Italy: Tax System

Tax Rate For Foreign Companies

Resident companies are taxed on their worldwide revenue. Non-resident companies are taxed on their Italian-sourced income.
A foreign tax credit is available on the tax paid on foreign-source income.

Capital Gains Taxation

In general, capital gains are treated as ordinary income and taxed at the corporate income rate of 24%, plus IRAP at 3.9%. Capital gains derived from the sale of participations may be 95% tax-exempt if the following conditions are met: a) the participation has been held for a minimum uninterrupted period of 12 or 13 months; b) the participation is classified as a financial fixed asset in the first financial statement closed after the participation was acquired; c) the majority of the subsidiary's income is not generated in a tax haven country or one with a privileged tax regime over the last three years before the disposal; and d) the company in which the participation is held carries out a business activity continuously over the last three years before the disposal.
Capital gains obtained by non-resident companies are taxed at a 26% rate. Capital gains realized by a non-resident from the sale of a participation in a non-resident company are subject to taxation in Italy if more than 50% of the value of the non-resident company derives directly or indirectly from certain real estate property located in Italy at any time during the 365 days preceding the transfer.

Main Allowable Deductions and Tax Credits

Business expenses directly related to income generation are generally deductible: costs of setting up a business, commissions, depreciation and amortisation, staff bonuses and remuneration, royalties, advertising and entertainment expenses (capped; expenses related to gifts with a value of EUR 50 or less are entirely deductible). IMU is deductible for IRES purposes up to 100% (from FY 2022). In calculating the taxable base for IRES, the following IRAP expenses can be subtracted: 10% of the IRAP paid in the year; an amount determined by the IRAP paid on the cost of employees, after taking into account relevant deductions.

 

Interest expense is fully tax-deductible up to the amount of interest income. Interest expense in excess is deductible at up to 30% of the gross EBITDA, and the part in excess of the yearly limitation is carried forward in the following five fiscal years. Specific rules apply to the deduction of bad debts. Travel expenses incurred within the municipality are tax-deductible up to 75% (however, VAT is fully deductible).

An "allowance for corporate equity” (ACE) is available, consisting of a deduction equal to the net increase in the equity employed, multiplied by a rate determined each year (1.3% in 2023). The deduction is available each year, provided the equity increase is not diminished.

Company car expenses can be deducted up to 20% for cars that are not assigned to employees or are granted to employees solely for business use, and 70% if they are destined to employees for both business and private purposes. Mobile and landline telephones expenses are deductible up to 80%.

Deductions are available for charitable contributions. Meals and lodging expenses incurred within the municipality are deductible up to 75% of the expense incurred.

Losses may be carried forward and offset against corporate taxable income; however, 20% of taxable income in any year cannot be offset by carried-forward losses and is subject to corporate tax. Losses incurred in the first three tax periods may be carried forward to be offset against 100% of taxable income if these losses are linked to a new business activity. The carryback of losses is not permitted.

The patent box regime and R&D credit scheme grant tax credits subject to qualifying provisions to companies that invest in R&D. The tax exemption is up to 10% of the expenditure (capped at EUR 5 million) and can be granted to the permanent establishments of foreign companies if the latter are based in countries with which Italy has concluded a tax treaty and which exchange tax information with the company.

Other Corporate Taxes

A municipal tax is generally applied at a rate between 1.06% and 0.76% (generally 0.86%) on company-owned real estate (IMU). Municipal taxes are also calculated on the IMU for a common tax (IUC - Imposta unica comunale) on service (TASI) and refuse (TARI).

A transfer tax is applicable to all transactions registered with the public register, generally taxed at a percentage of the value.

Stamp duty ranging from EUR 2 to EUR 100 is levied on legal and banking transactions, at varying rates. Stamp duty applies to the transfer of shares or other financial instruments issued by resident companies at 0.2% of the transaction value, or 0.1% if the sale is made on a stock exchange (so-called "Tobin Tax").

Companies deemed to be "non-operating" are subject to a tax on a deemed minimum income at a rate of 34.5%. Non-operating status includes companies: with low turnover and inventory increase rates, with insufficient revenues, that are unprofitable or declare tax losses for 5 consecutive fiscal tax years.

A regional tax on productive activities (IRAP) of 3.9% is levied on the net value of production in each Italian region by resident companies and permanent establishments (PEs) of foreign companies. The rate may vary by up to 0.92% across regions. IRAP is on average 4.65% for banks and financial institutions and 5.9% for insurance companies.

