Taxes in Italy: A Comprehensive Guide

Understanding taxes in Italy is essential for residents, citizens, and those conducting business in the country. Italy has a complex tax structure that funds its public services and maintains the Italian economy.

This guide will break down how Taxes in Italy work and cover these areas:

• Italian Taxes Overview
• Types of Taxes in Italy
• Who Pays Taxes in Italy?
• Tax Rates in Italy
• Taxes for Individuals in Italy
• Corporate Tax in Italy
• Tax Exemptions in Italy
• Taxes for Foreigners in Italy
• Taxes in Italy vs. US: Key Differences
• Tax Evasion in Italy

Italian Taxes Overview

Taxes in Italy are managed by the Italian tax authorities. These enforce tax compliance and monitor income taxes, consumption taxes, corporate taxes, wealth taxes, and financial investments owned outside of Italy. Through taxes, Italy covers government-sponsored services like healthcare, education, and infrastructure.

Usually, taxes in Italy range from 23 percent to 43 percent, depending on your income. Not everyone in Italy needs to file an annual tax return. For instance, you’ll be exempt if you only earn your income from one employer or earn less than €8,000 in a year. Corporate taxes, on the other hand, are typically 24 percent. Each year, taxpayers have to turn in tax return report that clearly outlines their income, declare foreign assets, and calculate their liabilities.

Italy offers tax exemptions, but they usually apply to small businesses, foreign residents, and certain types of income.

Italy has tax agreements with various countries, and you don’t have to pay double taxes.

Who pays taxes in Italy?

Tax residents in Italy have to pay for taxes. These taxes include their worldwide income, coming from both Italy and other countries.

A tax resident in Italy is a person who meets one of three criteria:

1. They spend more than 183 days in Italy during the tax year.
2. They have their primary residence in Italy.
3. Their center of business or economic interests is located in Italy.

Non-residents are only taxed on their income generated within Italy, namely from employment, financial investments, and real estate. Italy Golden Visa is a great way to get your residency in Italy and reside there for 183 days a year.

In 2023, the average single worker in Italy had a net tax rate of 27.7 percent, higher than the OECD average of 24.9 percent. This means that after taxes and benefits, the take-home pay for an average single worker in Italy was 72.3 percent of their gross wage, compared to the OECD average of 75.1 percent.

Types of Taxes in Italy

Here are the main types of taxes in Italy:

1. Income taxes: Income taxes are for both individuals and businesses. In Italy, income taxes are divided into the following categories: personal income tax, corporate income tax, and municipal income tax.
2. Consumption taxes: Consumption taxes include value-added tax (VAT) on goods and services. This is the tax that you pay when purchasing items in stores or online.
3. Capital gains tax: Capital gains tax is based on profits from financial investments and the sale of properties.
4. Wealth and property taxes: These taxes are separate from capital gains tax and include real estate taxes and various local taxes imposed on property ownership. The tax rates for this vary from region to region.
5. Inheritance and gift taxes: This is the tax imposed on individuals when there are transfers of wealth between individuals. It can be an inheritance or a gift.

Income taxes in Italy

Income taxes in Italy are divided into three main categories: personal income tax, corporate income tax, and municipal income tax. Here’s how they work in Italy.

Personal income tax

Personal income tax, also known as IRPEF (Imposta sul Reddito delle Persone Fisiche), is the most common tax individuals have to pay in Italy. The rates for personal income tax depend on your annual income, meaning the higher the income, the higher the taxes. The rates range from 23 percent to 43 percent. The IRPEF is a progressive tax, and until 2022, the following rates were applied: 23 percent for income up to €15,000, 27 percent for income between €15,001 and €28,000, 38 percent for income between €28,001 and €55,000, 41 percent for income between €55,001 and €75,000, and 43 percent for income above €75,000.

It’s important to note that all income from rental, employment, business activities, and financial investments must be declared separately.

You can get tax deductions based on medical expenses, mortgage interest payments, and expenses related to dependent family members.

National, regional, and municipal income tax

It’s also important to know the main differences between national, regional, and municipal taxes in Italy.

• National income tax: This tax goes to the Italian government.
• Regional income tax: As a part of your income tax, you’ll pay regional income tax. This is tied to a specific region and the rates are usually from 1.23 percent to 3.33 percent of taxable income.
• Municipal income tax: This type of tax is tied to towns and cities. They can impose a municipal tax, which comes out to anywhere between 0 percent to 0.9 percent.

Corporate income tax

Corporate income tax, or IRES, is levied on companies’ profits. The standard corporate tax rate is 24%, which applies to both Italian companies and branches of foreign corporations operating in Italy.

Each year, businesses in Italy have to submit annual tax returns and cover the taxes on their profits.

On top of IRES, companies in Italy have to pay a regional production tax (IRAP), and the tax rate is usually at 3.9 percent. Regional production tax may vary depending on the region.

The special tax regime for small businesses

Small businesses and freelancers in Italy can benefit from a special tax regime. You can opt for a flat tax rate, which will make the process of paying taxes simpler and more manageable, especially if you have a lower income.

Value-added tax (VAT)

Like other European countries, Italy has a value-added tax (IVA). This is a special tax that applies to most goods and services.

The standard VAT rate in Italy is 22 percent. However, there are ways to get reduced rates of 10 and four percent. While 10 percent can apply to some food items, hotel accommodations, and some tourism-related services, a reduced rate of four percent applies to basic food items and certain medical supplies.

Exemptions and refunds

Crucial sectors in Italy, like education and healthcare, may be exempt from VAT. Businesses engaged in export activities may be eligible for VAT refunds since Italy aims to promote international trade with this.

