Dealing with tax, payroll, and employment regulations for your staff from overseas is a tricky process. Italy is no exception, with fines, sanctions and other penalties applying for not complying with the complex and many-layered aspects of taxation.
Global expansion is a great way to grow your business and Italy offers many appealing opportunities. However, the tax laws can be complex and require time-consuming research. By using our PEO-service we will take care of the complicated legwork so that you can focus on your business goals in Italy.
We have made it our goal to keep track of the latest changes in tax policies to always ensure complete compliance. To keep you informed and updated too we created this guide which includes the basic facts regarding tax regulations in Italy.
Overview of Italy's Taxes
- Individual Income Tax - Progressive
- VAT - 22%
- Corporate Income Tax - 24% (income tax), 3.9% (regional production tax)
- Employer & Employee Social Security Contributions - 29-32% (Employer), 10% (Employee)
- Capital Gains and/or Withholding Taxes - 26% (yields on loans and securities)
Individual Tax Italy - Single, Married
In Italy, the individual’s ability to pay income tax depends both on their residency status, as well as the source of their income. All Italian residents are taxed on their worldwide income, regardless of their nationality, whilst non-residents are only taxed on their Italian-sourced income.
Income Tax in Italy is progressive, based on the amount of income that the individual receives. This applies for both residents and non-residents. For income in 2021, those rates are:
- EUR 0 – 15,000: 23%
- EUR 15,001 – 28,000: 27%
- EUR 28,001 – 55,000: 38%
- EUR 55,001 – 75,000: 41%
- EUR 75,001 +: 43%
In Italy, there are two types of income tax returns that can be done, which depend on specific tax rules:
- Mod. 730 (Modello 730) – this is a simplified tax return, which only applies for incomes subject to ordinary taxation, and taxpayers must meet the following conditions in order to qualify for this return type:
- the individual must be an Italian tax resident in the year of filing this return, as well as the previous one
- the individual has a withholding agent (or employer) in Italy in the period of the filing of the Italian income tax return
- the individual does not have a VAT number
For this type of tax return, the taxpayer is not obliged to prepare any calculation – the balance is withheld by the employer or refunded to the employee in their pay slip. For this type, married couples can file jointly.
The Mod. 730 must be submitted to the Italian Revenue Agency by the 30th of September, via electronic filing.
- Dichiarazione dei Redditi – this tax return type is applicable in cases where the Mod. 730 is not applicable. The individual must then file this tax return through self-assessment.
This tax return type must be filed by the 30th of November via electronic filing. Married couples cannot file this tax return type jointly.
On employment income, the Italian employer acts as a “withholding tax agent” and must effectively withhold both income tax on the basis of the progressive income tax rates, as well as social security benefits.
The employer is also obliged to issue an annual employment certification or Model CU, within or before the 31st of March of the following year. This certificate must certify the individual’s taxable income as well as the withholding taxes done for them during the fiscal year.
If foreign individuals have no employment relationship with an Italian company, they are then obliged to declare their tax income through the second tax return type, Dichiarazione dei Redditi or the ‘self-assessment’ method.
Other income taxes
Individuals are also subject to two other types of income taxes that an individual must compensate:
- Regional income tax – this tax depends on the individual’s region of residence in Italy, and ranges from 1.23% - 3.33%.
- Municipal income tax – this tax depends on the individual’s municipality of residence in Italy, and ranges from 0% - 0.8%. Municipalities also have the option to establish progressive tax rates that apply to the national income bracket.
To learn more about personal income taxes in Italy, check out Italy’s tax agency page.
Italy Individual Tax Rules
The tax year in Italy is the calendar year. An individual’s obligation to pay Italian individual income tax is determined by their tax residency status. According to the Italian Tax Code (Article 2), an individual is considered to be an Italian tax resident if (for more than 183 fiscal days):
- The individual is registered in the Records of the Italian Resident Population (Anagrafe)
- The individual possesses a residence in Italy (a habitual abode)
- Or the individual possesses a domicile in Italy – which can be a principal center for business, social and economic interests
If any of the above conditions are met, the individual then qualifies as an Italian tax residence.
An individual who lives in Italy must apply for registration with the Record of the Italian Population in the municipality where they intend to reside. If they are registered but reside in Italy for less than 183 days, they are considered a non-resident for tax purposes. However, these individuals are subject to taxation on their Italian-source income.
To file taxes, an individual must first have a tax identification number from the Italian Revenue Agency. Before the taxes are due, they will receive the appropriate forms in the mail with instructions to fill out the forms on paper, or online.
