Taxation in Italy: an updated overview (F.Y. 2016)
The Italian tax system is based on both direct and indirect taxes. The former cover personal income tax (IRPEF) and corporate tax (IRES) as in most countries, as well as a regional production tax (IRAP) and also a property tax (IMU). Indirect taxation includes VAT (IVA), registration tax (imposta di registro) and stamp duty (imposta di bollo). Inheritance/gift taxes (imposte di successione e donazione) have recently been abolished for the most part. Below we look at the main taxes.
Personal income tax (or individual income tax, as it is called in some countries) is payable by individuals on income earned in the tax year. For employees tax is deducted from their salary through the PAYE (pay-as-you-earn) system whereas the self-employed are responsible for paying their own tax through a system of self assessment.
B. Taxable persons
IRPEF is a general progressive income tax levied on natural persons as opposed to legal persons. Residents are subject to income tax on their world-wide income. Non-residents are taxable on their income arising in Italy.
For income tax purposes resident individuals are those persons who for most of the tax year are registered in the Italian civil registry or are resident and/or domiciled in Italy as defined in the Civil Code. In Italian law residence is equivalent to one's place of habitual abode while domicile refers to the place where a person has established his or her principle centre of business and interests.
Anti-avoidance provisions apply to Italian nationals who claim to be resident in tax havens: an Italian resident is deemed to be still resident in Italy if he moves to a tax haven and removes his name from the civil registry: this is a rebuttable presumption but the burden of proof that actual residence is outside Italy is on the taxpayer.
C. Taxable Income
Personal income tax is based upon income from the following categories: income from real property, income from capital, income from dependent employment, professional (self-employment) income, business income and certain miscellaneous income. The aggregate taxable income is calculated by adding the net income of each category. Exempt income and income subject to a final withholding tax or a substitute tax is not taken into account and neither are certain categories of income subject to separate taxation.
Companies pay corporate tax (or corporation tax as it is called in some countries). This tax (27,5%; 24% starting from the fiscal year 2017) is charged on the company's profits which include both income and chargeable gains. A company’s income for tax purposes is calculated in accordance with income tax rules whereas chargeable gains are calculated in accordance with capital gains tax rules. Companies are responsible for assessing and paying their own tax.
B. Taxable persons
Legal persons, whether they be a joint-stock company (S.p.A.), a partnership limited by shares (S.a.p.A.), a limited liability company (S.r.l.) or a permanent establishment in Italy of a non-resident company, are liable to corporate tax on their business income. General partnerships (s.n.c.) are treated as transparent entities and are not subject to corporate tax. Under certain conditions, limited liability companies owned by not more than 10 individuals may opt to be treated as flow-through entities, and in such case income is attributed directly to the members.
Non-resident undertakings are taxable just on income derived from Italy. Resident firms are those which for the greater part of the tax year have their registered office, place of effective management or main business purpose in Italy. The place of incorporation is not a determining factor.
C. Taxable Income
The taxable income of a company is that shown in the profit and boss account for the relevant financial year and adjusted in accordance with tax legislation. Income subject to a final withholding tax or a substitute tax are not taken into account in determining taxable income. Taxable income is determined on the accrual basis with certain exceptions (e.g. for dividends and directors’ fees).
The tax was introduced in 1998 and replaced a number taxes amongst which (i) a local tax levied on different categories of income including corporate profits (ILOR), (ii) national health service contributions paid by employers and employees on wages and (iii) a tax on firms' net assets. The tax is not deductible for income tax purposes.
The tax is levied on the net value produced in each Italian region. Taxpayers carrying on business in more than one region by employing personnel in each region for more than three months must apportion the taxable base among the regions concerned on the basis of the remuneration paid to personnel employed in each region.
The standard rate is 3.50% although individual regions may increase or decrease the rate by a maximum of 1% and may introduce percentage differentiations according to sector and category of liability.
For commercial and manufacturing enterprises the taxable base is the difference between the "value of production" in the tax year (i.e. gross revenues plus increases in inventory plus work in progress) and the "costs of production (i.e. the costs of raw and other materials, the costs of services, depreciation of tangible and intangible assets, the decrease in inventory of raw and other materials, provisions for risks and other miscellaneous costs). The cost of personnel, losses on bad debts and interest paid are not deductible.
