Resident individuals are subject to a personal income tax, named IRPEF, on their
Individuals carrying on a business or profession and/or partnerships are liable to IRAP which is not deductible from IRPEF. Non-resident individuals are subject to tax only on their Italian source income.
Individuals are considered resident in Italy if they are registered in the official register of population; their principal place of business and interests is located in Italy; or if they remain in Italy for more than six months in any calendar year.
Progressive rates for IRPEF are as follows:
Taxable Income (EUR) Tax Rate
Up to 15,000 23%
15,001 – 28,000 27%
28,001 – 55,000 38%
55,001 – 75,000 41%
Over 75,000 43%
In addition to the above progressive rates, a regional surcharge (variable rate from 0.9% to 1.4%) is payable and an additional municipal tax could be charged and fixed locally.
The tax period in Italy is the calendar year and tax is due over two advance payments made during the tax year with the balance due by 16th June of the following year. The tax return must be filed annually by the end of July if transmitted electronically. IRPEF is withheld at source from employees' salaries and wages. The payment of taxes on account and settlement operates under a similar system as for companies.
There is no wealth tax in Italy. Gift and inheritance tax has come back into force with a range of tax rates and taxable bases.
Other taxes on individuals:
Capital duty – A negligible registration tax is levied on contributions of cash in exchange of shares. Contribution of other assets may trigger registration tax at various rates.
Stamp duty – Stamp duty is levied on legal and banking transactions at varying rates.
Capital acquisitions tax – No
Real property tax – Property owners, whether or not resident, are liable for property tax (ICI) on buildings and land owned for their own use or as investments. Each local authority sets their rates, which apply at 0.04%-0.07% of the taxable value of the property.
Inheritance/estate tax – Inheritance tax was reintroduced in 2007. The taxable amount is generally represented by the value of the assets and rights inherited. Rates are 4%, 6% or 8% based on the proximity between the deceased and the beneficiaries, and exemptions up to EUR 1 million may apply on bequests to close relatives.
Net wealth/net worth tax – No
Social security – Individuals working in Italy are generally subject to social security contributions. Rates vary according to the sector of activity and the employee's job title.
Social security in respect of the state pension fund borne by the employee is generally equal to 9.19%, plus 1% over EUR 40,765 up to a cap of EUR 88,669 for employees who started contributing to an obligatory social security scheme after 1 January 1996. For those who started contributing before that date, contributions are calculated on the total amount of employment income received.
The corporate tax (IRES) rate in Italy is 27.5%, plus IRAP of 3.9% (or 4.9%) or an additional 5.5% corporate income tax charge. Please read below.
As a rule, corporate income tax (named IRES from 2004) is payable by all resident companies on income from any source, whether earned in Italy or abroad. Non-resident companies are subject to IRES only on income earned in Italy. Both resident and non-resident companies are subject to regional income tax (IRAP), but only on income arising in Italy. The corporate income tax rate (IRES) is 27.50%. Companies involved in trade and manufacturing are also subject to a regional tax on productive activities (IRAP) at the rate of 3.90% although regional authorities may increase or decrease the standard rate by up to one percentage point. It is envisaged that IRAP will be gradually eliminated in the near future.
An additional 5.5% corporate income tax charge (IRES – i.e. IRES 27.5% + 5.5%) is levied on companies (i) having revenues higher than EUR 25 million in the relevant fiscal period, and (ii) carrying on their activities in one of the following fields:
- research and exploitation of hydrocarbon
- oil refining, production and sale of petrol, gasoline, gas, lubricating oil, liquefied gas of petrol and natural gas
- production and sale of electricity.
Company tax returns, which cover both IRES and IRAP, must be filed within nine months of the statutory year end by electronic transmission. An advance tax payment is payable by the 16th day of the sixth month of the accounting period equal to approximately 40% of the previous year's income tax liability. A second advance payment of about 60% is due by the end of the 11th month of the company's financial year, i.e. 30 November. Any remaining amount would be due by the 16th day of the sixth month after the end of the period.
For income tax purposes the company can chose either a calendar or a fiscal year.
For VAT and withholding tax, the calendar year always applies.
BRANCH PROFIT TAX
Foreign branch profits are fully liable to IRES and IRAP.
FISCALLY TRANSPARENT COMPANIES
Italian limited liability and joint stock companies may opt for this regime and be treated as fiscally transparent companies. In order to qualify for this treatment, joint stock companies must hold between 10% and 50% of the voting rights in another Italian company for a continuous 12-month period, whereas Italian limited liability companies must have gross incomes totalling no higher than Euro 7,500,000 and be owned by a maximum of 10 private shareholders. Non-resident companies (regardless of their legal form) may also opt for such a regime but only if they are established in the EU and hold a percentage of capital stock (of an Italian company) of between 25% and 50% for a continuous 12-month period.
