The Italian tax system provides two main kinds of taxes: direct or income taxes and indirect taxes.
Direct taxes (IRES, IRPEF and IRAP), due on the income gained by individuals and companies, are self-calculated through an annual declaration of revenues (Modello Unico) and paid in three partitions along the year.
Indirect taxes, otherwise, are due on property or given acts like purchases, transactions, business acts, etc. . They are usually paid as soon as they originate.
Personal Income Tax IRPEF
The Italian Personal Income Tax (IRPEF) is regulated by the Consolidated Tax Code, Testo Unico delle Imposte sui Redditi (TUIR / CTC). Italian resident individuals have to pay IRPEF on their worldwide income; non-Italian resident individuals are subject to IRPEF only on Italian source income. According to the Italian tax law, an individual is considered “resident” in Italy when he lives here or has business affairs in this country for more than 180 days a year (taxable period).
IRPEF is a progressive tax which apply a maximum rate of 43% and minimum tax rate of 23%.
Corporate Income Tax (IRES)
According to the Consolidated Tax Code (TUIR / CTC), Italian resident corporations are subject to IRES (Imposta sul reddito delle società, or Corporation income tax) on their worldwide income. Non-Italian resident corporations are subject to IRES only on Italian source income.
IRES is not a progressive tax: the flat tax rate on taxable income is 24% for any amount.
Regional Tax on Business Activities (IRAP)
Regional tax on business activities, or Imposta regionale sulle attività produttive (IRAP), is a local tax applied on the value of the production generated in each taxable period by individuals and companies carrying out business activities in a given Italian region. Non-Italian resident corporations are subject to IRAP only on the production generated through Italian permanent establishments.
Value Added Tax (VAT)
The Italian value-added tax (VAT) system conforms fully to the Sixth EEC VAT directive. The system ensures VAT to be borne by the ultimate consumer only and, at the intermediate level, input VAT to be deducted by the suppliers of goods and of services. VAT is charged on any supply or service deemed to be made or rendered within the Italian territory, except the duty-free municipalities of Livigno and Campione d’Italia. The ordinary VAT rate is set at 22%; reduced rates set at 4% and 10% are for some food products or essential services.
Transfer tax, that is Imposta di registro, is due on specific contracts formed in Italy and contracts formed abroad about transfers or leases of business concerns or immovable properties located in Italy. The taxable base and rates depend on the nature of the contracts and on the status of the parties.
When transferring immovable properties, cadastral and mortgage taxes also apply. These are due for formal transcription in the public registers; tax rates set respectively at 1% and 2%, applied on the same base of the transfer tax.
Transfer tax, cadastral and mortgage taxes are imposed as a lump sum of €200 on transfers of immovable properties subject to VAT. Alternatively, transfer tax rates may vary from 3% up to 15% according to the type of real property.
Municipal Tax on Immovable Property (IMU)
Any owner of real properties located in Italy must pay every year the municipal tax on immovable property, or Imposta municipale sugli Immobili (IMU). The taxable base is built from the sum of the estimated value for the type and class of immovable property, as determined by the Cadastral Office and a given multiplier. The municipality where the immovable property is located sets the tax rate from 0.04% for the main house to 0.076% for other immovable properties. IMU is paid both by residents and non-residents.
Inheritance and Gift Tax
Inheritance and gift tax were abolished at the end of 2001, but reintroduced at the beginning of 2007. Subsequently, only gifts made to persons not having a certain degree of relationship with the donor in that period are only subject to other indirect taxes like transfer tax, cadastral, and mortgage taxes. From January 1st 2007, inheritance and gift tax is due with the rate of 4% of the value among fathers and sons, of 6% among other members of the family, of 8% among other people.
There are three main withholding taxes applicable at source on certain payments: dividend withholding tax, withholding tax on interest, and withholding tax on royalties.
Dividend withholding tax
In principles, dividends paid to Italian resident individuals from non-substantial participations in Italian corporations are subject to a 26% final withholding tax. Dividends from substantial participations in Italian corporations are not subject to withholding tax.
Dividends paid to Italian resident corporations, or to Italian permanent establishment of non-resident corporations, are not subject to withholding tax.
Dividends paid to non-resident corporations without, or not through, an Italian permanent establishment, from substantial and non-substantial participations in Italian corporations are subject to a 27% final withholding tax. The withholding tax rate is reduced to 12.5% for dividends from saving shares.
The withholding tax is not due, in line with the EU Parent-Subsidiary Directive, for dividends paid by Italian resident corporations to its EU parent company. The benefit is subject the parent’s current ownership dating back at least one year, of no less than 25% of the Italian subsidiary’s share capital.
Withholding tax on interests
Interest from bank accounts and deposits, certain bonds, and similar securities are subject to withholding tax at rates of 26%; interest and other profits from certain bonds issued by the State, by banks and by Italian-listed corporations are subject to a 12.5% substitute tax . These taxes, if any, on interest received by Italian residents generally consist of an advanced payment of income tax due by the recipients. As such, gross interest must be included in the recipient’s tax base and the withholding tax deducted from the aggregate taxable income.
