Reconsidering taxation on foreign currency transfers: a call for clarity
In a recent case, an individual who had transferred their tax residence to Italy moved sums in foreign currency from one of their bank accounts—holding an average balance exceeding €51,645.69 for over seven days—to another account in their name at a different bank. The Italian Revenue Agency (Agenzia delle Entrate) treated this transfer as a “withdrawal” capable of generating capital gains from currency exchange differences, thereby subjecting it to taxation.
The agency’s stance is based on the interpretation of Article 67, paragraph 1, letter c-ter of the Italian Income Tax Code (TUIR), which considers any “withdrawal” of foreign currency as an event potentially generating capital gains, provided the average account balance surpasses the specified threshold for at least seven consecutive working days. This presumption serves an anti-avoidance purpose—aiming to prevent taxpayers from covertly selling withdrawn foreign currency and realizing untraceable capital gains, as highlighted in the Ministry of Finance Circular No. 165 dated June 24, 1998.
According to the revenue agency:
– Absolute presumption: article 67 introduces an absolute presumption (not subject to rebuttal) that every withdrawal is an event capable of generating capital gains from exchange differences.
– Definition of “Withdrawal”: the term encompasses transfers between accounts (giroconto), not just cash withdrawals.
– Analytical calculation: capital gains or losses realized from all withdrawals within the same tax period must be calculated analytically and separately for each account (as per Response to Inquiry No. 204, February 7, 2023).
Why this interpretation is problematic
This approach raises several concerns:
– Retention within the banking system: in the case of account transfers, the foreign currency remains within the banking system. Thus, treating such transfers as taxable events is unnecessary. This is consistent with the agency’s own stance in Response to Inquiry No. 397/2022 regarding cryptocurrencies, where it clarified that transferring crypto assets between wallets owned by the same individual does not constitute a taxable event.
– No tax avoidance risk: the transfer does not facilitate any tax evasion or avoidance since any potential taxation is merely deferred until the actual withdrawal of the currency from the banking system.
A call for reassessment
In light of these considerations, it is advisable for the Revenue Agency to reconsider its position. Treating transfers of foreign currency between a taxpayer’s own accounts as tax-neutral events would not only align with logical tax principles but also remove unnecessary administrative burdens. Such a reassessment would promote clarity and fairness in the taxation of foreign currency transactions, ensuring that anti-avoidance measures are applied where they are genuinely warranted.