1. Types of Taxes in Italy
The Italian tax system is divided into direct taxes and indirect taxes. Each of these taxes serves distinct purposes and applies to different sectors of the economy. The legal framework for taxation in Italy is extensive, with many laws, regulations, and decrees establishing specific rules and procedures.
1.1 Direct Taxes
Direct taxes are levied directly on income and wealth. These taxes are primarily governed by the Italian Tax Code (Codice Tributario) and other relevant legislation. The main direct taxes in Italy include:
Personal Income Tax (IRPEF)
The Imposta sul Reddito delle Persone Fisiche (IRPEF) is the personal income tax in Italy. It is a progressive tax, meaning that the rate increases with income. The IRPEF rates are as follows (as of 2024):
Up to €15,000: 23%
€15,001 to €28,000: 27%
€28,001 to €55,000: 38%
€55,001 to €75,000: 41%
Over €75,000: 43%
IRPEF applies to all types of income, including employment income, self-employment income, pensions, and other forms of income such as investment earnings and rental income. The calculation of taxable income takes into account various deductions (spese deducibili) and tax credits (detrazioni fiscali) such as for healthcare expenses, dependents, and mortgage interest.
The legal basis for IRPEF is found in Legislative Decree No. 917 of 22 December 1986, which is the Italian Income Tax Code (Testo Unico delle Imposte sui Redditi).
Corporate Income Tax (IRES)
The Imposta sul Reddito delle Società (IRES) is the corporate income tax, applied to the income of Italian companies. As of 2024, the standard IRES rate is 24%. However, companies may also be subject to additional taxes based on their activities and geographical location, such as the Regional Tax on Productive Activities (IRAP), which is applied to companies based in a specific region.
IRES is regulated by Legislative Decree No. 917 of 22 December 1986 (Art. 73-99), which provides guidelines on the taxation of corporate profits.
Wealth and Inheritance Taxes
Italy also levies taxes on wealth, including property and inheritance. The Imposta sulle Successioni e Donazioni (Inheritance and Donations Tax) applies to the transfer of assets upon death or as gifts. The rates range from 4% to 8%, depending on the relationship between the deceased and the beneficiary, as well as the value of the assets being transferred.
Local Taxes
In addition to national taxes, Italy has several local taxes that vary by municipality. These include the Municipal Tax on Real Estate (IMU), which is paid by owners of real estate properties in Italy. IMU is governed by Legislative Decree No. 23/2011 and is calculated based on the cadastral value of the property.
1.2 Indirect Taxes
Indirect taxes are applied to goods and services rather than income. The most significant indirect tax in Italy is the Value Added Tax (VAT) or Imposta sul Valore Aggiunto (IVA).
Value Added Tax (IVA)
IVA is applied to almost all goods and services in Italy, with a standard rate of 22%. However, reduced rates of 10% and 4% apply to certain products, such as food, medical supplies, and books. The VAT system in Italy is based on European Union regulations and follows the EU's VAT Directive (Council Directive 2006/112/EC).
Other indirect taxes in Italy include excise duties on tobacco, alcohol, and fuels, as well as taxes on gambling and certain luxury goods.
2. Tax Residency in Italy
One of the key aspects of the Italian tax system is the concept of tax residency. In Italy, individuals are considered tax residents if they meet one of the following conditions:
They spend more than 183 days in Italy during the tax year.
They have their principal place of residence in Italy.
They have their center of economic interests in Italy.
Law No. 675/1973 and the Italian Income Tax Code (Art. 2) establish the rules for tax residency. Tax residents are required to pay taxes on their worldwide income, whereas non-residents are only subject to tax on income sourced in Italy. This distinction is particularly important for expatriates and foreign nationals.
2.1 Tax Regime for Foreign Nationals (Expats)
Italy has introduced various favorable tax regimes to attract foreign nationals and retirees to relocate to the country. For instance, the Flat Tax Regime for New Residents (introduced in 2017) allows foreign nationals who establish residency in Italy to benefit from a flat tax rate of 7% on income earned outside of Italy, for a period of up to 15 years. This tax regime is governed by Law No. 232/2016 and is designed to encourage wealthy individuals to move to Italy.
