Personal Income Tax (IRPEF) is payable by both resident and non-resident individuals on income derived from business activities and assets. For residents (defined as individuals who live in Italy for the majority of the tax year or who are registered with the Resident Population Records Office), the tax is applicable to their total income. For non-residents it is applicable only to income generated in Italy. There are particular types of income for which nonresidents are subject to IRPEF, including:
Tax rates applicable to aggregate income are the following:
|Up to €15.000||23%|
|From €15.000 to €28.000||27%|
|From €28.000 to €55.000||38%|
|From €55.000 to €75.000||41%|
These rates are applied to the overall taxable income after subtracting certain types of income separately, and after deducting certain personal expenses and other allowances (e.g., specific medical expenses, checks for dependent spouse, health insurance premiums and family deductible tax burden). The result is the gross IRPEF.
Net IRPEF is obtained by subtracting certain additional tax deductions from gross IRPEF (e.g., interest on loans for dwelling house, specific medical expenses).
Both resident and non-resident individuals may make capital gains when disposing equity investments in partnerships or corporations. If the partnership or corporation was established no more than seven years prior to the disposal, and the investment has been held for at least three years, the capital gain is not included
in taxable income if it is reinvested in companies engaged in the same business within two years of the gain being realised.
All incomes earned in Italy, whether by a corporation (S.p.A.), a limited liability company (S.r.l.), or a permanent establishment in Italy of a non-resident company, are subject to the following income taxes:
IRES is the main corporate tax, and it applies to the net income of resident companies; for Italian tax law purposes, resident companies and entities are those which, for most of the tax period, have either their registered office, their administrative headquarters or their principal business in Italy.
From 1 January 2017, the tax rate has been fixed at 24%. It is applied on the gross profit resulting from the income statement, adjusted according to the tax law. Costs are allowed as a deduction if, and to the extent that, they are entered in the profit and loss account and they form part of the taxable base during the taxable period in which such an imputation is made. In general, resident companies can deduct all the costs and expenses incurred on their business activities. These expenses can include capital and extraordinary losses, labour expenses and royalties. There are limits to deductions for interest paid, income taxes, car expenses and charitable donations.
The Italian Unified Tax Code (TUIR) is the basis on which taxable income is calculated. Corporate income (redditi d’impresa) for tax purposes is all income that is received by corporations resident in Italy, regardless of its nature. All income and expenditure are considered on an accruals basis for tax purposes. However, there are specific exceptions for certain types of income and income subject to withholding. Taxable income comprises net income in the tax period (as reported in the company’s income statement), adjusted in accordance with TUIR provisions.
Matters to be considered in determining taxable income are set out below.
Revenue includes income generated through the sale of goods and services whose production or delivery is the purpose of the business; the sale of raw and related materials and semi-finished goods; and the sale of shares, bonds and similar securities that are not classified as non-current financial assets.
Dividends distributed by companies with legal status are 95% not subject to taxation, except for dividends distributed by companies residing in Countries with a preferential tax regime. The companies may also be in the winding-up phase. In the taxation of the remaining 5% of the distributed dividends, the costs related to managing the participation shares are totally deductible.
Interest and similar income received by industrial and commercial companies can usually be deducted from their corporate tax liability (provided that the income has not been capitalised in the cost of assets). The amount that can be received tax free is limited to 30% of gross operating profit as identified in their income statement.
Interest received that is above this 30% limit can be carried forward to subsequent tax periods.
If the interest received is less than 30% of the gross operating profit, the difference between the amount of the interest received and the 30% of gross operating profit can be carried forward to increase profit in following years.
Where capital gains are made from the sale of company assets, the gains are included in taxable income for the tax period in which they accrue. If the assets have been held for three years or more, the tax payable on the gains is payable in equal instalments over five years, commencing in the year in which the gain is made.
The rules include gains generated by the sale of equity investments recognised as non-current financial assets in the last three financial years.