In order to file income tax electronically, the individuals can do so through the RedditiOnLine Pf software, which can be accessed through the Revenue Agency online services (which requires a tax identification number) or registration with the Public Digital Identity System (SPID).
VAT, Excise Duty, etc.
All individuals are obliged to pay IVA, or VAT, when purchasing goods and services in Italy.
The VAT rate in Italy is 22%, which applies to most goods and services.
The legislation also offers reduced VAT rates of 4% for certain listed food, pharmaceuticals, agricultural products, books, newspapers, medical equipment; 5% for certain health services, food herbs, and certain transport services on seas, lakes, and rivers; and 10% for medicines, supplies of food and drink in restaurants, bars, and hotels, supplies of electricity, methane and liquid petroleum for domestic use, and accommodation services.
Employers Social Security and statutory contributions
In Italy, both income tax and social security contributions are settled through the employee’s salary. Social security contributions are withheld from the employee’s salary monthly, which are then sent to the tax office. Employers are also obliged to make their own contributions.
Both employer and employee social security contributions are like so:
Employer’s Social Security Contributions
- Social Security: 29-32%
- Injuries at Work Insurance (INAIL): 0.4%
Employee’s Social Security Contributions
- Social Security: 10%
Like income tax, social security contributions are affected by categories of employment, as well as seniority. However, the figures listed above are the general rates. The contributions listed above go towards the following funds:
- The National Pension Fund (INPS)
- Temporary unemployment compensation
- Social mobility
- Other minor funds
Executives, however, are required to make contributions to these specific funds:
- The National Mandatory Pension Fund (INPS) – 9.19% (up to a ceiling amount of EUR 47,379) and 10.19% on income that is over the ceiling amount.
- The Complementary Pension Fund (Fondo Mario Negri) – 1% on an estimated annual compensation of EUR 59,224.54. EUR 129.12 per annum is due from the amount as professional training charges.
- Medical Care Fund (FASDAC or Fondo Mario Besusso): 1.87% on an estimated annual compensation of EUR 45,940.
- Supplementary Pension Fund (Fondo Pastore): This fund is a combination of insurance and investment (which is not compulsory), with a required contribution of EUR 464.81 per annum.
Italy Corporation Tax
Tax-resident corporations in Italy are taxed on their worldwide income and gains. Italian non-resident companies, however, are only taxed on Italian-sourced income.
Corporation income is subject to two types of taxes:
- National corporation tax (IRES or imposta sul reddito sulle società) – Companies are liable to a uniform tax rate of 24% on their total net income as reported in financial statements and adjusted for specific tax rules.
- Regional Production Tax (IRAP or imposta regionale sulle attività produttive) – Companies in Italy are also obliged to pay a regional tax, which is normally around 3.9%. This tax can vary according to the region, as well as the nature of the business.
The tax period for corporations in Italy is 12 months, but conformity with the calendar year is not obligatory. New established companies, however, may have a taxable period of up to 18 months. Extension of the taxable period may be accepted in certain cases.
As a general rule, both income tax and regional production tax returns must be filed by the 11th month after the tax year’s end. The filing deadline for the withholding tax agent return is the 31st of October of the following year.
VAT returns must be filed by the 30th of April of the following year.
Tax payments and form filing should be done electronically via the tax agency portal. For the corporate tax types above, the tax law provides both advance and settlement payments.
Advance payments must be made in two instalments:
- 40% by the end of the sixth month following the tax year-end
- 60% by the end of the 11th month following the tax year-end
Settlement payments, however, are due by the end of the sixth month following the tax-year which they refer to.
Capital Gains & Withholding Tax
In Italy, standard withholding tax rate of 26% applies to yields on loans and securities that are paid by Italian resident entities to both Italian and non-Italian resident investors.
This rate, however, can be lowered under double taxation treaties, EU directives, or other special domestic tax regimes.
In Italy, the following expenses are eligible for tax deductions and exemptions:
- Interest expense (up to the amount of interest income)
- Bad debts
- Charitable contributions
- Entertainment expenses
- Meals and lodging expenses
- Car costs
- Telephone expenses
- Net operating losses
- Payments to foreign affiliates
Stamp Duty tax in Italy is known as ‘Imposta di Bollo’, which applies to a certain list of deeds/ documents – it is levied on legal and banking transactions at varying rates (from EUR 2-100).
Stamp duty also applies to the transfer of shares or other financial issues that were issued by resident companies at 0.2% of transactional value, or 0.1% if made on a stock exchange.
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