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Italy

General Information

Country Name: Italian Republic (Italy)
Currency: Euro (EUR, €)
Primary Tax Authority: Agenzia delle Entrate (Italian Revenue Agency)

Key Legislation

  • Constitution of Italy: Provides the framework for the Italian tax system. Article 53 mandates that everyone must contribute to public expenditure based on their ability to pay.
  • Income Tax Act: Governs the taxation of individual and corporate income.
  • Value Added Tax Act: Regulates the imposition of VAT.
  • Tax Code of Local Entities: Governs the taxation powers of local authorities.

Fiscal Authority Allocation

Italy has a mixed tax system, where both the central government and local authorities have taxing powers. The central government is responsible for major taxes, while regional and local governments collect taxes specific to their jurisdictions.

Taxes Collected by Central Authorities:

  • Corporate income tax (IRES)
  • Personal income tax (IRPEF)
  • Value-added tax (VAT)
  • Excise taxes
  • Social security contributions

Taxes Collected by Local Authorities:

  • Regional tax on productive activities (IRAP)
  • Municipal property tax (IMU)
  • Local income surtaxes

Revenue Sharing Mechanisms:

The Italian government redistributes a portion of tax revenues collected by the central government to regional and local authorities through a revenue-sharing system.

Corporate Income Tax (IRES)

  • Standard IRES Rate: 24%
  • Deductions: Costs directly attributable to business activity, including depreciation, interest expenses (subject to limits), and research and development costs.
  • Loss Carryforwards/Carrybacks: Losses can be carried forward indefinitely but can offset only up to 80% of taxable income in each subsequent year. No loss carryback is allowed.
  • Tax Incentives: Italy offers tax credits and deductions for investments in R&D, innovation, and specific industries like green energy and technology.

Value-Added Tax (VAT)

  • Standard VAT Rate: 22%
  • Reduced Rates: 10%, 5%, and 4% apply to specific goods and services (e.g., food, healthcare products, and cultural services).
  • Scope of VAT: VAT applies to the sale of goods and services within Italy, as well as imports. Exported goods are zero-rated.
  • Exemptions: Certain sectors like education, healthcare, and financial services are exempt from VAT.

Personal Income Tax (IRPEF)

  • IRPEF Rates: Progressive rates from 23% to 43%:
    • 23% on income up to €15,000.
    • 27% on income between €15,001 and €28,000.
    • 38% on income between €28,001 and €55,000.
    • 41% on income between €55,001 and €75,000.
    • 43% on income exceeding €75,000.
  • Tax-Free Allowances: Personal deductions for dependent family members, interest on mortgages, medical expenses, and pension contributions.
  • Regional and Municipal Income Tax: In addition to national income tax, taxpayers are subject to regional income tax (0.9% to 3.33%) and municipal income surtaxes (up to 0.8%).

Additional Mandatory Contributions

Social Security Contributions:

  • Rate: The employer contribution ranges between 30% and 40% of gross salary, depending on the industry, while the employee contribution is generally around 9.19%.
  • Tax Deductibility: Employee contributions are tax-deductible.

National Health Contribution:

  • Rate: This is included within the social security contributions.

Withholding Taxes

  • Dividends: 26% withholding tax, which may be reduced under Double Tax Treaties (DTTs).
  • Interest: 26% withholding tax, with potential DTT reductions.
  • Royalties: 30% withholding tax, reduced under applicable DTTs.
  • Payments to Non-Residents: Withholding taxes apply, with treaty-based reductions available.

Transfer Pricing Rules

Italy follows OECD guidelines on transfer pricing. All cross-border transactions between related parties must comply with the arm’s length principle. Documentation requirements are strict, and penalties apply for non-compliance.

Special Tax Regimes

  • Patent Box Regime: Provides a partial exemption (up to 50%) on income derived from intellectual property.
  • R&D Tax Credit: Allows a tax credit for qualifying R&D expenses.
  • Super-Deduction for Innovation and Digitalization: Additional deductions for investments in technology and innovation projects.

Other Taxes

  • Inheritance and Gift Tax: Rates range from 4% to 8%, depending on the relationship between the deceased/donor and the heir/recipient.
  • Municipal Property Tax (IMU): Applied on the ownership of real estate at a rate set by local authorities, generally between 0.4% and 0.76%.
  • Regional Tax on Productive Activities (IRAP): A regional tax imposed on the net value of production, with rates ranging from 3.9% to 4.82%.
  • Stamp Duty: Charged on various legal documents, including real estate transactions and financial transactions.

Double Taxation Agreements (DTAs)

Italy has a broad network of DTAs with over 90 countries, including the US, UK, Germany, and France, which aim to prevent double taxation on income earned in multiple jurisdictions.

Compliance and Reporting

  • Corporate Tax Filing Deadline: Corporate tax returns must be filed by the end of the ninth month following the end of the fiscal year.
  • VAT Filing: Monthly or quarterly VAT returns are required, depending on turnover.
  • Penalties for Late Filing: Penalties and interest apply for late or inaccurate tax filings.

Recent Developments

  • Tax Reform Plans: Italy has been implementing tax reforms aimed at reducing the corporate tax burden and enhancing digital services tax. There have also been discussions on lowering the income tax rates and broadening the tax base.
  • OECD BEPS: Italy has adopted several OECD BEPS measures, including Country-by-Country Reporting (CbCR) and transfer pricing documentation requirements.
  • Global Minimum Tax: Italy has expressed its commitment to the OECD’s global minimum tax proposal and is preparing for its implementation.

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