Italian Good News: Living and Doing Business in Italy - part 2
- WTI Magazine #76 Feb 14, 2016
WTI Magazine #76 2016 February 15
Author : Italian Notariat Translation by:
The Guide entitled "Living and Doing Business in Italy" was created by the Italian Notariat to meet the needs of Italy's new economic scenarios and to inform foreign citizens about operations that in Italy by law require the intervention of a notary, who is a public official of the Italian Republic. To learn more, download the guide from www.notariato.it This is part 2 of 3
PURCHASING REAL ESTATE IN ITALY
Buying or selling a property (a home, office, shop, studio, land etc.) is one of the most significant moments in the life of a person, whether it is an investment or, especially, if the property is intended as the family home.
In order to protect citizens, whether Italian or foreign, the Italian State requires that the contract be drawn up by an impartial public official who is aspecialist in this area: the notary.
By law, the notary acts as a third party who is independent of both seller and buyer, ensuring that the conveyance of the property complies with all legal requirements, in accordance with the common interests of the parties and with particular attention to the purchaser.
The role of the notary in this case is seen in all its importance, both for the complexity of the operation and because of the need to protect the parties, from the first moment in which they reach an agreement to proceed with the deal: for this reason it is recommended that the purchaser (almost always the weaker party in the transaction) contact his own notary from the start of the negotiations, before signing a proposal to purchase or preliminary contract, since these already represent a binding commitment; in this way, every aspect of the transaction to be entered into can be considered together with the notary. So do not hesitate to consult your notary.
The choice of notary is absolutely free (the choice may not be imposed by the estate agent or the bank providing a mortgage or by the seller) and it is up to the purchaser, who is required to pay the fees, unless otherwise agreed with the seller.
The choice of notary, then, should be guided by the confidence the client has in him, the amount of time he is willing to spend and the advice given to ensure a safe purchase. If one does not know a notary, one can go to the nearest one.
It is extremely important to check that everything is in order before signing any binding document and advice requested of the notary, even before the conclusion of the sale, does not have an additional cost. The parties have the right to consult the notary personally and ask him for all the clarifications and explanations that may be useful for understanding the consequences and legal effects of the deed.
There are numerous activities carried out by the notary for the preparation of all documentation necessary for setting up the transaction. The notary first investigates the intentions of the parties so as to identify the type of deed most suitable for achieving the purpose desired by the client, within the confines of the law.
So the notary must ask the parties for all the information that will enable him to understand fully the result they want to achieve. It often happens that, in conversation with the notary, the client ends up changing what had been the initial idea because, for example, there is a more suitable or more fiscally correct solution.
Let us imagine the case in which the price is not paid in full at the time of the deed and part of the payment is postponed. In this case it is important to ask the notary’s advice on forms of collateral that can be provided to the seller and the corresponding costs. There are in fact various forms of protection: from the preparation of promissory notes to the registration of a legal mortgage, to a sale with reservation of ownership, in which case the transfer of ownership of the property takes place only upon payment of the last instalment of the price. Lastly, the recent economic crisis has led to the creation of additional contractual forms such as rent-to-buy, in which the purchase is preceded by a period of fruition of the property upon payment of rent, part of which is deducted from the sale price.
Once the deed to be prepared has been defined, the notary must by law carry out a series of advance checks on legality, to ensure the contract will be valid and unassailable over time. The property may be bought by a private purchaser, by a company or by a construction company.
In any case, the notary will ensure that:
• the seller really owns the property and has the right to sell it:
The notary ascertains the identity of the parties involved in the transaction and their right to act, by verifying the matrimonial property regime applicable between spouses, any power of attorney etc. The notary’s check on the identity of the parties serves to avoid the risk of identity theft, which is widespread in jurisdictions where there is no “Latin” notary.
• the property is not mortgaged:
By law the notary must ascertain that there are no previous mortgages, liens or foreclosures recorded at the Territorial Offices of the taxation authorities. The notary must ensure also that the property in question is not subject to specific constraints e.g. in terms of public housing (existence of particular individual requirements on the buyer, or price constraints), or right of first refusal in favour of certain persons, or covenants regarding assets classified as of historic, artistic or archaeological value.