Under the above regime, the 'transparent' company is not taxed on its own income. However, income produced by its subsidiaries is directly allocated to the parent company according to its percentage of ownership, whether or not these profits have been remitted to it by way of dividend. The election is irrevocable for three years and must be communicated to the Tax Authorities. A ministerial circular provides clarification on this rule.
CONTROLLED FOREIGN COMPANIES
Italian tax law includes a comprehensive set of rules on controlled foreign companies (CFC). These rules aim at avoiding the hiving off of income to foreign subsidiaries located in certain low tax jurisdictions. These are countries typically considered as tax havens i.e. those not listed in the so-called "white list" (new definition being those countries having agreed on an exchange of information with the Italian Tax Authorities). Pursuant to Decree 78/2009, the CFC rules have been extended so that profits earned by a CFC located in a tax haven country have to be imputed to the Italian resident parent company/individual regardless of any dividend distribution.
ITALY CAPITAL GAINS TAX
Capital gains realised by the company are generally taxable as normal business income subject to IRES and IRAP and capital losses are generally deductible. Tax on gains may be spread over five years for assets owned for more than three years.
Capital gains on assets owned for less than three years are taxed in the year in which they are realised. Capital gains arising from stock transfers are partially exempt, under specific conditions, where they relate to financial assets owned for an uninterrupted period of at least 12 months.
FRINGE BENEFITS TAX (FBT)
Fringe benefits are included in the taxpayer's total aggregated income.
MINIMUM TAXABLE INCOME
Companies with an annual turnover of less than EUR 7.5 million are subject to an automatic evaluation in accordance with the so-called Sector Studies (Studi di Settore). This is to determine a minimum level of income on which the company is deemed to be taxable as well as a minimum VAT amount due.
NON-OPERATING OR DORMANT COMPANIES
Such companies are subject to a minimum tax charge as far as IRES and IRAP are concerned. The company must declare an income for the tax period which cannot be lower than the amounts calculated by multiplying percentages to certain balance sheet items. Where the actual values reported are below those presumed, the company must pay an additional tax charge based on the difference between the presumed and declared income. Furthermore, a VAT receivable is not refunded if these non-operating circumstances persist for three years.
The taxpayer has the right to seek recourse against assessments, undue payment demands, etc by appealing to the tax courts through three ranks of justice. In addition, a tax conciliation allows a taxpayer to settle his tax liability directly to the tax office.
Real estate tax (ICI) is payable annually in two instalments (June and December) on the value of real estate property owned by companies. It has a variable rate ranging from 0.4% to 0.9% on property value, depending on each county council's assessment.
Registration tax is levied on the registration of any written contract or deed. The percentage varies depending on the type of deed. A higher rate of 7% applies to contributions or transfers of real estate. Registration tax is not applicable if the contract is subject to VAT, except for real estate rental contracts whereby VAT and 1% registration tax are applicable.
From 2008 onwards, stamp duty on the transfer of shares, bonds and similar securities has been repealed.
PAYMENTS DUE BY VAT REGISTERED ENTITIES
VAT registered persons are required to effect all tax and social security payments electronically, whether or not an intermediary is involved, by means of a standard form (F24).
DETERMINATION OF TAXABLE INCOME
The taxable income of a company is based on the result of its business profits, which consists of all net income determined during a financial period, adjusted as required by the Tax Act. Non-resident companies are taxed in Italy on certain types of income earned from sources in Italy.
Depreciation is permitted on a straight-line basis calculated by applying the coefficient established by the Ministry of Finance to the cost price, reduced by half for the first tax year. The Ministry of Finance is updating the depreciation rates and for 2008 a draft rule foresees that the reduction of the depreciation rates will not be applied for the first year. Tangible property with an acquisition cost of less than EUR 516.46 may be written off in the current year.
Tax payers investing in new plant and equipment from 1 July 2009 to 30 June 2010 are entitled to a 50% tax relief of the amount of the expenditure, in addition to the usual capital allowances. Should such a deduction give rise to a loss in the tax return, the capital allowances can be carried forward to offset the taxable income of the following five fiscal years.
In principle, inventory is valued at the lower of cost or market value. Companies may apply any acceptable method of inventory pricing, i.e. FIFO, average, continuous average, etc.
From January 2004, the tax credit applicable to resident recipients of dividends has been abolished.
(a) Companies are taxed at 5% on dividends distributed by resident companies or at 0% where the dividend is paid between two members of a consolidated group.
(b) Individuals and partnerships are taxed on only 40% of the value of dividends received if they own more than 20% of the share capital of the company paying the dividend. If they own less than 20%, the full dividend is taxed at a fixed rate of 12.5%.
As from 4 July 2006, dividends derived directly or indirectly from subsidiaries located in low tax jurisdictions will be subject to full taxation unless a favourable ruling is obtained.