A 30% withholding tax is levied on compensation paid to a non-resident company for the use of industrial, commercial and scientific equipment in Italy.

A Digital services tax (DST) was introduced in 2020. It is levied on taxpayers that, at a group level, have annual global turnover over EUR 750 million in the previous calendar year and annual revenue from digital services rendered in Italy of over EUR 5.5 million in the previous calendar year, irrespective of their tax residency. The rate is 3% of gross revenue net of VAT or indirect taxes. Companies subject to the tax must maintain monthly records of relevant transactions.

Social security contributions depend on the activity performed by the company, the number of employees, and the employee's position. For employers, the contribution is generally around 30%.

Italian shipping companies that are tax residents, as well as non-resident shipping companies that operate in Italy through a permanent establishment, may meet the requirements to opt for the tonnage tax regime.

Other Domestic Resources

Italian Revenue Agency

Doing Business: Italy, to obtain a summary of taxes and mandatory contributions

Country Comparison For Corporate Taxation

Source: The World Bank - Doing Business, Latest data available.

Accounting System

Accounting Standards

Since November 2001, the Italian Accounting Organisation (Organismo Italiano di Contabilità– OIC) has been in charge of accounting standards. The OIC replaced the ‘Commissione Paritetica per la Statuizione dei Principi Contabili’, which had previously published 30 accounting standards. Italian accounting standards do not have force of law. Listed companies and banks are required to adopt International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS). Small entities cannot adopt IAS/IFRS accounting principles.

Accounting Regulation Bodies

OIC, Italian Accounting Organisation

Accounting Law

Italian accounting is essentially based on the Civil Code of 1942 (especially articles 2424 and 2449), as amended by the decree of 9 April 1991 integrating the fourth and seventh European Directives.

Difference Between National and International Standards (IAS/IFRS)

IFRS Standards are required for all domestic public companies and listings by foreign companies (except in the case of a foreign company whose home jurisdiction’s standards are deemed by the EU to be equivalent to the IFRS Standards. IFRSs are not required for SMEs.

Accounting Practices

Tax Year

From 1 January to 31 December

Accounting Reports

Italian companies must submit the following documents in their financial statements: a balance sheet, profit and loss statement, notes to the accounts and an annual report.
Annual reports are not required for smaller companies, which prepare short-form balance sheets if financial and economic parameters are met for two consecutive financial years. Such companies cannot adopt IAS/IFRS accounting principles

Publication Requirements

The annual report, audit report, financial statements and a copy of the minutes of the AGM (Assemblea dei soci) must be filed with the company register 30 days after the AGM. Unlimited liability companies (SNC, SAS) are not required to publish their accounts, but must draw up a balance sheet and a profit and loss account. Companies listed on the stock exchange must draw up quarterly financial statements. Small companies are authorised to draw up financial statements in a shorter form.

Accountancy Profession

Accountants

The Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili is the professional body established by in 2005. Being the only professional body in Italy, it represents all members of the profession both inside the country and abroad, monitors activities at a local scale and issues regulations and recommendations, including the Code of Ethics.

Esperti contabili are regular accountants that are authorised to deliver accounting services and perform limited audit functions while dottori commercialisti can also undertake company appraisals, insolvency procedures, defend clients before tax courts, and perform full scope audit and assurance services for non-statutory audits.

Professional Accountancy Bodies

INRC, National Institute of Auditors

Member of the International Federation of Accountants (IFAC)

Yes

Member of Other Federation of Accountants

Italy is part of the IASB (International Accounting Standards Board), the EFRAG (European Financial Reporting Advisory Group) and Accountancy Europe.

Audit Bodies

The Civil Code requires limited liability companies (with more than 120,000 EUR in capital) to appoint an audit committee (collegio sindicale) of three to five members at the AGM. The audit committee is appointed for three years and may be prolonged indefinitely. These members must give an account of their audit in an annual report, which is to be included in the company’s financial statements. There is no legal requirement for the audit report to be presented in a particular manner. Companies listed on the stock exchange must have their accounts audited by external independent auditors (società di revisione).

