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Italy

Italy is composed of 20 administrative regions, with Rome as the capital. It has a population of about 60 million, and its territory covers about 301,000 square kilometres. The official language of Italy is Italian, and the currency is the euro (EUR).

VAT
23%

CIT
24%

SSC
40%

CIT = Corporate Income Tax 

SSC = Social Security Contribution  (Employee + Employer)

Business Economics

Italy has a diversified economy, which is divided into a developed industrial north, featuring many private companies, and a less-developed south. The economy is driven in large part by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises, many of which are family owned. Due to its archaeological and artistic heritage, tourism is one of the most important sectors.

Italy is a founding member of the European Economic Community (EEC) and North Atlantic Treaty Organization (NATO). It is also a member state of the United Nations (UN), World Trade Organization (WTO), and Organisation for Economic Co-operation and Development (OECD).

Image by Luca Bravo

Taxation

Tax management is entrusted to the Revenue and Tax Agency.

Taxation of individuals

The main income tax levied on individuals is the personal income tax (PIT), also known as the Imposta sui redditi delle persone fisiche (IRPEF).

In Italy, the individual is subject to the following income taxes:

  • National income tax.

  • Regional income tax.

  • Municipal income tax.

The tax liability shall be computed on a progressive rate, and the applicable tax rates are shown below. 

The scope of taxation in Italy

The tax status of an individual is the starting point for applying the correct taxation in Italy. According to the Italian tax law, both Italian residents and non-resident individuals are subject to taxation in Italy, but on a different basis.

Tax resident individuals

Tax resident individuals are liable to the Italian personal (or national) income taxes on their income wherever produced (under the so called ‘worldwide principle’). Therefore, tax residents are also subject to taxation on foreign incomes (e.g. deriving from real estate owned outside of Italy, foreign dividends and interest, foreign compensation and director’s fees, and other foreign income).

Tax resident individuals are also subject to 'wealth tax' on real estate and on financial investments owned outside of Italy.

Tax resident individuals are required to declare all their foreign investments (financial and not) for monitoring purposes through the Italian tax return.

Tax regime for neo-domiciled individuals

Individuals who transfer their tax residency (see the Residence section for more information) from abroad to Italymay elect for the application of a flat substitutive tax, at a fixed amount of 100,000 euros (EUR) (hereinafter the ‘neo-domiciled tax regime’).

The mentioned tax regime will also apply on:

  • the income tax on foreign investments (foreign interests, dividends, and capital gains) with the exception of capital gains on qualified participation earned in the first five years

  • the wealth tax on real estate and financial investments owned out of Italy, and

  • financial monitoring obligations through the Italian tax return (meaning that the individual is not required to declare one's foreign investments into the Italian tax return).

In addition to the taxpayer, each family member could be subject to a flat forfeiture substitutive tax on non-Italian sourced income at a lower fixed amount of EUR 25,000.

In order to be eligible for this tax regime it is necessary to carry out the option through the annual Italian tax return. In any case, it is advisable to apply for an advance ruling from the Italian tax authorities.

To elect such treatment, the individual must meet several requirements, including previous non-Italian tax residency for at least nine years over ten fiscal years preceding the transfer.

The mentioned tax regime is not cumulated with the tax regime for inbound workers 

Non-tax resident individuals

Tax non-resident individuals are subject to PIT (IRPEF) only on ‘income produced’ in Italy (i.e. employment income related to the work activity performed in Italy). Therefore, the foreign incomes are not relevant to the purposes of taxation in Italy.

National income tax

National income tax for fiscal year 2024 is levied at progressive tax rate on all income reported below.



 

 

 

Flat tax on 'productivity' bonus

Productivity bonus consists of a variable remuneration paid to an employee in light of the improvement of the quality of production and/or of the company’s productivity, as long as it is applied for the whole eligible workforce (or homogeneous category of them) grounded on objective, fair, predetermined and materially valuable performing criteria, generally named ‘KPIs’ (e.g. savings related to electricity, growth of revenue, profits increase, decrease of the production waste; improvement of the delivery time; implementation of the smart working scheme).

The productivity bonus cannot exceed EUR 3,000 per year.

Such bonus is subject to a substitutive taxation equal to 10% as PIT, regional, and municipal withholding, but it is not exempt from social security withholding borne by the employer and employee. The Budget Law for FY 2024 has reduced, confirming what was already provided with the Budget Law for FY 2023, the applicable tax rate to 5%.

With regard to eligibility, employees who have received an annual gross retribution during the previous year (including variable compensation scheme potentially provided) exceeding EUR 80,000 are not entitled to benefit from the aforesaid tax discount.

