Who Is Liable For Income Taxes in Italy
Tax residents of Italy are subject to tax on their worldwide income. Individuals who are not tax resident in Italy are subject to tax on their Italian-source income only.
An individual is considered resident for income tax purposes if, for the greater part of the tax year, he or she satisfies any of the following conditions:
- His or her habitual abode is in Italy.
- The center of his or her vital interests is located in Italy.
- He or she is registered at the Office of Records of the Resident Population in Italy.
Italian citizens who move their residence for tax purposes to countries considered to be tax havens (“black list” countries) are deemed to be tax resident in Italy in all cases, unless they provide specific evidence of their nonresident status.
Income subject to tax. Taxable income for personal income tax purposes consists of income from the following categories:
- Income from employment
- Income from self-employment
- Business income
- Income from real estate
- Income from capital (primarily, dividends and interest)
- Miscellaneous income, including capital gains
Each category, including miscellaneous income, is defined by law. If income falls under a category not specifically mentioned in the law, further investigation is needed to determine the tax treatment. Uncategorized income may not be automatically aggregated with miscellaneous income.
Employment income. Employment income is income derived from work performed for an employer. It includes any compensation, either in cash or in kind, received during a tax period in connection with employment, including any payments received as shares, as acts of generosity or as reimbursement for expenses incurred in the production of the income. Benefits in kind are valued for tax purposes at the “normal value,” as defined by the Italian tax code.
For certain benefits in kind, the Italian tax code provides specific rules for determining the applicable tax value. All compensation received in connection with employment is considered employment income, even if the compensation is paid by a third party (for example, the legal employer’s parent company).
Employment income also includes income known as “income deriving from a collaboration” unless the activity is performed by an individual who is registered for value-added tax (VAT) purposes and income derived by directors, auditors and contractors.
An Italian employer, which qualifies as a withholding tax agent, must withhold income taxes monthly from payments of gross employment income, including benefits in kind. Employment income is also subject to social security contributions (see Section C). The same rules apply to the determination of the tax base for income taxes and social security contributions.
The following items are not included in the taxable employment income:
- Mandatory contributions paid by an employer and by an employee for social security as provided by law
- Contributions, up to a ceiling of €3,615.20, paid by an employer or an employee to entities or funds for the sole purpose of medical assistance in accordance with collective labor contracts or company agreements and regulations
- Rewards in connection with holidays given to all employees or to categories of employees up to certain annual limits
- Business trip indemnity, up to a maximum of €46.48 for trips within Italy and up to €77.47 for trips abroad if the employer reimburses only the travel expenses
- Certain benefits in kind, including meals in factory cafeterias and transportation services provided to a majority of employees, up to certain amounts and under specified conditions
Nonresidents are subject to tax on income from employment derived from services performed in Italy and pensions paid by the state or by Italian residents.
A special tax regime applies to employees who meet all of the following conditions:
- The individual is resident for tax purposes in Italy.
- The employment activity is rendered wholly and continuously outside Italy for more than 183 days in a 12-month period.
- The employee’s assignment outside Italy is regulated by an employment contract or by another written agreement signed by the parties.
Under the tax regime mentioned in the preceding paragraph, an individual is subject to tax in Italy on a notional remuneration, as determined each year by the Italian Ministry of Finance.
Directors’ fees. For tax purposes, directors’ fees are treated as employment income, subject to progressive income tax rates and withholding tax. This tax treatment does not apply if the services are performed by a professional individual who is registered for VAT purposes (see Self-employment income).
Nonresident directors are subject to a final withholding tax at a rate of 30% on directors’ fees received.
Self-employment income. Self-employment income consists of income from a profession, including accounting, law and medicine. As mentioned in Employment income, income from a collaboration is treated as employment income, unless the activity is performed by an individual who is registered for VAT purposes.
Residents are subject to tax on worldwide self-employment income at the rates; a 20% withholding tax applies to income derived from Italian sources. Nonresidents are subject to tax on income from self-employment derived from services performed in Italy. Nonresidents are subject to a final withholding tax of 30% on self-employment income and need not file a tax return.
For professionals, taxable self-employment income consists of the difference between compensation received during a tax period and related expenses incurred during the same period, subject to certain limits.
Professional income is subject to VAT and to regional tax (IRAP) at a rate of 3.9% or 4.97% (see Business income), and bookkeeping is required.
Real estate income. Income from unrented real estate located in Italy is based on the cadastral value and is taxed as ordinary income. Rental income derived from real property is also taxed as ordinary income. Italian tax residents must report income from real estate located outside Italy in their Italian tax return, unless otherwise provided in an applicable double tax treaty.
Real estate is also subject to a local municipality tax (ICI; see Section B).