Allowable Deductions and Tax Credits

Provided that the conditions requested by law are met, the main deductions from gross taxable income, if they have not been deducted from each kind of income, are the following:

- Employee’s mandatory social security contributions are fully deductible
- Social security contributions paid for domestic employees: up to EUR 1,549.37
- Medical expenses for disabled individuals are fully deductible
- Contributions paid to the specific complementary pension funds are deductible, up to EUR 5,164.57
- Voluntary social security contributions paid to the mandatory pension scheme

Individuals can fully deduct from taxable income the alimony paid to a separate or divorced spouse resulting from a court judgment. Contributions to certain religious entities can be deductible from the taxable income up to EUR 1,032.91 per taxpayer.
Other deductions include maintenance allowance, university expenses, medical expenses, dependent elderly or disabled persons, etc.

In determining taxable income, Italy has adopted a system of tax credits (i.e. up to EUR 1,910 for employment income, up to EUR 1,265 for self-employment, up to EUR 800 for dependant spouse, up to EUR 1,200 for each child below three years, or EUR 950 for each child above three years, EUR 750 for other dependants, etc.).
Other credits include: medical expenses (19% of the amount in excess of EUR 129.11), interest on real estate mortgage loans (19%, capped at EUR 4,000), life and accident insurance (up to EUR 530 or 1,291.14 depending on the type), annual rental fees paid for the principal abode (for incomes below EUR 30,987.41).

In addition to the classic system of tax deductions provided for by the Italian Tax Code, Law no. 21/2020 and the Italian Budget Law for FY 2021 introduced an extra mechanism for reducing taxes, consisting of the recognition of a sum by way of additional treatment. The sum does not contribute to the formation of income and therefore constitutes a net amount, and is equal to EUR 1,200 per year (FY 2023) in the case of incomes not exceeding EUR 15,000. For annual income between EUR 15,001 and 28,000, the amount of the additional treatment needs to be prorated on the basis of the Italian net income tax.

Special Expatriate Tax Regime

Non-residents are only taxed on income and gains arising in Italy, compared to worldwide income and gains for residents.

Under the “Neo-domiciled tax regime”, individuals who migrate their tax residency to Italy (if they did not have an Italian tax residency for at least nine years over ten fiscal years preceding the transfer) are allowed to opt for their non-Italian sourced income to be taxed in with a flat substitutive tax, at a fixed amount of EUR 100,000.
Resident individuals are taxed 26% on interest (12.5% on Italian treasury bonds or similar bonds), dividends and capital gains on non-qualified participations. Non-resident individuals resident in a “white list” country are not taxed on capital gains related to non-qualified participations, and gains realized by non-residents on the disposal of shares listed on a stock market are exempt. Otherwise, non-residents are taxed at the 26% flat rate on dividends, capital gains related to participations and interest.
Under the new “Foreign Pensioners’ regime”, individuals that already receive a foreign pension may opt to pay a substitutive tax of 7% on all foreign source income in lieu of the progressive tax rates for a period of nine years.

Capital Tax Rate

Financial assets held abroad by a resident individual (i.e. bank accounts, participation, etc.) are taxed at 0.2% of the market value. Immovable property outside Italy owned by a resident individual is subject to tax at a rate of 0.76% of the original cost or market value of the property (0.4% applies to principal residences).
Italy levies a gift/inheritance tax, with rates varying between 4%, 6% or 8% (with an exemption of up to EUR 1 million for close relatives).
For employees who began contributing to a mandatory social security scheme on or after 1 January 1996, the social security payment for the state pension fund typically amounts to 9.19% of their employment income, plus an additional 1% of income exceeding EUR 52,190 for FY 2023 (with a maximum of EUR 113,520 for FY 2023).
Municipalities levy a "unique municipal tax" (Imposta municipale unica or IUC), composed of three different taxes: municipal tax (Imposta municipale propria or IMU); garbage tax (Imposta sui rifiuti or TARI); indivisible service tax (Imposta sui servizi indivisibili or TASI). Rates vary according to the municipality.

Self-employed individuals with a structured organisation and non-resident taxpayers exercising business activity in Italy throughout a permanent establishment or a partnership are also subject to IRAP (whose flat rate can go up to 3.9%).

Directors operating in the financial sector are subject to an additional 10% tax levied on the variable compensation exceeding the fixed remuneration on bonuses of stock options and variable payments.
Resident individuals are taxed on interest at a flat rate of 26% (12.5% for interest on Italian treasury bonds). Capital gains derived by an individual on the disposal of Italian immovable property normally are taxed as miscellaneous income, but are exempt from tax if the individual held the property for more than five years. Gains arising from the sale of a principal residence are not subject to tax.