Certain gains qualify for exemption, such that 95% of the gain on the transfer of shareholdings by companies may not be subject to IRES taxation, whether the investments are in companies or partnerships resident in Italy or abroad. Consequently, no deductions are allowed for capital losses, write downs or other expenses.
Qualifying investments are those classified as non-current financial assets, investments in commercial activities, investments that have been held continuously for at least twelve months, and investments in entities resident for tax purposes in a country or territory other than a tax haven.
If companies belonging to the same group are resident in Italy for tax purposes, they can, subject to meeting certain criteria, elect to adopt consolidated taxation for some or all the subsidiaries. In this situation, the income of subsidiaries is allocated to the parent company. The group tax liability offsets taxable income for some group companies against tax losses for other group companies. If companies opt for consolidated taxation, the option lasts for three years and may not be revoked during this period.
Interest and similar income received by companies participating in the consolidated tax approach can be shared between participating companies in the same way as profits and losses to reduce group taxable income or to increase gross operating profit in subsequent years.
The group taxable income for the parent company is the total of the taxable income of each consolidated company. Regardless of the size of the stake held by the parent company, the consolidation includes the total net income of the subsidiaries involved.
Shareholders of corporations that are resident in Italy for tax purposes can, subject to meeting certain criteria, elect to include the income of the companies in which they invest their own taxable income. In these situations, the corporation taxable income is directly attributed to each shareholder in proportion to its holding in the company. This option is referred to as pass-through taxation.
This is a local tax levied on the value generated in each tax period in the Italian Regions.
IRAP taxable income is the net value of production in each Italian Region, based on income statements produced either from Italian National Accounting Standards or International Accounting Standards. The basic rate for IRAP is 3.9% although individual regions can alter this rate by up to 1%. Some construction companies, banks, financial institutions and insurance companies are subject to higher rates ranging from 4.2% to 5.9%.
For industrial and commercial enterprises, income excludes capital gains generated from the disposal of companies and equity investments; some elements of extraordinary income; and financial income (dividends, interest). It also excludes all costs and expenses other than most labour costs; interest and finance charges; some specific capital losses; and some elements of extraordinary income.
Some deductions from IRAP taxable income may be possible for employing research and development personnel and new employees.
Tax losses arising in a given tax period can be deducted from taxable income in subsequent periods with no time limit for limited companies and within five years for unlimited ones.
For limited companies, losses can be deducted for up to 80% of the taxable income for the period, and for an unlimited company, losses can be fully deducted.
Companies resident in Italy must file their corporate income tax return electronically within 9 months of the end of their financial year.
Corporate income tax is payable electronically and is normally paid in advance in two instalments based on the tax paid for the preceding tax year. The instalments are due at the point when a company pays a balance for its previous financial year and by the end of the 11th month of the current financial year. Reduced amounts of tax can be paid if the company expects taxable income to be lower than in the previous year.
Any balance of corporate income tax is payable:
The domestic consolidation system for tax purposes is an optional system, irrevocable for at least 3 years, which is available to Italian resident groups of companies where the majority control requirement is met.
Companies belonging to a group benefiting from IRES rate reductions cannot exercise this option.
The system is based on the consolidation of taxable incomes with the following possible consequences:
Entry and exit from the consolidation system implies, among other things:
If the control requirement does not exist, both the controlling company and the controlled company must integrate their advance payments made.
The worldwide tax consolidation system is an optional system, irrevocable for at least 5 financial years of the controlling company, which is available to groups of companies where the majority control requirement is met, subject to certain requirements.
The system is based on the consolidation of the percentage of taxable income, obtained by each of the companies belonging to the group, corresponding to the proportion owned directly or indirectly.
The same principles as those formulated for domestic tax consolidation system apply, with the following exceptions:
The transfer pricing regulations require that transactions with foreign companies in the same group must be at “normal value” reflecting free market rates. Variations must be fully documented, or penalties ranging from 100% to 200% of the value of international transactions apply.