In order to allow for the application of the aforementioned measures, the employer shall mandatorily sign a collective agreement with unions/work councils. In case of lack of unions/work councils, it is possible to apply a territorial collective agreement (if existing) signed by the most representative unions (if any) in the territory of reference.

Regional income tax

Regional income tax depends on the region of residence. The regional income tax rate ranges from 1.23% to 3.33%.

Municipal income tax

Municipal income tax depends on the municipality of residence. The municipal income tax rate ranges from 0% to 0.9%. Municipalities can establish progressive tax rates applicable to the national income bracket.

Social contributions

The social security contribution mainly depends on the employment relationship.

Employment relationship (staff)

Social security contributions are due by both the employee and the employer.

The Italian employer, in order to pay social security contributions for employees, must register with the Italian Social Security Administration (Instituto Nazionale Previdenza Sociale or INPS).

The total social security rate is around 40% of the employee's gross compensation (the rate depends on the work-activity performed by the company, the number of employees of the company, the employee's position), and is shared as follows:

  • Employer's charge is around 30%.

  • Employee's charge is around 10%.

In general, only around 33% of the total rate is paid into the National Pension Scheme, while the remaining part of the contribution is paid to the following Social Security funds:

  • Unemployment fund.

  • Sickness fund (not applicable for executives).

  • Maternity fund.

  • Temporary unemployment compensation fund (ordinary and extraordinary, not applicable to executives).

  • Social mobility fund (not applicable to executives).

  • Other minor funds.

The social security contributions for employees who registered with INPS after 1 January 1996 without a previous social security enrollment in the mandatory scheme or, under certain conditions, in other EU countries are due up to a maximum amount of EUR 119,650 for the year 2024. 

Over the cap, only minor contributions (about 5%) are due only by the employer.

Employment relationship (executive)

Social security contributions due from executives (i.e. dirigenti) for the year are summarised below.

A commercial executive is required to make the following contributions:

  • INPS (national mandatory pension fund): 9.19% on the income up to a ceiling of EUR 55,008 of income and 10.19% on the excess above the maximum amount.

  • Fondo Mario Negri (complementary pension fund): 1% is due on a notional annual remuneration of EUR 59,224.54; and EUR 130.00 per annum as professional training charges.

  • Fondo Mario Besusso or FASDAC (medical care fund): 1.87% is due on a notional annual remuneration of EUR 45,940.

  • Fondo Pastore (supplementary pension fund): Entity consists of a combination of insurance and investment (not compulsory) and is required to contribute EUR 464.81 per annum.

 An industrial executive is required to make the following contributions:

  • INPS: 9.19% on income up to a ceiling of EUR 55,008 of income and 10.19% on the excess above the maximum amount.

  • Fondo Assistenza Sanitaria Industria or FASI (medical care fund): A flat contribution of EUR 1,120.

  • Fondo Previdenza Dirigenti Aziende industriali or PREVINDAI (additional pension fund): 4%, up to a maximum annual income of EUR 180,000.

Self-employment relationship

Self-employed individuals who are not value-added tax (VAT) number holders and are not covered by a mandatory private pension fund must be registered with INPS in a ‘separate social security regime’ (Gestione Separata Inps), instituted with Law n. 335/95.

The separate social security regime provides for three different rates:

  • Individuals enrolled in other mandatory contribution regimes: Rate is equal to 24%.

  • Individuals with a VAT number enrolled in the exclusive way into the separate social security regime (Gestione separata INPS): Rate is equal to 26.07% for FY 2024 (26.23% for FY 2023).

  • All other individuals enrolled in the exclusive way into the separate social security regime (Gestione separata INPS):

    • For who is provided DIS-COLL additional contribution: Rate is equal to 35.03%.

    • For who is not provided DIS-COLL additional contribution: Rate is equal to 33.72%.

All the percentages are applied up to the limit established by the law for the year 2024 equal to EUR 119,650.

The percentages due by the self-employed individuals without VAT are:

  • two-thirds on charge of the company, and

  • one-third on charge of the collaborators.

The payment of the contribution is effected wholly by the company.

For self-employed individuals who are VAT number holders, and who are not covered by a mandatory private pension fund, the percentage is wholly charged to the individuals, and the payment of the contributions follows the same deadline applied for taxes. Individuals, in this case, can charge an amount equal to 4% of the compensation to the customer/client resulting from the invoice for services rendered..

The Budget Law for FY 2023 introduced a specific provision, valid only for the year 2023, for the individuals who earn self-employment or business incomes.

