The main tax on personal income that is implemented in Italy is the Personal Income Tax. In the local terminology, it is referred to as Imposta sui redditi delle persone fisiche (IRPEF). Individuals residing in Italy are subject to three different classes of taxes, which are as follows:
- National Income Tax
- Regional Income Tax
- Municipal Income Tax
Overall, a progressive taxation system is implemented in Italy. There are several different applicable tax rates that are taken under the tax net, contingent on the nationality status of the residing individuals.
Scope of Personal Taxation in Italy
The tax status of individuals that are residing in Italy is considered to be the primary step in evaluating the tax incidence on personal income. In accordance with the Italian tax law, Italian residents, as well as non-residents are subject to taxation in Italy. However, they are subject to different rates and on different basis.
Tax Resident Individuals
Tax Resident Individuals are supposed to pay their personal income tax on their income, regardless of where that income has been earned. In other words, tax resident individuals in Italy have their income taxes on their worldwide income, including income that is earned from foreign sources. Some examples of these foreign sources of income might include foreign dividends and interest, foreign compensation, as well as foreign salaries that might be earned while residing in Italy.
In the same manner, tax resident individuals are also subject to wealth tax that is paid on real estate as well as on financial investments that exist outside Italy. Tax resident individuals are supposed to declare all foreign investments for purposes of monitoring, using an Italian tax return.
Taxation for neo-domiciled individuals
Individuals that have migrated to Italy, and have shifted their tax regimes to Italy are supposed to pay taxes on their Non-Italian sourced income that should be taxed in Italy through the application of a flat substitute tax. This is flat rate that is applied on an amount equaling to greater than 100,000 euros (EUR). Under this tax regime, tax payers could substitute the income tax on foreign investments, the wealth tax on real estate and financial investments outside Italy, and financial monitoring obligations via an Italian Tax Return.
Non-tax resident individuals
Taxing non-resident individuals are mostly subject to Personal Income Tax on the income that is earned within Italy. In this regard, foreign sources of income are not accounted for when it comes to tax computation.
Tax Rates on Personal Income
National Tax on Personal Income is levied at a progressive rate in Italy. The tax rates are as follows:
- For an income between 0 EUR and 15000 EUR: A tax rate of 23% is applied
- For an income between 15,001 EUR and 28,000 EUR: A tax rate of 27% is applied
- For an income between 28,001 EUR and 55,000 EUR: A tax rate of 38% is applied
- For an income between 55,000 EUR and 75,000 EUR: A tax rate of 41% is applied
- For an income greater than 75,001 EUR: A tax rate of 43% is applied
Regional Income Tax
Regional Income Tax is contingent on the region of residence. The rate varies from 1.23% to 3.33%.
Municipal Income Tax
Municipal Income Tax varies from different municipality. The tax rate ranges from 0% to 0.8%. All the municipalities establish their progressive tax rates that are further levied on the national income bracket.
Taxation on Corporate Income in Italy
Corporates that are working in Italy are subject to a corporate income tax. This tax is locally referred to as mposta sul reddito sulle società (IRES). Additionally, corporations are also subject to a regional production tax (or IRAP).
The standard rates of taxation, for both corporate tax, as well as for regional production tax are as follows:
- Corporate Income Tax: A tax rate of 24% would be applicable.
- Regional Production Tax: A tax rate of 3.9% would be applicable.
However, it must be noted that different regional production rates are applicable for banks and financial entities, and companies that are focused in provision of financial services. Subsequent details of Corporate Income Tax, and Regional Production Tax are given below:
Corporate Income Tax
The taxable base for corporate income tax is determined in accordance to the worldwide taxation principle. According to this principle, any income (regardless of being sourced in Italy, or in any foreign country), that is attributable to an Italian resident entity is liable to be taxed in Italy. This tax is charged on the total net income that is reported in the financial statements of the company adjusted for specific tax rules. However, as far as non-resident companies are concerned, they are taxed on their Italian sourced income only.
Regional Production Tax
The computation of Regional Production Tax is contingent on the nature of business that is carried out by the taxpayer. In this regard, provision for liabilities and contingent risks are not accounted for when calculating the tax base for regional production tax.
This particular tax is applied on a regional basis. In this regard, regions are allowed to increase or decrease the taxation up to 0.92%. Companies that have facilities in different regions are supposed to allocate their taxable base to different regions, contingent on a variety of different workers.
In addition to the taxes mentioned above, it can be seen that there are a number of other taxes that are levied on a couple of other instances. These taxes are mentioned as below:
- Substitutive Taxes on reorganizations – This includes mergers as well as contributions in kind. The substitutive tax is calculated on a progressive rate ranging from 12% to 16%.
- Tonnage Tax – This is applicable on tax shipping companies that are residents of Italy, as well as those shipping companies that are foreign, but are operating in Italy. This tax regime allows determination of presumptive income that is based on net tonnage of the qualifying ships that are apportioned to the effective shipping days.