• the previous owner has paid all service charges:
Upon completion it will be essential to have the managing agent prepare a statement on the payment in full of service charges and levies by the seller, since the buyer is liable for the non-payment of service charges due in the previous year.
• the cadastral plan conforms to the actual state of the property:
The notary must ensure that the cadastral plan exists and must bring it to the attention of the parties; the seller must declare and guarantee correspondence between the cadastral plan and the actual state of the property.
• the necessary checks have been put in place to ensure that the property is in order in terms of building/planning permissions
• the correct fiscal regime is adopted by the parties:
The notary identifies the taxation applicable to the specific case and proposes it to the parties as well as checking, following indications from the parties, the existence of the requirements for any tax benefits (for example, benefits for the purchase of a first home, or a tax credit or exemption in the case of transfers pursuant to separation or divorce proceedings). The notary has specific training in tax matters and is able to suggest solutions resulting in legitimate tax savings.
The notary is obliged to collect from the purchaser the funds needed for the payment of taxes and duties; upon registration of the deed these will be paid over to the taxation authorities.
• the rules specifically designed to protect those who buy a property under construction have been complied with (e.g. issuance of a bank surety to guarantee any advance payments)
• the energy performance of buildings is certified in accordance with national and regional rules:
For the sale of properties with heating plants it is mandatory to have and often even to annex the certificate of energy performance (EPA) prepared by a registered certifier that shows the class of the property’s energy consumption for heating.
• all regulations have been observed regarding money laundering, traceability of payments and the commissions paid to any real estate agency. The notary’s checks end with the signing of the deed. As a rule at the time of signing of the deed of sale, the handover of the property also takes place.
Nevertheless, the parties may agree otherwise, deciding for:
• early handover, it being understood that the seller remains the owner of the property and therefore responsible for it under the law;
• delayed handover to meet the needs of the seller, a clause being inserted in the contract of sale setting a time limit by which handover must be made, if necessary with provision for a penalty for any delay.
To protect the public, the law provides detailed rules for the preparation of the deed, in particular:
a) the notary must explain the entire contents of the document to the parties and any witnesses whose presence is required by law in certain cases (such as when one party is unable to sign or is suffering from sensory impairment), making sure that they understand the contents and legal effects. If he does not do so, he is criminally responsible for the crime of falsity in a public document;
b) the document, once read and approved, must be signed by the parties and any witnesses before the notary and it is then signed by the notary;
c) what the notary certifies in the notarial deed is legally conclusive evidence for all purposes - even in the courts - unless the crime of falsity in a public document can be proved.
The phases of a sale are many and often complex, and do not come completely to an end with the signing of the deed, given that the notary must undertake an important series of steps at the Public Registries, including lodgement and fiscal registration.
The Preliminary Contract (commonly called a “compromesso”)
This is the first contract that the seller and the buyer must sign. Sometimes, however, the preliminary contract (“compromesso”) is preceded by a purchase proposal (“proposta d’acquisto”). With the compromesso, the party agrees to sell/buy; the total price of the property is set, as well as the terms of payment, the actual timing of the sale and the amount of the advance payment (down payment/deposit) that is paid at that moment to the vendor.
This preliminary agreement (even if it is concluded privately) gives rise to commitments that are legally enforceable. They pose constraints for both the seller and the buyer: if after payment of the deposit the buyer decides not to buy the property, the seller may retain the deposit; but if the seller decides not to sell, the It should also be pointed out that if the preliminary contract is made with a notarial deed, the contract can be “transcribed” into the registries: in this way the buyer is protected from any problem that may arise during the period of time between compromesso and completion of the deed, such as mortgages, foreclosures or bankruptcy of the seller. In case of insolvency of the seller, for example, registration of the preliminary contract allows for recovery of all or part of the amounts paid. This suggested approach offers the best protection for the buyer.