Capital gains tax

When you sell financial investments or real estate properties in Italy, you may need to pay capital gains tax. The tax rate is 26 percent is imposed on financial assets, such as the sale of stocks, bonds, and other securities.

For real estate properties, capital gains are applied if you, after buying property in Italy, sell it within five years of acquisition. After five years, capital gains tax generally does not apply.

Wealth and Property Taxes

Property tax

If you’re a property owner in Italy, you must pay property taxes (IMU). It’s important to note that this only applies to real estate in Italy. The rates are prone to changes depending on the property type and size. Principal residences are generally exempt from property taxes unless they are luxury properties.

The property tax is calculated based on the cadastral value of the property, which is typically lower than the market value.

Wealth tax

Wealth tax applies to financial assets owned outside of Italy. All Italian tax residents have an obligation to these assets. The most common types of financial assets include bank accounts, investments, and real estate owned abroad. The current tax rate for wealth tax is generally set at 0.2 percent, but this can change depending on the type of asset and its value.

This type of tax is meant to ensure that all residents contribute to the public finances of Italy, no matter where their assets are located. If you don’t declare foreign assets, you may suffer substantial penalties and legal repercussions.

Inheritance and Gift Tax

Inheritance tax and gift taxes in Italy apply when there’s a transfer of wealth between two or more individuals. The tax rate isn’t flat, and it varies based on the relationship between the individuals and the value of the assets being transferred.

For instance, spouses and children typically pay lower tax rates of four to eight percent. Distant relatives or non-relatives may have to cover tax rates as high as 15 percent.

Exemptions

There are some exemptions for inheritance and gift tax in Italy. For instance, the first €1 million of inheritance for direct heirs may be exempt from tax, while siblings may enjoy a €100,000 exemption.

Tax Rates in Italy

Taxes for individuals in Italy

Here are the tax rates for individuals based on their personal income:

On top of national income tax, individuals must pay regional income tax and municipal income tax. Generally speaking, the overall tax rate for individuals may differ significantly depending on where they reside.

Corporate tax in Italy

Businesses in Italy have to cover the following taxes:

• corporate income tax at 24 percent
• regional production tax (IRAP) at approximately 3.9 percent

The total tax liability for companies is at around 27.9 percent.

Corporate entities must also stick to specific compliance regulations, such as maintaining proper accounting records, filing annual tax returns, and paying taxes on their profits.

Tax Exemptions in Italy

Italy offers various tax exemptions and tax benefits. For example, expats under the “flat tax regime” may be eligible for reduced taxes, especially for those relocating to Italy for work. Additionally, certain income types, such as rental income below a specified threshold, may enjoy tax relief.

The Italian government encourages entrepreneurship by offering tax incentives for start-ups and innovative businesses. Understanding the available exemptions can significantly enhance tax efficiency and compliance.

Taxes for Foreigners in Italy

When you’re a foreigner and an Italian tax resident, you must declare your foreign financial assets and pay taxes on your worldwide income.

This is what counts as a foreign financial asset:

• bank accounts
• real estate owned outside of Italy
• other foreign financial assets.

On the other hand, non-residents only pay taxes on income generated within Italy.

Remember, foreigners must also pay social security contributions based on their earnings. Social security contributions are separate from the income tax system.

Depending on the nature of their employment, expats may also have access to specific tax treaties between Italy and their home countries, which can mitigate their overall tax burden.

Filing taxes as a foreigner

Foreigners living in Italy have to file an annual tax return and declare all their sources of income. The Italian tax authorities provide resources and guidance for expats.

Taxes in Italy vs. US: Key Differences

The tax systems in Italy and the United States have significant differences. Italy uses a progressive tax rate system, while the U.S. has federal taxes and state taxes that may vary. Italy’s tax system includes additional components like municipal income tax and regional taxes that the U.S. tax system does not have.

One key difference is that Italy taxes residents on their worldwide income, while the U.S. offers exclusions for foreign income under certain conditions. Furthermore, the way deductions and exemptions are applied can differ greatly between the two systems.

If you want to retire in Italy, check out how pensions are taxed, as the two systems differ drastically. 

Tax filing process

In the U.S., the tax filing process typically involves submitting forms to the federal government and state authorities. In contrast, Italy has a more centralized approach, where individuals primarily deal with the Italian tax authorities. Understanding these differences is crucial for anyone transitioning between the two tax regimes.

Tax Evasion in Italy

To avoid tax evasion in Italy, the Italian tax authorities now monitor bank accounts, financial institutions, and other income sources closely. The Italian government has implemented stricter measures to identify tax evaders, such as sharing financial information with other countries to combat tax evasion on an international scale. So, it’s best to adhere to the tax laws and pay your taxes on time and properly.

Penalties for tax evasion can be severe. If you’ve done tax evasion, you may face fines, interest on unpaid taxes, and even criminal prosecution in extreme cases.

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Frequently Asked Questions About Taxes in Italy

1. Who is considered a tax resident in Italy?

Tax residents in Italy are individuals who spend at least 183 days in the country during the tax year or have their primary residence in Italy.

2. Do foreigners pay taxes in Italy?

Yes, foreigners have to pay taxes based on income generated in Italy. If you’re an Italian tax resident, you must pay taxes on your worldwide income.

3. What is the capital gains tax rate in Italy?

The capital gains tax rate on financial investments in Italy is 26 percent. This also applies to real estate sold within five years of buying it. However, it doesn’t apply if you sell your property after five years.

4. What is the property tax in Italy?

Property taxes (IMU) are levied on real estate. This changes depending on the location and property type. Principal residences (such as your home) are exempt from property tax unless classified as luxury properties.

5. Are there any tax treaties with other countries?

Yes, there are tax treaties with other countries. Italy has entered into tax treaties with various countries. This prevents double taxation and simplifies cross-border trade and investment.