Business income. Business income consists of income derived from the commercial or industrial activities (entrepreneurial activities) described in the Civil Code.
Taxable business income consists of profits disclosed in the financial statements, adjusted for exemptions, disallowed expenses, special deductions and losses carried forward. Business income is determined using the accrual method.
Taxable business income is subject to personal income tax at the rates. In addition, business income is subject to IRAP, a regional tax on productive activities. IRAP is levied at a rate of 3.9% or 4.97% on the amount of net production income derived from activities carried out in Italy. Net production income is calculated by adding to taxable business income certain costs that are not deductible for IRAP purposes (for example, salaries paid to employees and interest expenses).
Nonresidents are subject to tax on business income from a permanent establishment in Italy.
Investment income. 49.72% (40% for earnings yielded before 1 January 2008) of dividends derived from qualified participations that are received by Italian tax residents from resident and non-resident entities is taxed as ordinary income. Dividends derived from nonqualified participations that are paid by resident and nonresident entities are subject to a separate final withholding tax of 12.5%. The tax base for dividends on nonqualified participations that are paid by nonresident entities is net of foreign taxes.
For listed companies, a nonqualified participation is a participation representing no more than 2% of the voting rights in the ordinary shareholders’ meeting and representing no more than 5% of the issued capital. For unlisted companies, a nonqualified participation is a participation representing no more than 20% of the voting rights in the ordinary shareholders’ meeting and representing no more than 25% of the issued capital.
One hundred percent of the dividends received by an individual that are derived from a company resident in a tax haven (as defined by Italian authorities) is taxed as ordinary income.
Dividends paid by Italian resident entities to nonresidents are subject to a 27% withholding tax if the dividends are paid on ordinary shares. The withholding tax rate is 12.5% for dividends paid on saving shares. Tax treaties may provide for a lower tax rate.
Italian-source interest paid to residents is usually subject to a final withholding tax at a rate of 12.5% or 27%. Consequently, such interest is not aggregated with other taxable income.
Foreign-source interest may be included with other income and taxed at the rate or taxed separately at a rate of 12.5% or 27%.
Interest paid to nonresidents is subject to a final withholding tax of 12.5% or 27%; tax treaties may provide for a lower tax rate. Interest derived from bank and postal accounts that is paid to nonresidents is exempt from tax.
Residents are subject to tax on royalties derived from patents, trademarks and know-how at the rates.
Nonresidents are subject to a final withholding tax at a rate of 30%. In some cases, this tax is imposed on 60% or 75% of the amount of royalties received from Italian resident entities.
Capital gains and losses
Securities—residents. Capital gains derived by residents from the sale of securities (including shares representing capital and other similar interests, convertible obligations, stock options and similar rights) not related to business activities are subject to a flat tax. The taxation of such gains varies according to whether the transaction involves a qualified percentage of the company’s shares (see Investment income). If the transaction involves a qualified percentage of the company’s shares, the ordinary rates are applied to 40% (49.72% beginning 1 January 2009) of the gain. The ordinary rates are applied to 100% of the gain if the shares sold relate to a company residing in a tax haven (as defined by the Italian authorities).
In general, the capital gain or loss equals the difference between the sales proceeds and the purchase cost, or the value that has already been subject to taxation. If the taxpayer’s losses exceed gains, the difference may be carried forward up to a maximum of four years against future capital gains. The capital gains tax must be paid by the same date as the balance of tax due shown in the taxpayer’s annual income tax return. If the security is held with an Italian resident intermediary (for example, an Italian bank) and if the transaction does not involve a qualified percentage of the company shares, an election may be made under which the tax due is withheld at source by the Italian resident intermediary and the transaction does not need to be reported in the individual’s annual income tax return.
Securities—nonresidents. Capital gains derived by nonresidents from the sale of securities (including shares representing capital and other similar interests, convertible obligations, stock options and similar rights) not related to business activities are subject to the tax treatment applicable to residents (see above) if the securities are issued by an Italian entity.
Real estate. Capital gains derived by individuals from the sale of real estate are taxable if the sale occurs within five years after the date on which the property was purchased or built and if the property had not been used as a principal abode. The gain is subject to tax as ordinary income, unless in the transfer deed, the vendor asks the Public Notary to apply a separate final tax at a rate of 20%. Capital gains derived from sales of real estate after the five-year period are not subject to tax.