2.2 The “Non-Dom” Regime for High Net-Worth Individuals
In addition to the flat tax regime, Italy offers a special tax regime for high-net-worth individuals under Decree Law No. 135/2018. This law allows foreign nationals who establish tax residency in Italy to pay a fixed annual tax of €100,000 on their worldwide income, regardless of the amount of income earned. This regime is typically used by expatriates with significant foreign income, such as investments or pensions.
3. Social Security Contributions
In Italy, social security is primarily financed through payroll taxes, which are contributions made by both employers and employees. These contributions fund pensions, healthcare, unemployment benefits, and other social services.
The legal basis for social security contributions is found in the Legislative Decree No. 151/2001 and the Italian Social Security Code (Codice della Previdenza Sociale).
For employees, the contribution rates are as follows:
Employer contribution: Approximately 30% of the employee's salary
Employee contribution: Approximately 9-10% of salary
Self-employed individuals are required to make their own social security contributions based on their income, and these contributions vary depending on the type of activity and the individual’s earnings.
3.1 Healthcare Contributions
Italy has a public healthcare system funded through social security contributions. Healthcare services are generally free or low-cost for residents, and the contributions for healthcare are typically included in the overall social security contributions deducted from employees' wages.
3.2 Pensions
The Italian pension system is based on a pay-as-you-go model, where current workers contribute to the pension funds of retirees. The amount of pension paid out is linked to the contributions made during an individual’s working life.
4. Tax Administration and Compliance
Italy's Revenue Agency (Agenzia delle Entrate) is the central body responsible for tax collection and enforcement. It oversees the filing of tax returns, the payment of taxes, and the implementation of audits.
Italian tax law requires individuals and companies to file annual tax returns. The key regulations for filing tax returns are laid out in Law No. 675/1973 and Legislative Decree No. 241/1997. Taxpayers are expected to file tax returns by November 30 each year (or earlier, if extensions are granted). Tax withholding is also a standard practice for employees, with employers deducting taxes at source before paying wages.
For businesses, VAT returns are typically filed on a quarterly or annual basis, depending on the company’s size and turnover. The Agenzia delle Entrate provides online platforms for tax filing and payment, making the process more streamlined for both individuals and businesses.
5. Tax Incentives and Deductions
Italy offers several tax incentives and deductions designed to support businesses and individuals. These incentives aim to encourage investment, innovation, and social welfare.
Research and Development (R&D) Tax Credits: Italy offers significant tax credits for businesses investing in research and development. The National Plan for Industry 4.0 (Law No. 232/2016) promotes tax breaks for businesses investing in innovative technologies.
Energy Efficiency and Green Tax Credits: Businesses and individuals may be eligible for tax credits if they invest in energy-saving or environmentally friendly projects.
Deductions for Family and Personal Expenses: Taxpayers can deduct a wide range of expenses from their taxable income, including medical expenses, educational costs, and expenses related to dependents.
6. Conclusion
The Italian tax system is complex but highly regulated, with a clear legal framework that ensures both fairness and efficiency. It provides a balance between taxation on income, wealth, and consumption, while offering incentives for businesses and individuals to invest in the economy. Understanding the system’s structure, regulations, and available incentives is crucial for anyone living in or doing business in Italy, especially foreign nationals and expatriates.
By referencing key legislation such as Legislative Decree No. 917/1986, Law No. 232/2016, and Decree Law No. 135/2018, it becomes clear that Italy continues to refine its tax policies to remain competitive while fostering social welfare.
The Flat-Rate Tax Regime (Law 190/2014)
The flat-rate tax regime is a simplified tax system for individuals engaged in business, art, or professional activities, introduced by Law 190/2014 (the 2015 Stability Law) and later amended. Its primary goal is to simplify tax management for small businesses and professionals, reduce bureaucratic requirements, and encourage the formalization of informal economic activities.
