Income Tax for Corporates
Italian corporate entities are subject to a corporate income tax, known as imposta sul reddito sulle società or IRES, and to a regional production tax, known as imposta regionale sulle attività produttive or IRAP.
The standard rates are as follows:
· 24% for IRES.
· 3.9% for IRAP.
Up to FY 2016, the IRES rate was 27.5%. Specific rules will apply for bank and financial entities.
The following different IRAP rates are applicable for certain entities:
· 3.80% for entities with a determined governmental exclusive right to provide services.
· 4.20% for banks and financial entities.
· 5.30% for insurance corporations.
Regions have the power to slightly increase or decrease IRAP rates.
The IRES taxable base is determined according to the worldwide taxation principle, which states that, regardless of the location/jurisdiction where the income is produced, to the extent that the income is legally attributable to an Italian resident entity, the income is taxed in Italy. IRES is charged on the total net income reported in the financial statements of the company as adjusted for specific tax rules. Non-resident companies are taxed only on Italian-source income.
There are different methods of computation for the IRAP taxable base, depending on the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, cannot be taken into account when determining the IRAP taxable base.
For sales and manufacturing companies, the IRAP taxable base is broadly represented by the company’s gross margin in its financial statements. In addition to the non-deductible items mentioned above, interest income and expense and provisions for bad debts are excluded for the purposes of the IRAP taxable base.
For banks, the IRAP taxable base is broadly defined as follows:
· Intermediation margin reduced by 50% of dividends.
· 90% of amortisation costs relating to fixed tangible and intangible assets.
· 90% of other administrative expenses.
· Net value of adjustments and reassessments for bad debts.
Special rules apply to financial institutions, other than banks.
IRAP is levied on a regional basis, and regions are allowed to increase or decrease the standard IRAP rate up to 0.92%. Companies with facilities in different regions must allocate their overall taxable base to the different regions on the basis of the employment costs of personnel located at the various sites. Facilities become relevant to the calculation of IRAP if they have been established for more than three months. Italian companies with permanent establishments (PEs) abroad, as well as shipping companies qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on the income earned through these PEs.
The deduction of labour costs for IRAP purposes depends on the type of hiring contract. In particular:
· Full deduction for costs related to employees hired with an open-ended contract.
· Deduction limited to contributions for compulsory insurance against accidents (i.e. Istituto Nazionale Infortuni sul Lavoro or INAIL) for temporary employees.
Moreover, for the companies that have no employees, a tax credit equal to 10% of IRAP is recognised to be used to offset other tax liabilities.
Income Tax for an Individual
An individual is liable for tax on his income as an employee and on income as a self-employed person. Tax will be payable on income earned in Italy and overseas by an individual who meets the test of a "permanent resident" of Italy. A foreign resident who is employed in Italy pays tax only on income earned in Italy.
One of two tests must be passed to be considered an Italian resident: a life centered in Italy, or being registered in the Population Registry as living more than 183 days a year in Italy.
It is important to point out as regards taxable income from outside Italy, that a "tax credit" is granted for tax deducted outside Italy. In the case of income from a salary, the employer is obligated to deduct the amount of tax payable on a monthly basis. A self-employed person must prepay income tax that will be offset on filing an annual return.
The advance payment is determined on the basis of the return made for the previous year.
In the event of a new business, the advance will be calculated on the basis of estimates made by the owner of the business. Certain payments are deductible from taxable income as detailed below.
Income Tax Rates 2017
Tax Base (EUR)
75,001 and above
In addition to the personal income tax, the regional tax is also due on the same taxable income and the percentage depends on the decision of the region in which the individual has his/her domicile at the date of 1 January. Generally the additional regional tax is charged at progressive rates between 0.7 percent and 3.33 percent.
In addition to the personal income tax, the municipal tax also is due on the same taxable income and the percentage depends on the decision of the Italian municipality in which the individual has his/her domicile at the date of 1 January. Generally, the additional municipal tax percentage ranges between 0 percent and 0.9 percent.
There is an advance payment for additional municipal income tax to be paid as a one-off payment together with the income tax balance due for the previous year in the amount of 30 percent of the tax due for the previous year.
Beginning in FY 2011 and up to 31 December 2016, a solidarity contribution of 3% has been introduced. In particular, the new contribution applies to individuals who declare yearly total gross income higher than EUR 300,000 and the additional taxation is applicable only to the amount exceeding the said ceiling of EUR 300,000.
This contribution is deductible from the total taxable income of the same year.