Activities Subsequent to Completion of the Deed
Even after the signing of the deed, the notary is required by law to perform a series of tasks, within a short time, which will ensure on the one hand that the State receives payment of its taxes, and on the other publicly advising third parties and establishing the certainty of the transaction for the benefit of all citizens.
The notary is obliged to carry out, within a brief time-frame:
a) registration of the deed with the taxation authorities and payment of the relevant taxes on behalf of the client;
b) lodging of the deed – as protection for the whole community - in the Public Registers, making it known and fully effective to all (technically known as third parties). The filing of the deed with the competent authority in the land register is required by law to let everyone know who is the owner of the property and whether it is subject to mortgages or other encumbrances.
c) cadastral registration in order to update the land registry.
How much does the notary cost?
There are no obligatory or predetermined tariffs. The fee is therefore left up to free negotiation between the buyer and the notary. The notary is obliged to provide, upon request, a written estimate with the detailed description of his fees and the taxes payable. As an indication only, the fees charged for the purchase of a property valued at EUR 200,000 may not exceed 1%.
What other costs are associated with the purchase?
Where a real estate agency is involved, the buyer must pay his commission. As an indication only, the fees charged for the purchase of a property of the above-mentioned value is commonly 3%.
Buying a Home: Fiscal Aspects
A) Purchase from a builder/renovator
Purchase from a firm of builders or renovators, except in particular circumstances, attracts VAT which is payable directly to the seller.
The VAT rate to be applied on the sale price will be:
- 10% unless it is a first home purchase
- 4% if “first home” assistance applies.
The same tax treatment is applied to the allocation of houses to members of housing cooperatives.
In the case of purchases subject to VAT, the following taxes will be also paid to the notary who will then pay the Taxation Office:
• Registration Tax: Euro 200
• Mortgage Tax: Euro 200
• Land registry Tax: Euro 200
The rates apply on the sale price declared in the deed.
B) Purchase from a private party
For the transfer of property between private individuals the registration tax, mortgage and land registry taxes are paid by the buyer to the notary who, in turn, will forward them to the government Taxation Office at the time of registration.
1) In the absence of incentives
• Registration Tax: 9%
• Mortgage Tax: Euro 50
• Land registry Tax: Euro 50
2) Support for the purchase of a first home
• Registration Tax: 2%
• Mortgage Tax: Euro 50
• Land registry Tax: Euro 50
In the case of transfer of residential property to physical persons the purchaser may apply for payment of the registration tax on the “cadastral value” (price-value) of the property (which is the value obtained by multiplying the cadastral income by the legal coefficient of 115.5), regardless of the actual amount of the sale price, even if it is higher than this value. The minimum tax is still €1,000.
TAKING OUT A HOME LOAN IN ITALY
A mortgage loan is the typical financing contract within our legal system and almost always one of the parties is a bank.
To obtain a home loan it is sufficient to approach a bank and provide the documentation it requests.
Those applying for a mortgage loan who need clarification can also consult, in addition to the bank, various consumer associations and their usual notary who can furnish all the advice and information needed for the operation.
It is not necessary, on the other hand, to make use of a credit intermediary (e.g. a credit broker or financial asset manager): if this occurs, the costs of the operation are destined to grow, the broker’s fee sometimes being expressed as a percentage of the amount borrowed.
Common sense and prudence are necessary in applying for a home loan or other financing in general.
The use of credit is now common for the purchase of motor vehicles or non-durable, sometimes inessential, goods. Also the use of electronic means of payment often does not allow one to fully assess a dangerous decline in one’s savings.
One must therefore be fully aware that the accumulation of instalments that have been inadequately weighed up at the time the commitments were made, could render the periodic payments out of real family income unsustainable, thus in some cases causing serious financial difficulties with unpredictable consequences.
Sometimes it is wiser to give up, limit or postpone a purchase. Good advice and the exchange of views with an expert can help ensure one’s future serenity.
The role of the notary is important to the granting of home loans. His participation is required by law because a mortgage is recorded in the land register.
The notary, in addition to checking the validity of the contract and accepting responsibility toward the bank as to the ownership and freedom from encumbrance of the property denominated as security, checks in the contract for the existence of any unfair terms detrimental to the client, prevents fraud that might harm the bank or the client and, by virtue of his experience and training, can advise the an imbalance in the contractual terms.