Deductions
Personal deductions, tax credits and allowances. Tax deductions are allowed for various items, including the following:
- Mandatory social security contributions paid by an individual to the social security authorities
- Voluntary social security contributions to qualified and individual pension funds and life insurance premiums, within specified limits
- Social security and welfare contributions required by law that are paid on behalf of servants and babysitters
- Alimony paid to a spouse from whom the taxpayer is legally separated or divorced (children’s maintenance is not deductible)
- Medical expenses paid to disabled individuals
- Main residency (deduction equal to the main residency taxable income) A tax credit of up to 19% is granted for various items, including the following:
- Interest paid to European entities on mortgage loans for real estate located in Italy that is used as a principal abode, up to a maximum amount of €3,615.20
- Medical expenses, including specialized medical treatment, surgical expenses and prostheses, for the taxpayer or dependents if the expenses exceed €129.11
- Life and health insurance premiums, up to a maximum amount of €1,291.14 (applies only in certain circumstances)
- University tuition expenses, not exceeding tuition charged at state universities
- Funeral expenses, up to a maximum amount of €1,549.37
A tax credit for family members may be claimed by resident taxpayers, regardless of the category of income earned.
B. Other taxes
Municipality tax on real estate. A municipality tax (ICI) is imposed on the ownership of real estate in Italy at a rate ranging from 0.4% to 0.9% of the cadastral value (legal value) of the real estate. ICI is not payable on a non-luxury principal abode.
Inheritance and gift taxes. Inheritance and gift taxes apply to residents and nonresidents. The tax base is related to the value of the assets. The following are the applicable tax rates:
- 4% for recipients in a direct relationship (spouse and children) with the deceased or the donor, to the extent that the assets have a taxable value of greater than €1 million
- 6% for brothers, to the extent that the assets have a taxable value of greater than €100,000
- 6% for other relatives, with no assets exclusion
- 8% for recipients who are not related to the deceased or the donor, with no assets exclusion
In addition to the above taxes, cadastral and mortgage taxes apply if immovable properties are inherited or given as a gift. The applicable tax rate is 3%. However, if the real estate inherited or gifted is classified as a primary home, the cadastral and mortgage taxes are imposed at a fixed amount of €168 each.
To prevent double taxation of estates, Italy has entered into estate tax treaties with Denmark, France, Greece, Israel, Sweden, the United Kingdom and the United States. In the absence of a treaty, a tax credit may be available for foreign taxes paid on assets located abroad.
C. Social security
Coverage. Italian law provides for a comprehensive system of social insurance covering the following:
- Disability, old age and survivorship
- Illness and maternity
- Unemployment and “mobility”
- Family allowances
- Health care
- Labor injuries
- Professional diseases
The system is controlled by the government, with various sections administered by separate public institutions, most notably, the National Institute for Social Security (Istituto Nazionale Previdenza Sociale, or INPS).
Collective labor agreements provide for compulsory additional coverage through pension and health funds. Both employers and employees usually make contributions to these funds.
Contributions
Employees. In general, social security contributions are payable at varying percentages of gross remuneration, depending on the employee’s qualification level and the employer’s activity sector.
In general, employees’ social security contributions range from approximately 9% to 10% of their gross remuneration. Employers’ contributions may range from 30% to 35%.
Employees with no record of social security contributions before 1 January 1996, are subject to pension contributions on gross income up to a maximum of €93,622 for 2011.
Self-employed individuals. Self-employed individuals, directors and consultants must enroll with the Gestione Separata (INPS), unless other specific rules apply (for example, certain professionals, such as lawyers, engineers and accountants, are required by law to enroll in specified pension plans). The contributions are calculated at a flat rate ranging from 17% to 26.72% on annual income up to a maximum of €93,622 for 2011.
Also foreign citizens, such as nonresident directors, must enroll with the INPS.
Under certain circumstances, a totalization agreement may provide an exemption from the contributions mentioned above.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, Italy has concluded totalization agreements with various jurisdictions. In addition, an EU regulation on social security applies to all of the EU countries, including all of the new member states (plus Switzerland).
Italy has entered into totalization agreements with the following jurisdictions.
Argentina
Channel Islands (a)
Tunisia
Australia
Croatia
United States
Bosnia
Israel
Uruguay
Herzegovina
Korea (South)
Vatican City
Brazil
Macedonia
Venezuela
Canada and Quebec
Monaco
Yugoslavia
Cape Verde
San Marino (former) (b)
(a) The Channel Islands consist of Alderney, Guernsey, Herm, Jersey and Jethou.
(b) This treaty applies to Montenegro and Serbia.
Most of Italy’s totalization agreements allow an employee temporarily seconded abroad to remain covered under the social security scheme in the employee’s home country for a two-year period that may be extended to five years or more. The agreement with the United States does not provide a time limit. Italy’s totalization agreements with the United States and a few other countries do not cover all the mandatory social security contributions payable in Italy. As a result, U.S. and other foreign companies must pay minor contributions in Italy.
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