This provision, so-called Incremental flat tax (Tassa piatta incrementale), provides, under certain conditions, a flat tax of 15% to be applied to the portion of income's increases calculated with respect to the three previous years.

Flat tax scheme for self-employees

The flat tax scheme (Regime forfettario) has been introduced by the Law 190/2014. As a general rule, it provides that the taxable income is determined on a lump-sum basis, a flat tax rate of 15%, the exclusion of VAT, IRAP, and ISA and without the application of withholding taxes (WHTs).

The eligibility for the flat tax scheme is subject to the respect of certain criteria and limits.

The Budget Law for FY 2023 increased the annual income threshold to be eligible for the application of the flat tax scheme up to EUR 85,000 (the limit was EUR 65,000 previously). These provisions remain unchanged for FY 2024.

Collaborators/directors relationship

Generally, collaborators and directors (unless an exemption applies) also have to be enrolled in a ‘separate social security regime’ with INPS.

The social security regime is the same as discussed under the self-employment relationship above for individuals who are not VAT number holders.

Taxation of Legal Persons

Applicable rates

Italian corporate entities are subject to a corporate income tax, known as imposta sul reddito sulle società or IRES, and to a regional production tax, known as imposta regionale sulle attività produttive or IRAP.

The standard rates are as follows:

  • 24% for IRES.

  • 3.9% for IRAP.

Up to FY 2016, the IRES rate was 27.5%. Specific rules apply for bank and financial entities.

Different IRAP rates are applicable for certain entities (i.e. banks and financial entities, insurance corporations, entities with a determined governmental exclusive right to provide services).

Regions have the power to slightly increase or decrease IRAP rates.

General rules

IRES

The IRES taxable base is determined according to the worldwide taxation principle, which states that, regardless of the location/jurisdiction where the income is produced, to the extent that the income is legally attributable to an Italian resident entity, the income is taxed in Italy. IRES is charged on the total net income reported in the financial statements of the company as adjusted for specific tax rules. Non-resident companies are taxed only on Italian-source income.

IRAP

There are different methods of computation for the IRAP taxable base, depending on the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, cannot be taken into account when determining the IRAP taxable base.

For sales and manufacturing companies, the IRAP taxable base is broadly represented by the company’s gross margin in its financial statements. In addition to the non-deductible items mentioned above, interest income and expense and provisions for bad debts are excluded for the purposes of the IRAP taxable base.

For banks, the IRAP taxable base is broadly defined as follows:

  • Intermediation margin reduced by 50% of dividends.

  • 90% of amortisation costs relating to fixed tangible and intangible assets.

  • 90% of other administrative expenses.

  • Net value of adjustments and reassessments for bad debts.

Special rules apply to financial institutions, other than banks, and holding companies.

IRAP is levied on a regional basis, and regions are allowed to increase or decrease the standard IRAP rate up to 0.92%. Companies with facilities in different regions must allocate their overall taxable base to the different regions on the basis of the employment costs of personnel located at the various sites. Facilities become relevant to the calculation of IRAP if they have been established for more than three months. Italian companies with permanent establishments (PEs) abroad, as well as shipping companies qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on the income earned through these PEs.

The deduction of labour costs for IRAP purposes depends on the type of hiring contract. In particular:

  • Full deduction for costs related to employees hired with an open-ended contract.

  • Deduction limited to contributions for compulsory insurance against accidents (i.e. Istituto Nazionale Infortuni sul Lavoro or INAIL) for temporary employees.


Value Added Tax - VAT

Italian VAT (Imposta sul Valore Aggiunto) applies to the supply of goods and services carried out in Italy by entrepreneurs, professionals, or artists and on importations carried out by anyone. Intra-Community acquisitions are also subject to VAT under certain situations.

The Italian standard VAT rate is 22%. Reduced rates are provided for specifically listed supplies of goods and services, such as:

  • 4% for listed food, drinks, and agricultural products, and e-books/e-periodicals that meet certain requirements.

  • 5% for certain health services, for the sale of food herbs, for certain transport services on seas, lakes, and rivers, for district heating services.

  • 10% for electric power supplies for listed uses, listed drugs, pellets and for specific products regarding childhood (e.g. milk powder).

Intra-Community supplies and exports are exempt from VAT under certain conditions.

Under certain conditions, transactions with taxable persons who usually carry out export of goods are exempt from VAT with right to deduct. The exemption with right to deduction is subject to the following procedures:

  • The usual exporter is required to submit via electronic means the declaration of intent, which can concern more than one transaction, to the Italian tax authorities, who will issue a receipt with a specific protocol number.

