses mentioned above offer an opportunity to make some other brief considerations. Upon reading the two responses it is evident that this exemption, in addition to applying to purely domestic cases, i.e., involving an Italian seller and property located in Italy, can also be applied to:

1. Cases where a non-resident entity sells property located in Italy.

2. Cases where an Italian entity sells property located abroad.