From 2008 onwards, the thin capitalisation and the "pro-rata patrimoniale" rules have been abolished and replaced by a new deduction rule based on the following principle:
a) interest expenses, including interest on leasing costs but excluding capitalised and non- deductible interest and net of the interest income accounted in the same tax period, are not deductible if they exceed 30% of the Company's statutory EBITDA i.e. the earnings resulting from its "core business".
b) Interest expenses exceeding the aforementioned limit may be carried forward, with no time limit, and used to offset taxable income within the 30% limit as above in succeeding tax years. Any surplus interest deductions (interest cost lower than the 30% EBITDA) may be carried forward starting from 2010.
Net operating losses may be carried forward for five years starting from the year in which they originated. This rule applies for company income tax (IRES) only and not for IRAP. Losses accumulated for the first three years from the commencement of a company's business activity may be carried forward indefinitely but a number of conditions apply from 4 July 2007 in respect of such losses.
FOREIGN SOURCE INCOME
Only 5% of the value of dividends received from controlled foreign companies is liable to IRES. This 95% exemption is not available if the source of the dividends is a company resident under a 'privileged tax regime' outside the EU.
TAX INCENTIVES IN ITALY
Italian law provides for various forms of incentives to support economic investment in the south of Italy, other depressed areas in the centre/north, and in those areas struck by catastrophes such as earthquakes or floods.
Corporations and partnerships ("società di persone") issuing share capital to individuals between 5 August 2009 and 5 February 2010 are eligible to a special tax allowance. The tax relief is equal to 3% of the capital increase, up to a cap of €500,000, thus giving rise to a maximum yearly deduction of €15,000. The benefit applies for five fiscal periods only.
FOREIGN TAX RELIEF
Foreign taxes may generally be credited against the Italian IRES tax liability, provided there is an equivalent clause in the territory from which the income derives. Any excess foreign credits relating to the income of a foreign permanent establishment or a non-resident company not included in the worldwide consolidation can be carried forward or back for eight years.
Provisions for the consolidation of resident and non-resident company results were introduced in 2004. These provisions allow for the consolidation of income between group companies at both domestic and international level, resulting in a single tax liability for the parent company.
The option is irrevocable for a three-year period where only Italian resident companies are involved and for a five-year period for a worldwide consolidation (or three years if subsequently renewed).
The companies participating in the group consolidation are jointly liable for taxes, penalties and interest assessed on the aggregate income. The consolidated income is taxed at the parent company level.
RELATED PARTY TRANSACTIONS
Transactions with foreign affiliated companies are closely scrutinised in order to determine whether transfer prices are at arm's length. There are ministerial guidelines which suggest various limits on payments between affiliates.
Domestic companies making certain types of payments (e.g. interest, royalties, professional fees, etc) are required to withhold taxes at various rates. Italian legislation has implemented the EC Directive 2003/49/CE (Parent/subsidiary Directive). Under the Directive, no withholding tax is payable on interest and royalties paid to EC resident companies that have held at least a 25% interest in the payee company for a continuous 12-month period.
In general, dividends distributed to non-residents are subject to a final withholding tax of 27%. For dividends paid to residents of EU countries and those listed in the "white list", a special withholding tax rate of 1.375% applies. This rule applies only to profits earned starting from fiscal year 2008. Any dividends paid that represent profits from previous fiscal years will be subject to previous years' rules.
In line with the EC Parent/subsidiary Directive, no withholding tax is levied on dividends paid to a parent company in another EU Member State if both the parent and the subsidiary are qualifying companies under the Directive and the parent has held at least 10% of the capital of the subsidiary continuously for at least one year.
EXCHANGE CONTROL/ANTI-MONEY LAUNDERING
There are no exchange controls in Italy. However, banks and financial institutions are required to monitor any deposit/withdrawal over EUR 12,500 for anti-money laundering purposes. This duty has recently been extended to audit firms, professionals, etc.
The standard VAT rate in Italy is 20%. Other rates applied are 4% and 10%. Items exported or destined for export are not subject to VAT. A specific VAT regime is applied to real estate transactions for sales, purchases or rentals negotiated by companies.
VAT is levied on transfers of goods and services by enterprises in the course of their business or professions within Italy and on all imports into Italy.
As an alternative to the nomination of a VAT Representative (that remains the only procedure allowed for extra-EU companies), non-resident EU companies can apply for a "Direct VAT Identification". This enables the non-resident to settle any VAT payment directly in Italy or claim back any VAT credit. The direct VAT identification procedure is intended to facilitate the payment of Italian VAT liabilities by the non-resident. This procedure was discontinued with effect from 25 September 2009 in cases where a non-resident EU company has set up a permanent establishment in Italy.
From 1 January 2010, the basic "place of supply" rule for supplies to "VAT registered persons" is that such supplies are deemed to be made where the customer is established and the related VAT is due in accordance with the so-called "reverse charge" procedure.
The reverse charge also applies to services which must be reported on Intrastat forms. Previously, only intra-Community supplies of goods had to be included on Intrastat forms. From 1 January 2010, services subject to reverse charges also have to be included, subject to some exceptions. The normal reporting period is a calendar month.
Income Tax Rate
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Last Update: Nov 2010
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