In the light of a recent decision to gradually phase out the tax, the following tax incentives currently in force have been enhanced: (i) labour costs relating to personnel hired with training contracts may be deducted from the taxable base in their entirety and (ii) the amount of the current general deduction from taxable base has been increased.
Real estate is subject to a specific tax, the municipal tax on real estate (IMU). The taxable base is the imputed income determined by the land registry multiplied by a certain coefficient. In the event that a land registry value has not been determined by the tax office, the taxpayer must determine by itself the value of the building on the basis of certain parameters. For industrial buildings without a land registry value, the taxable value is the historical cost of the real estate property revalued by reference to certain fixed parameters. The tax rate can range from 0.5% to 1.0% of the tax base.
Value Added Tax (VAT) is a consumer tax. It is collected by VAT registered traders on their supplies of goods and services. Each trader is liable to VAT on the goods and services it acquires for the business and in turn charges VAT on the goods and services supplied by the business to customers. The difference between the VAT amounts paid to suppliers ("input tax") and the amounts collected from customers ("output tax") must be remitted to the Collector-General and an appropriate VAT return filed. If the seller pays out more VAT than it collects, it receives a tax credit or refund. This ensures that VAT is paid by the ultimate customer and not by the business.
The tax is levied on the total amount due to the transferor of goods or the performer of services under the contract. The base tax rate is 22 percent, which applies to most goods and services. However, medicines, natural gas and electricity for domestic use, private telephone service, and most processed foods are taxed at 10 percent. Agricultural products, some foodstuffs, and books are taxed at 4 percent.
Some transactions are exempt from the tax (for example transfers of shares and games of chance) while others fall outside the scope of the tax since they are not considered as a supply (for example, sale of newspapers).
Registration tax is a tax on certain legal documents and instruments. The tax is paid to the registry office, which records the document in appropriate registers and retains a copy therefor, returning the original to the party requesting registration. Registration certifies the existence of documents, gives them a date certain as regards third parties, and assures their preservation. The failure to register when required does not invalidate documents but limits their legal effectiveness before state agencies in certain instances. Unregistered instruments are admissible in proceedings before courts and state agencies, but they are automatically sent to the registry office for registration and the parties are charged the tax and penalties.
For some types of instruments, registration is due within 20 days of the date of execution, examples being real property deeds, real property leases, real property mortgages, and instruments transferring ownership of motor vehicles. For other instruments, registration is required only "in case of use", which occurs when the instrument is presented before a court whether for purposes of litigation or other use, or at any state administrative office. Examples of such instruments include those concerning the transfer of goods and performance of services subject to VAT, employment contracts, and un-notarized receipts and releases.
The taxable value for real property deeds is the amount stipulated for the sale for the whole period of the agreement or, if higher, the market value of the property or right transferred.
All parties to a document that must be registered within 20 days of execution are jointly and severally liable for the tax. For documents subject to registration only “in case of use”, only the person requesting registration is obligated to pay. The tax is paid to the registry office at the time registration is requested.
Stamp duty is an indirect tax on certain instruments (i.e., acts, documents and books of account) of a civil, administrative, or judicial nature. Some instruments are required to be stamped in all cases while others just “in case of use", i.e. when the document or whatever is filed with the registry office.
The applicable rates for every instrument are set forth in the relevant tariff schedules. The most common tax rate for official papers and documents is € 16. There are three types of payments:
ordinary payment consists of using stamped paper (“carta bollata”) where the amount of the duty is indicated on the paper and if the stamp duty to be paid is higher than the amount indicated on the paper, stamps can be affixed to pay for the difference;
extraordinary payment consists of using paper stamps (so called “marche da bollo”), rubber-stamping or an impressed seal;
virtual payment consists of making the payment to the Registry Office (or other authorised offices or to a postal account). In such cases the receipt of payment must be attached to the instrument it refers to.