The CFC rules mean that the profits of a non-resident entity are deemed to be profits of an Italian resident (individual or company) if the resident controls (directly or indirectly) the non-resident entity and the non-resident entity is resident in a tax haven. The profits of the foreign controlled entity are taxed at the Italian resident’s average tax rate (which will be not lower than 24%).
If the non-resident company can prove that its principal function is to do business in the country in which it is resident, the CFC rules will not apply. Similarly, the rules will not apply if the non-resident company is not generating income in tax haven countries.
The Anti-Tax-Haven legislation, implemented to prevent the use of tax haven jurisdictions, has been revoked. Deductions can now be made for costs and expenses arising from transactions with companies resident in a non-EU member with a preferred tax regime.
VAT affects almost all transactions involving goods and services acquired in Italy. The normal rate is 22% with reduced rates of 4% and 10% applied to basic items. Companies must calculate their VAT liability every month and any payments due must be made in the following month. Under certain conditions, VAT can be calculated and paid on a quarterly basis. There is an annual VAT return that must be completed before 15 March.
To carry out intra–community transactions, VAT subjects must opt to be included in the VIES archive (VAT information exchange system), but may opt out at any time. The requirement to be included in the VIES archive for making Intracommunity transactions applies to all persons undertaking business activities, art or profession in the state, or establishing a permanent establishment there.
VAT is due from all persons making taxable supplies of goods or services in Italy, regardless of their residence. Non-residents with no permanent establishment in Italy may appoint a tax representative who is responsible for completing all their VAT formalities.
Residents of other EU Member States, that are VAT registered in their own country, must register with the VAT authority in Italy before making any taxable transactions in Italy.
Entities that are not resident in Italy may be able to obtain a deduction for VAT charged by suppliers if they have either a permanent establishment or a fiscal representative in Italy.
A non-resident entity that does not have a permanent establishment or fiscal representative in Italy, and who has not supplied taxable goods or services in Italy maybe able to obtain a refund of previously paid VAT on the acquisition of goods and services in Italy.
Italian inheritance tax law was last updated with amendments published in December 2006 and further amendments are likely. Standard rates for inheritance tax on properties are shown in the chart below.
Main Categories and standard tax rates
|Beneficiary||Inheritance Tax imposta di successione||Mortgage Tax imposta ipotecaria||Cadastral Tax imposta catastale|
|• Spouse||4% on the amount exceeding EUR 1 million for each beneficiary||a) 2% of the property value on record;||a) 1% of the property value on record;|
|• Direct line relative (e.g. parents and children)||or||or|
|• Sibling||6% on the amount exceeding EUR 100.000|
|• Other relative up to and including the 4° level||6%||b) EUR 200 if the property will be the main house (“prima casa”) of the beneficiary||b) EUR 200 if the property will be the main house (“prima casa”) of the beneficiary|
|• Direct line in law|
|• Indirect line in law up to and including the 3° level|
|• Other Subject||8%|
This tax applies to transfers of assets or rights through donations or other free transfers, and to establishing restrictions on their intended use. It is payable based on the value of shares assigned to individual beneficiaries at a rate varying between 4% and 8%. A tax free element of €1m can be received by the spouse’s direct descendants; brothers and sisters can receive €100,000.
Transfers of enterprises or controlling stakes in enterprises to spouses or descendants are exempt from inheritance or donor’s tax. The beneficiary is required to continue the business activity or to retain control of the enterprise for five years from the date of transfer.
There are additional taxes that apply to immovable property. The imposta ipotecaria (2%) and the imposta catastale (1%) are due in addition to inheritance or donor’s tax, without prejudicing the benefits applying to primary residences.
A local property tax, IMU (Imposta Municipale Unica) is aimed at increasing revenue and reducing the cost of rent through the taxation of vacant apartments. Only religious buildings and main residencies are exempt.
The tax is based on a percentage of the value of each property, and is collected by the local municipality in which each property is located. Some of the tax goes to the national government.
IVIE must be paid each year by the owners of buildings located abroad. The tax rate is 0.76% of the total value of the building, calculated on its acquisition price.