Main Features of the Flat-Rate Tax Regime
Eligible Taxpayers The flat-rate regime can be adopted by individuals who carry out business, art, or professional activities, provided they meet certain requirements. The main ones are:
Annual Revenue Limit: The revenue or compensation must not exceed €85,000 for professionals (or service-based businesses) and €100,000 for trade-related businesses (e.g., retail).
Employee and Collaborator Expenses: Costs for employees or independent collaborators must not exceed €20,000 per year.
Other Conditions: There should be no other particular fiscal conditions (such as being registered in categories excluded from the flat-rate regime).
Simplified Tax Treatment Taxpayers under the flat-rate regime are exempt from VAT, meaning they don't charge or pay VAT on invoices. They are also not required to file annual VAT returns or periodic VAT payments.
Substitute Tax: Instead of ordinary taxes (IRPEF, IRES, IRAP), flat-rate taxpayers pay a substitute tax, which ranges from 5% to 15% of their revenue or compensation, depending on the type of activity and the length of time the activity has been running. The rate is reduced to 5% for new businesses (in the first 5 years of operation), while the standard rate is 15%.
Income Calculation The taxable income under the flat-rate regime is calculated by applying a fixed percentage of profitability to the revenue or compensation earned. This percentage varies based on the type of activity (e.g., professionals, merchants, craftsmen, etc.). This simplified system eliminates the need for detailed accounting of expenses.
Profitability Percentage: The profitability percentage is determined according to the activity category. For example, for professionals, it can be 78%, while for trade activities, it may range from 40% to 60%.
For example:
A professional with €50,000 in revenue and a 78% profitability rate will have a taxable income of €39,000 (50,000 * 78%). The substitute tax will be applied to this amount, at a rate of 15% (or 5% for new businesses).
Accounting and Reporting Requirements The flat-rate regime comes with minimal accounting obligations. Taxpayers are only required to:
Keep a record of revenue (or compensation) and issued invoices.
Submit the annual income tax return (model Redditi PF), without the need to file VAT returns, VAT periodic statements, or other complex filings.
There is no need to maintain ordinary or simplified accounting or prepare an annual balance sheet, which represents significant savings in both time and cost.
Social Security Contributions Taxpayers in the flat-rate regime are still required to pay the necessary social security contributions to INPS or other professional pension funds (e.g., for lawyers, doctors, engineers, etc.), but the income used to calculate the contributions is based on the amount determined after the substitute tax.
Exclusions from the Flat-Rate Regime Some individuals are excluded from the flat-rate regime, including:
Individuals who participate in partnerships or limited liability companies (SRL), if the company itself has revenue exceeding the specified limits.
Individuals with employment income or pensions over €30,000 per year.
Individuals with significant foreign income exceeding certain thresholds.
Individuals who have transferred their business to a legal entity or participate in capital companies.
Advantages of the Flat-Rate Regime
Simplicity: It eliminates many tax and accounting obligations (e.g., VAT returns, VAT reporting, invoice registration, etc.).
Lower Tax Burden: The substitute tax rate is generally lower than the ordinary IRPEF tax rate, and the tax is applied only to revenue, not actual expenses.
Access to Simplified Financing and Benefits: Even though the taxed income is simplified, taxpayers can still benefit from certain incentives, such as tax credits and contributions for new entrepreneurs.
Limitations and Disadvantages
Revenue Limit: If revenue or compensation exceeds the specified limits (e.g., €85,000 or €100,000), the taxpayer loses the right to apply the flat-rate regime and must switch to the ordinary tax regime.
Not Suitable for High-Expense Activities: The flat-rate regime is more beneficial for businesses with modest revenue and lower expenses. If, on the other hand, a business has high costs for goods and services, the ordinary tax regime, which allows for the deduction of actual expenses, may be more advantageous.
In conclusion, the flat-rate tax regime represents a simple and advantageous solution for small businesses and professionals with moderate revenue, offering them reduced bureaucratic requirements and a more favorable tax treatment. However, it is important for taxpayers to consider the eligibility requirements, revenue limits, and the specific needs of their business to determine if the flat-rate regime is the best option.