- Tax Bands and Rates -
The tax payable by an individual or company is generally calculated as a percentage of taxable income after all relevant allowances and deductions have been taken into account. This percentage is known as the tax rate. For individuals, taxable income is normally divided into tax bands and a higher tax rate (from 23% to 43%) is applied to each successive band. Indeed people often refer to themselves as being in a low or high tax bracket.
The above rates are increased by a regional surcharge varying between 0.9% and 1.4% depending on the region. Moreover, they can also be increased by a local surcharge varying from 0% to 0.5% depending on the municipality.
Obviously the gross tax payable can be reduced by any tax credit the taxpayer is entitled to.
When calculating the final amount of tax to be paid, the taxpayer must subtract any tax paid on account during the year, for example, withholding tax on account that remuneration paid to self-employed individuals by a company in Italy is subject to and which the company concerned is obliged to withhold and remit to the tax authorities.
- Assessment and Payment of Tax -
For individual taxpayers the tax year coincides with the calendar year.
Dependent employees with no other income are not obliged to file an annual tax return as during the course of the year the employer deducts tax from the employee and immediately remits it to the tax authorities. If year-end calculations indicate that the employee has overpaid, they are due a refund.
Self-employed individuals whose taxable income exceeds a certain threshold must file an annual tax return by 30 June of the year following the tax year (31 July for electronic filing). In principle, the self-assessment system is used although the tax authorities are authorised to issue a notice of assessment to taxpayers who fail to file a tax return.
Two advance payments of income tax must be made during the tax year (by 16 June and 30 November as a rule): the amount must be 100% of the estimated tax for the year concerned or an amount that is the equivalent of 100% of the final tax liability for the previous year, whichever is the lower. The balance of the tax due, based on the final liability shown in the annual return for the year concerned, must be paid by 16 June of the following year. Excess tax is refundable or the taxpayer may opt for a tax credit instead.
For corporate tax purposes the tax year is the company's own financial year as determined by the deed of incorporation, articles of association or by law: self-assessment is used. The corporate tax return must be filed within 7 months after the end of the company's financial year (i.e. the deadline for electronic filing, which is mandatory for resident companies).The date of approval of the company's financial statements is irrelevant.
Corporate income tax for the current year is paid as follows:
by the 16th day of the sixth month following the end of the company's previous financial year, an advance payment of tax for the current year (equal to 40% of the estimated tax liability for the current year or the previous year's final tax liability, whichever is the lower);
by the 30th day of the 11th month of the company's previous financial year, a second advance payment of tax for the current year (equal to 60% of the estimated tax liability for the current year or the previous year’s final tax liability, whichever is the lower);
the balance by the 16th day of the sixth month following the end of the company's current financial year (subject to some exceptions depending on when the company may legally approve its annual accounts).
If there is uncertainty regarding the correct interpretation of tax provisions, in a few cases a taxpayer may obtain a private ruling by filing a written request with the tax authorities, which must for their part issue a written and reasoned reply within 120 days. A reply is only binding on the authorities for the case presented and with respect to the requesting taxpayer.
A new approach to fight tax evasion in Italy:the “Studio di settore” checking tool
For some years now the Italian fiscal authorities have been monitoring all VAT registered traders by a sophisticated software (based on quantitative survey methods), aimed at comparing actual annual revenues with their notional “congruent” threshold, as calculated by the software itself.
Algorithms are mainly based on some specific data, given by the taxpayer, about its own business, such as: market sector; number of people employed; geographical location; business organization; total revenues; tangible assets and investments; variable costs; overheads; etc.
After running the software, taxpayer’s actual revenues can be assessed as follows:
b) non congruent; in this case a revenue-threshold is being given, in order to raise taxable value; the taxpayer who does not comply with the higher level of taxation he’s asked for, is likely deemed to receive a notice of tax assessment by the Revenue (the notice may be appealed, but the burden of proof is unfortunately on the taxpayer!).
So, if you’re off, there’s an absolute presumption of tax evasion, unless you demonstrate - beyond the reasonable doubt – why your revenues are below the notional threshold.
The software is based also on some other indexes, varying from sector to sector, finalized to check the adequacy of the business structure.
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For any further information, please do not hesitate to contact us.
Studio Zanichelli & Partners