If non-Italian residents receive interest from bank accounts and deposits through an Italian permanent establishment, no withholding tax is due.
If Italian resident corporations receive interest from such bonds no substitute tax is due. If residents in countries listed in the so-called “White List” (countries with adequate exchanges of information with the Italian tax authorities) receive interest from such bonds, not through an Italian permanent establishment, no substitute tax is due.
Interest from loans received by residents other than business entities is subject to a 12.5% advance withholding tax. If non-residents receive interest from loans, not through an Italian permanent establishment, the withholding tax is a final payment of tax. The withholding tax rate is set at 27% for residents in the countries listed in the so-called “Black List” (countries granting privileged tax regimes).
Withholding tax on royalties
Royalties paid to Italian resident corporations, or to Italian permanent establishments of non-resident corporations, are not subject to withholding tax. Royalty payments to non-Italian residents are subject to a 30% final withholding tax; by certain conditions, tax base may receive a 30% flat deduction.
Taxation of Corporations
TAXATION OF RESIDENT CORPORATIONS
Corporate Income Tax (IRES)
The most important tax on companies operating within the Italian territory is Corporate Income Tax, or Imposta sul reddito delle società (IRES). Resident corporations, including joint stock companies, or società per azioni (Spa), limited liability companies, or società a responsabilità limitata (Srl) and partnerships limited by shares, or società in accomandita per azioni (Sapa), are subject to IRES on their worldwide income; non-resident entities are subject to IRES only on the part of their income originated in Italy.
Resident corporations also include foreign jurisdiction companies which, for most of the taxable period, have their statutory office, place of effective management, or main object of their business in Italy.
For IRES purposes, the taxable period coincides with the company’s financial year, as provided by the law or by the articles of association. Otherwise, the taxable period coincides with the calendar year.
IRES is not a progressive tax and the provided flat rate for the year 2017 set at 24%.
Italy’s Consolidated Text Code (TUIR / CTC) provides the rules for calculating the tax base. Every item of income earned by companies is considered as commercial income regardless of its nature.
Taxable income consists of all net income earned in the course of the financial year, as resulting from the profit and loss account in the balance sheet, subjected to some adjustments according to the specific tax law. Income subjected to final withholding taxes is excluded from the taxable income.
Generally, positive and negative items of income are calculated on the basis of the accrual principle, but there are some exceptions, like dividends, which are taxable on a cash basis principle.
Positive items include ordinary business receipts, extraordinary items of profit and capital gains.
According to the Participation Exemption rule (PEX), 95% of capital gains earned by Italian resident corporations upon disposal of qualified participations in Italian and foreign corporations or partnerships are exempted from IRES. Such qualified participations must satisfy the following requirements:
1) Uninterrupted holding period as from the first day of the eighteenth month preceding that in which the disposal takes place, considering disposal of the last acquired shares;
2) Recording as financial assets in the first balance sheet closed during the holding period;
3) Tax residence of the participated company in Italy, or in a state or territory not blacklisted by ministerial decree as a tax haven, unless there is prior evidence that the company did not take up any preferential tax regimes there;
4) The carrying out of an actual commercial activity by the participated company.
Dividends received by Italian resident corporations are excluded from the IRES taxable base up to 95% of their amount if the dividends are paid by Italian resident corporations and Corporations located in a state or territory not blacklisted by ministerial decree as a “tax haven”, unless there is advance evidence that the company did not take up any preferential tax regimes there.
About negative items, costs and expenses are deductible from the tax base if they refer to activities or goods contributing to the production of taxable income, and they are put in the profit and loss account.
Withholding taxes on profits received by Italian resident corporations consist of the advanced payment of income tax due by the recipients. You have to include profits subjected to withholding taxes in the recipient’s taxable base, and deduct the withholding taxes from gross income tax.
Profits received by Italian resident corporations are subject to withholding taxes in very few cases, that are, for example, interest from bank accounts and deposits, interest from certain bonds and similar securities.
Foreign tax credit
If a resident corporation get taxable foreign source income, foreign taxes definitely paid abroad on such foreign source income are creditable from IRES. Italian domestic tax rules do not permit foreign tax credit if the foreign source income has not been taxed abroad. The foreign tax credit consists in the lower between the amount of taxes paid abroad and an amount equal to that part of the Italian tax, which is proportional to the ratio between foreign-source income and gross income.
Some tax treaties signed by the Italian government with other countries include a so-called matching credit clause, according to which, Italian residents can benefit from foreign tax credit irrespective of the circumstance that the foreign source income has been subjected to taxation in the State of source at a lower rate or has been exempted from taxation according to favourable domestic provisions.
The regional tax on business activities, or Imposta regionale sulle attività produttive (IRAP), is a local tax due in each taxable period on the value of production generated by Italian resident corporations and professionals.
For industrial and commercial companies positive items of income include all the receipts except for certain capital gains, extraordinary items of income and financial proceeds like dividends or interests. Negative items of income include all cost and expenses incurred by the company except for some labor costs, interest payments, capital losses and extraordinary negative items.
The positive and negative items of the value of production are determined according to the same rules applicable to IRES, but remember that IRAP is not deductible from IRES taxable basis.