  • The supplier is required to check, on the Italian tax authorities’ website or in its own Tax Box (Cassetto Fiscale), whether the letter of intent has been duly submitted. After checking the above, the protocol number of the receipt has to be quoted on each invoice issued without application of VAT towards the usual exporter. With reference to the applicable penalties in relation to the supplier who does not take care to check whether the letter of intent has been duly submitted, a substantial penalty ranging from 100% to 200% of the VAT amount applies.

  • In case of import, the importer of goods has to quote on the customs declaration the details of the protocol number of the receipt.

The content of the declarations of intent is defined by Act no. 96911/2020 of the Italian tax authorities.

The Italian tax authorities will carry out specific risk analysis and substantial controls with the aim to prevent the release of fake declarations of intent and to invalidate those fake declarations already issued.

In particular:

  • if, as a result of the above-mentioned analyses, the Italian tax authorities find out that one taxable person does not meet the conditions to issue a 'declaration of intent', the latter will be prevented from the possibility of issuing new declarations of intent via electronic means to the Italian tax authorities, and

  • it will no longer be allowed for the supplier to issue an invoice ('exempt from VAT according to article 8, paragraph 1, let. c, Presidential Decree no. 633/1972' as VAT treatment) via the SDI ('Sistema di Interscambio') with the indication of the protocol number of a declaration of intent invalidated by the Italian tax authorities. Starting from 1 February 2024, a specific control will be introduced in SDI (using the error code 477) which determines the rejection of the electronically issued invoice if the invalidity of the declaration of intent is detected in the "other management data" field.

In case an irregularity is detected, the Italian tax authorities could also invalidate the declaration of intent sent by the usual exporter.

Specific supplies of goods and services expressly listed in the law are exempt from VAT (e.g. hospital and medical care, education, insurance services, specific financial services, supply/leasing of certain immovable property cosmetic surgery healthcare services only on condition that the therapeutic purposes are demonstrated by a specific medical certificate).

Input VAT on purchases of goods and services related to business activity generally is allowed for recovery. Special limitations apply in relation to specific items (e.g. cars, entertainment expenses) and to companies carrying out both taxable transactions and transactions exempt from VAT with no right to deduct.

The filing deadline for the annual VAT return is 30 April of the following year.

Electronic invoicing obligations

Starting from 1 January 2019, a mandatory electronic invoicing obligation is in place for the supplies of goods or services carried out between persons that are resident or established in Italy. This obligation does not apply for non-established taxable persons, even if registered in Italy through direct VAT identification or a fiscal representative.

Electronic invoices should be:

  • converted into .XML format, in accordance with technical specifications referred to format currently used to send electronic invoices towards the public administration

  • signed with a qualified or digital signature (this is mandatory for B2G invoices and recommended for B2B and B2C invoices), and

  • sent to the counterpart through the Italian tax authorities’ SDI.

Electronic invoicing is also mandatory for business-to-consumer (B2C) transactions, where the supplier has the obligation to issue an invoice, with certain different specifications.

For the transmission of electronic invoices, the taxpayers, upon agreements between the parties, can rely on qualified intermediaries. However, the supplier will still be responsible for the issuance of the invoice in front of the Italian tax authorities.

On an experimental basis, in relation to the transactions carried out from 1 July 2021, the Italian tax authorities should made available the draft of the following documents:

  • Sales VAT ledger.

  • Purchases VAT ledger.

  • Communications of periodical VAT settlements.

  • Draft of the annual VAT return (from 1 January 2022).

At the time being, the Italian tax authorities have limited the above to Italian established taxable persons who carry out VAT payments on a quarterly basis and to:

  • taxpayers who pay the VAT on a quarterly basis as provided by the Article 74(4) of the d.P.R. 633/1972;

  • tax payers declared bankrupt in the reference year;

  • taxpayers who apply specific methods of determining the VAT allowed for deduction, such as agricultural producers or those who carry out related agricultural activities, referred to in Articles 34 and 34-bis of the d.P.R. 633/1972, agrotourism companies or associations operating in agriculture, referred to in Law of 30 December 1991 no. 413 or the wine tourism companies, referred to in Article 1, paragraphs 502 to 505 of Law no. 205 of 27 December 2017, or the companies referred to in Article 1, paragraphs 513 and 514 of Law no. 160 of 27 December 2019.

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OUR PRESENCE IN ITALY

Our Milan office can count on the support of a firm of Accountants and Auditors founded in 2000 consisting of 3 Partner as well as a staff of 10 people who work daily in the areas of auditing, payroll processing, accounting, tax assistance and compliance.  

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