The practice of contacting the notary early on is really crucial, because the notary has less room for manoeuvre if problems are raised when contractual deadlines are imminent and when the buyer of the property, to meet his commitments, absolutely must somehow and without delay obtain release of the funds. It should be remembered also that prior intervention of the notary in contracts of this kind is in effect an opportunity to obtain legal assistance that is routinely included in the total cost of the deed.
A mortgage loan normally accompanies the purchase of real estate (a so-called “fondiario” loan, i.e. secured by real estate, where the amount is not more than 80% of the market value of the mortgaged property), so that it very frequently happens that the deed of sale and the mortgage are signed in front of the notary simultaneously. In this case, too, it is useful to contact the notary well in advance, so as to have all the information necessary for the procedures to be followed with the bank, especially with regard to mode of delivery of the money, which is not always at the time the mortgage deed is signed.
The right to be informed
Consumers, according to the Consumer Code (Legislative Decree 206/2005), have a genuine right to full information – in clear and understandable terms – about the home loan agreement, a principle that, from 1 October 2003 pursuant to a resolution of the C.I.C.R. (Interministerial Committee for Credit and Savings), is contained in new national rules on the transparency of banking transactions and services set out in special provisions issued by the Bank of Italy. As a result of these rules, banks make available to their customers, in premises open to the public, an information sheet which contains, among other things, the economic conditions of the transaction and the main contract clauses that regulate it.
The customer is thus able to make assessments more easily and above all to compare the loan terms proposed by the various banks so as to choose the cheapest offer.
Under these provisions the customer (borrower), having picked a lending bank, then has the right to receive from it, before the signing of the contract, a copy of the contract in the form in which it is to be signed (i.e. a pro forma contract) for an informed evaluation of its content. The furnishing of this copy does not bind the parties to conclude the contract.
Timely exercise of this right is highly recommended, so that the client, after consultation with a trusted notary or with consumer associations, may request any appropriate changes and corrections to meet the specific case.
Attached to the contract is an epitome document aimed at providing the customer, in the clearest possible terms, with a summary of the most important conditions of the contract.
If there is difficulty in understanding these documents the Bank and the notary stand ready to give information and explanations.
The Interest Rate
The rate is certainly one of the main elements to be considered when assessing a home loan.
The interest rate can be fixed, when it agreed that it will remain unchanged for the duration of the mortgage, or variable, when it is determined with reference to changing parameters that must be defined with the requirement of objectivity and impartiality.
The choice between a fixed or floating rate is the substantive question, where the borrower has full discretion, assuming full responsibility for the risk. The rate of a variable mortgage is - normally - lower than that of a fixed-rate mortgage, but entails the risk that the rate may rise over time.
Apart from the primary split between fixed-rate mortgages and adjustable-rate mortgages, there are different types of contracts in which those characteristics may merge or alternate: for example, the term mixed-rate mortgage means the borrower has the option, as stipulated in the contract, to change from fixed to floating interest rate or vice versa; a capped mortgage has a variable rate which however can never exceed a certain predefined maximum; then there are variable-rate mortgages with fixed instalments where any increase or decrease in the benchmark rate automatically extends or shortens the life of the contract; and so forth.
In order to have a clear picture of the obligations to be met, the Bank provides an amortisation schedule. This document consists of a table containing details of all the instalments to be paid (split between principal and interest) and due dates, thus allowing for clearer planning of the family budget.
The generally short period during which the borrower is committed to interest-only and not capital repayments is called pre-amortisation.
In addition to interest there are other expenses that contribute to the overall cost of the loan, and these need to be known in good time. For example, the cost of expert valuation and investigation and any other cost item, or the insurance policy to guarantee against the risk of fire/explosion damaging the property given as collateral.