For industrial and commercial corporations, the ordinary tax rate is 3.9%; every region may increase the tax rate by up to 1%.
TAXATION OF NON-RESIDENT CORPORATIONS
Corporate Income Tax (IRES)
Corporate income tax is due on the revenues generated by non-Italian resident corporations through an Italian permanent establishment.
Calculating the income of non-resident corporations with a permanent establishment in Italy follows the same rules applicable to Italian resident corporations, so these companies have to drain an annual balance sheet according to the Italian law and present a declaration of revenue, the so-called “Modello Unico”, of course only about their business within the Italian territory.
For the permanent establishments of foreign corporations, however, the TUIR / CTC provides for a limited force of attraction. Other items of income sourced in Italy are, regardless, attributed and included in the aggregate income of the Italian permanent establishment, for gains and losses on assets destined for the business activity engaged within the territory of Italy, for capital gains on disposals of participations in Italian resident corporations and partnerships and for profits distributed by Italian resident corporations.
The limited force of attraction does not apply if the foreign corporations are resident in countries which concluded a tax treaty with the Italian Republic. Therefore, income attributable to the permanent establishment is limited to income actually derived through the permanent establishment.
Regional Tax on Business (IRAP)
The regional tax on business activities, or Imposta regionale sulle attività produttive (IRAP) is applicable during each taxable period on the value of production generated. Non-Italian resident corporations are subject to IRAP only on the value of the production generated through Italian permanent establishments. You have to calculate the value of the production according to the same rules applicable to Italian resident corporations.
Transfer pricing rules talk about determining prices in cross-border transactions between related parties.
According to the Italian tax law, items of income of Italian resident corporations from transactions entered into with non-resident related parties have to be evaluated on the basis of the so-called “normal value”, which consists in the price paid for goods and services of the same nature under free market conditions, and at the same stage of commerce, like fair market value.
As from the 2004 tax year, taxpayers, according to the “international tax ruling”, can agree in advance with the tax authorities appropriate transfer pricing methodologies.
The advance ruling is good for a maximum of three years and it’s binding for the tax authorities unless the conditions on which the ruling is granted change in due course.
CONTROLLED FOREIGN COMPANY RULES
To fight against unjustified tax benefits joined by companies located in certain low tax jurisdictions and controlled by Italian holding corporations, the Italian tax law includes a comprehensive set of rules on the so-called Control Foreign Companies (CFC).
These rules, under certain conditions like percentage of shareholding in the foreign company or black listed jurisdiction, income earned by the CFC is attributed to the Italian shareholder proportionally to the participation held. In particular, with or without an actual dividend distribution, income earned by the CFCs is included in the taxable income of the parent and taxable accordingly.
Sometimes CFC rules do not apply if the Italian parent proves that the CFC actually carries out an industrial or commercial activity in its home country; or from holding the participation in the CFC, income does not take the benefit of the preferential tax regimes granted by the foreign tax jurisdiction.
To join the safe-arbor rules, the Italian holding has to apply for an advance ruling with the tax authorities.
Taxation of Individuals
According to the TUIR / CTC (Consolidated Tax Code), Italian resident individuals are subject to IRPEF (Personal Income Tax)on their worldwide income, regardless their nationality; non-Italian resident individuals are subject to IRPEF only on certain items of income earned in Italy.
For individual taxpayers, the taxable period is considered the calendar year.
Individuals are considered Italian residents if, for the greater part of the taxable period, they are registered in the Italian civil registry or they usually live in Italy, that is they have their residence or domicile in Italy, as defined by the civil law.
According to the Italian Civil Code, residence (residenza) is “the place of habitual abode”; “domicile” is the place where an individual has his main center of interests or business.
An individual has to pay IRPEF if, during the taxable period, earned an income falling within one or more of the following categories:
1. Income from real estate;
2. Income from capital;
3. Income from employment;
4. Income from independent work;
5. Business income;
6. Other income, like capital gains from disposal of shares, securities, foreign real estate income for residents, etc.
Every category of income follows different rules for determining the amount of taxable income. The overall taxable income is made of the sum of the net income of each category. Exempt income and income subject to final withholding taxes, like interest from bonds or dividends, fall outside the computation of the overall taxable income.
About employment income, taxable revenue includes any compensation, including gifts, received during the taxable period in connection with the employment activity.
Under certain conditions, some fringe benefits for employees are not considered taxable income: for example stock options, stock granting, canteen food, transportation between home and work, education and training provided by the employer to benefit all employees, recreation, health, and religious purposes and social assistance fall into this category.
IRPEF is a progressive tax, whose rates applicable to aggregate income are actually the following:
|Taxable income||Tax rate|
|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%|
|Over € 75,000||43 %|
The above indicated rates are applied to the net overall taxable income, calculated after deducting certain personal expenses and other allowances like specific medical expenses, checks for dependent spouse and helth insurance premiums tax burden (the so-called “deduzioni”). The result is the Gross IRPEF.
Net IRE is calculated after subtracting additional certain tax deductions from gross IRPEF, like interest on loans for dwelling house, specific medical expenses, family deductions etc. (the so-called “detrazioni”).