The withholding tax agents will have to take into consideration the so called solidarity contribution of 3% in the year-end settlement, if it is paid by employees or collaborators.
For FY 2017, the solidarity contribution is no longer in force.
For individuals and companies capital gains are generally added to the regular income.
· The rate of tax payable on capital gains interest and dividend from shareholding is 26% for non-qualifying shareholding of up to 25% in a unlisted company.
· For the purpose of calculating a capital gain, the gain is decreased in line with the rate of increase in inflation, from the date of purchase to the date of sale. In regard to capital gains in a corporation, identical relief is allowed at the rate of increase in the Index.
· Companies pay 24% tax on capital gains. In sale of participation, 95% is tax exempt, subject to certain conditions.
Generally, interest income is taxable. There are, however, very different taxation rules for financial instruments, according to the source of the interest. In particular, interest income from government bonds is subject to a final withholding tax of 12.5 percent.
Interest income and income from other securities issued by banks or companies listed on the stock exchange, are subject to a final withholding tax of 26 percent.
Interest on bank and postal current accounts and interest on bank and postal deposits are subject to a final withholding tax of 26 percent. Interest on foreign bank accounts can be subject to a 26 percent substitute tax via the income tax return.
Deductions from Income
The deductions for family dependents are allowed as deductions from gross tax due.
The basic deduction for a spouse with income of less than EUR 2,840.51 is EUR 800; however, this amount is reduced progressively for incomes up to EUR 15,000. For income between EUR 15,000 and EUR 40,000, the basic deduction is fixed at EUR 690. For incomes in excess of EUR 40,000, the EUR 690 deduction is progressively reduced down to zero for income exceeding EUR 80,000.
An additional deduction for a spouse is due (varies from EUR10 to EUR30) for income between EUR 29,000 and EUR 35,200.
Basic deduction for a child is EUR 950. This is increased by:
· EUR 200 for each child, where there are three or more children in the family.
· EUR 400 for each disabled child.
These amounts are decreased as income rises as follows.
· For an individual with one child, the deduction no longer applies at income of over EUR 95,000.
· For taxpayers with two children, the deduction is not available for income over EUR 110,000.
· For three children, the deduction is not available for income over EUR 125,000.
· For four children, the deduction is not available for income over EUR 140,000.
· For five children, the deduction is not available for income over EUR 155,000.
A further deduction applies for individuals with four or more dependent children.
The deduction is equal to EUR 1,200, regardless to the amount of income.
These deductions are also available to non-residents; however, they will need to be able to prove the family relationship by means of a local family relationship certificate. According to the EU Law 2013 bis (Schumacker case), to qualify a non resident has to perform at least 75% of their work activity in Italy (at least 75%).
According to special rules, the following additional deductions from aggregate income are allowable.
· Alimony paid to a former spouse, excluding child support payments, for the amount established by the court.
· Social security and welfare contributions paid in accordance with legal requirements, even if paid abroad.
· Voluntary social security contributions paid in Italy up to the limit of EUR 5,164.57 and provided that further conditions are met.
· Mandatory social security contributions paid for household staff, babysitter, and elderly-care assistants up to EUR 1,549.37 per year.
A tax relief of up to a maximum of 19 percent of the following deducible expenses is allowed only to resident taxpayers.
· Medical expenses exceeding EUR 129.11 in any year, incurred by the taxpayer, his\her spouse, and other dependents, including those charged by specialists.
· Voluntary life insurance premiums and accident premiums, not exceeding EUR 1,291.14 provided that further conditions are met.
· Interest paid to a bank resident in the EU in connection with mortgage loans secured by property in Italy; up to a maximum of EUR 4,000 per year (if each spouse owns the property in common the deduction will be calculated in proportion to the ownership percentage).
· Interest paid to a bank resident in the EU in connection with agricultural loans up to the declared land income.
· Funeral expenses up to a maximum of EUR 1.550,00.
· High school tuition and university fees, not in excess of the tuition fees payable to state schools and universities.
· Expenses related to primary and secondary school up to a maximum of EUR 400,00.
· Expense paid to a real estate agent, up to a maximum of EUR 1,000.
· Grants for particular public objectives.
A National Income Tax Bonus is introduced in May 2015 for employment incomes that are not exceeding an annual gross salary EUR 24.000 (de minimus annual gross salary limit is EUR 8.000). The bonus is equal to EUR 80 per month andit is proportionally decreased for annual gross salaries between EUR 24.000 and EUR 26.000 €.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.