These charges weigh on the overall cost of the mortgage. For the purposes of clarity, banks provide to the customer - and the customer has the right to receive before signing the contract - the APR (Annual Percentage Rate) [T.A.E.G. (Tasso Annuo Effettivo Globale) in Italian], which provides in percentage terms the actual cost of the loan that is represented by a rate that takes into account not only the nominal rate of interest but also the other expenses to be incurred for using credit. By using this figure, the customer should be able to compare on a consistent basis the real cost of the loans offered by various banks.
The borrower should also enquire in advance of the bank, the notary and/or consumer associations the extent of the taxes and notarial fees to be paid. The tax treatment of bank loans is governed by Article 15 and following articles of Presidential Decree 601/1973: instead of the ordinary tax, provided that the term of the loan is set at longer than eighteen months, a substitute tax is applied. This tax is equal to 0.25% of the amount borrowed, except on money borrowed for the purchase, construction or renovation of houses to be used as a second home, for which the tax increases to 2%.
Set-up and Delivery Times
When one has committed to buying a home within a certain time and has to pay a penalty to the seller for any delay, it is good to be certain of the preparation time. As a rule, 60 days should be enough to get a mortgage loan, but it is necessary to look well ahead and take precautions, making one’s needs clear to the bank and demanding that they meet the schedule.
Late or Missed Payments: Interest on Arrears and Other Risks
Although a person seeking a mortgage does not expect to be in the position of not being able to pay the instalments on time, as already mentioned this possibility must be considered lest unfavourable or unforeseen circumstances produce dangerous ripple effects.
The first, automatic consequence of any delay in a loan repayment is that late payment interest is levied; the interest rate on arrears is generally higher than the normal rate, in order to discourage late payment; it cannot, however, exceed certain limits and penalise the borrower excessively.
The Amount of the Mortgage
The mortgage is the guarantee that the bank acquires over a property, in order to facilitate the forced recovery of its loan if the debtor does not pay. It is said to be a first mortgage when it is not preceded by other mortgages. To determine the value of the mortgage, to the amount borrowed (the capital) must be added the agreed interest, any interest on late payments, any possible legal costs etc. For this reason the mortgage is registered for an amount considerably greater than that of the home loan itself.
In case of non-payment of the mortgage, the bank has the right to auction the mortgaged property.
Additional Guarantees Required by the Bank
In granting a loan the bank must consider not only the value of the property offered as collateral but also the economic capacity of the borrower to make the repayments (one element in this evaluation is the borrower’s tax return). For this reason a surety from a third party is sometimes required (such as a parent guaranteeing for a child), whereby the third party undertakes to pay the amount due from the debtor in case of default. The surety must have certain limits as to amount and duration.
In mortgage-based financing, the law provides the borrower with the opportunity to repay the loan early. The borrower can then decide, at some point of the amortisation, to discharge the contract, returning the outstanding capital on which naturally he ceases to pay interest.
Faced with this loss of income the bank can, in general and if it is provided for in the contract, demand compensation (also called a commission or sometimes a penalty).
No commission or other compensation is applicable in the event of early repayment, or partial early repayment, of loans taken out (or imposed as a result of a subdivision) for the following purposes: “the purchase or restructuring of properties used as a home or the performance of their business or profession by natural persons”.
Renegotiation, “Portability” (or Substitution), and “Exchange” of the Mortgage (Loan Replacement)
Fluctuations in interest rates and innovations in the products offered by the market may sometimes make it interesting to change the conditions of a loan “during the course of the race”: such changes can be made using different methods.
Renegotiation (or perhaps rather: reformulation of the contract) means a new agreement by both parties (the bank and customer) and so can hardly be a unilateral expectation by the borrower.
Article 120 (4) of the Unified Banking Act provides a new way for borrowers to achieve savings: this is “portability” (or substitution). The borrower may make arrangements with a new bank for another loan of a similar amount to the previous one with which to pay off the one with the original bank, a move which the granted for the original loan; the cost of the operation is borne by the new bank.
In order to take advantage of more favourable financial conditions and possibly also obtain liquidity to meet financial needs that have occurred, it is also possible to pay off the old mortgage and take out a new one at the same or a different bank (loan replacement).
In this case, one must take into account the costs arising from taking out of a new loan agreement.