An Overview of Italian Taxes Due By Corporate Bodies Carrying on Business in Italy
Italian resident corporations and foreign companies operating in Italy through an Italian branch/permanent establishment, as well as a number of other entities that are treated as corporations are subject to two principal forms of taxation: Imposta sul Reddito delle Società (IRES) and Imposta Regionale sulle Attività Produttive (IRAP).
This article outlines the applicable rates, the structure of the taxable base, and key considerations for each.
IRES – Imposta sul Reddito delle Società
IRES is the national corporate income tax levied on the net income of companies operating in Italy.
Applicable Rate
The standard IRES rate is 24 per cent.
Taxable Base
The taxable base for IRES is the net income as reported in the statutory financial statements prepared generally according to Italian GAAP, or in some case IFRS, subject to adjustments required under Italian tax law. These adjustments aim to align accounting profit with a fiscally recognised measure of taxable income. As a general principle, to be tax deductible expenses need to be “inherent” to reported revenue – i.e. relate to the income produced by the company and be incurred necessarily for the purposes of producing taxable income, to the benefit of the company. Italian tax rules here follow rigorously the accruals concept such that expenditure, subject to certain specific rules, can only be deducted for tax purposes, if allocated to the correct accounting period. Principal adjustments include:
Disallowance of certain expenses, such as fines, penalties, and non-deductible entertainment costs, deemed private use element of costs such as telecommunications and motor vehicles used by staff.
Application of tax-specific depreciation and amortisation rates, which may differ from accounting rates.
Non-deductibility of provisions and reserves until the related expense is actually incurred (e.g. provisions for doubtful debts, subject to threholds).
Inclusion of taxable capital gains and exclusion of exempt income, such as dividends received under participation exemption rules.
- Fees paid to directors are generally tax deductible on a paid basis.
Availability of tax incentives, such as the Patent Box regime and the ACE (Allowance for Corporate Equity), which provides a notional deduction for increases in equity.
Group taxation options, including the national tax consolidation regime.
Carryforward of tax losses, which is permitted indefinitely, although only 80 per cent of taxable income may be offset in any given year.
For foreign companies with a permanent establishment in Italy, only income attributable to the Italian operations is subject to IRES.
IRAP – Imposta Regionale sulle Attività Produttive
IRAP is a regional tax levied on the value generated by productive activities within Italy. It applies to corporations, partnerships, and certain professionals, with the taxable base and rate varying by sector and region.
Applicable Rates
The standard IRAP rate for manufacturing and commercial entities is 3.9 per cent. However, Italian Regions have discretion to adjust this rate by up to ± 0.92 percentage points. The following table summarises effective IRAP rates for manufacturing and commercial businesses in selected Regions:
| Region | Effective IRAP Rate |
|---|---|
| Lombardy | 3.90% |
| Lazio | 4.82% |
| Emilia-Romagna | 3.90% |
| Tuscany | 4.20% |
| Veneto | 3.90% |
| Campania | 4.82% |
| Sicily | 4.82% |
| Piedmont | 3.90% |
| Puglia | 4.82% |
Rates may vary annually depending on regional fiscal policy.
Taxable Base
The IRAP taxable base is generally calculated as the gross operating margin, with specific exclusions and sector-based variations. For manufacturing and commercial entities, the base is derived from the value added by operations, excluding:
- Interest income and interest expense.
- Provisions for bad debts.
- Extraordinary income and charges.
A notable feature of IRAP is its treatment of personnel costs. In contrast to IRES, IRAP has traditionally excluded most employee-related expenses from deduction. Over time deduction for some employee related costs has been allowed, subject to certain thresholds and limits, for example:
- Costs for employees with open-ended contracts (contratti a tempo indeterminato) are generally deductible.
- Partial or full deductions may apply for apprentices, employees with disabilities, and staff hired under training or reintegration schemes.
- Seasonal workers may be eligible for a 70 per cent deduction under specific conditions.
- A flat deduction of €1,850 per employee (up to five employees) may apply to certain fixed-term contracts, excluding apprentices and other special categories.
- Costs related to temporary staff and fringe benefits are typically excluded from deduction.
The rules regarding the calculation of the IRAP taxable base are extremely complex, subject to Regional variation and legislative change, making accurate advance forecast difficult.
The IRAP base must be allocated across regions if the company operates in multiple jurisdictions, typically based on the distribution of employment costs.
Deferred Taxation
In calculating deferred taxes under applicable financial reporting standards, it must noted the analysis of permanent and timing differences should be conducted separately for IRES and IRAP.
The Importance of Timely Compliance with Italian bookkeeping and accounting rules and practice
Understanding the structure and application of Imposta sul Reddito delle Società (IRES) and Imposta Regionale sulle Attività Produttive (IRAP) is essential for any corporation or foreign entity with a permanent establishment in Italy. While IRES aligns more closely with net accounting profit, IRAP introduces a distinct approach focused on operational value added, with particular emphasis on the treatment of personnel costs. Regional variations in IRAP rates further underscore the importance of tailored tax planning for businesses operating across multiple Italian regions.
The final taxes due are the result of the companies statutory accounting records which must be set up correctly from the outset such that accounting movements flow into the annual financial statements and from the income statement into the tax return. In an Italian context there is no “short cut” to arriving at the tax bases – a rigorous approach is required, and expected, under Italian tax rules, to following Italian rules and practice in terms of bookkeeping, statutory accounting ledgers/reports and applicable accounting standards in preparing the statutory Italian financial statements.
Italian companies and other entities in Italy carry on business must also comply with Italian electronic invoicing rules (fatturazione elettronica) which require the issue of invoices in paperless electronic format via the Italian government e-invoicing portal within the time limits set out by Italian law. By the same token Italian (and at some stage in the future EU) based suppliers will issue e-invoices which can be inserted automatically into the recipient’s accounting records, avoiding the need to manual booking of purchases.
VAT – Imposta sul Valore Aggiunto
Italy applies a value-added tax (Imposta sul Valore Aggiunto, or IVA) on the supply of goods and services, as well as on imports. The VAT system is harmonised with European Union directives but retains specific national features.
VAT Rates
Italy applies four principal VAT rates:
Standard rate: 22 per cent – applicable to most goods and services.
Reduced rate: 10 per cent – applies to certain foodstuffs, water supplies, domestic passenger transport, hotel accommodation, certain restaurant services, and cultural event admissions.
Super-reduced rate: 5 per cent – applies to specific social services, non exempt healthcare services, and some agricultural products.
Preferential rate: 4 per cent – applies to printed and digital books, newspapers, periodicals, medical equipment for disabled persons, and certain educational materials.
Certain intra-EU supplies, exports of goods outside the EU, the provision of certain types of services to non EU residents may not be liable to VAT, without impacting the supplier’s right to credit for input VAT (VAT paid to suppliers).
Certain types of service, such as some financial and insurance transactions are treated as VAT exempt supplies, meaning that the supplier of the service is not able to obtain credit for input VAT.
VAT Compliance
Businesses operating in Italy must register for VAT at the outset and comply with electronic invoicing, reporting, and payment obligations. Electronic invoicing is mandatory for domestic transactions to secure credit for input VAT. VAT returns are typically filed monthly or quarterly, with an annual summary return also required.
Withholding Taxes
Italy imposes withholding taxes (ritenute alla fonte) on various types of income paid to both resident and non-resident recipients. This means that tax is withheld or deducted from the payment by the paying entity. The tax to be withheld is generally a percentage of the gross amount payable and rates of tax to be withheld vary depending on the nature of the income and the recipient’s status.
Domestic Withholding Rates
Salary:
Applicable scale rates of IRPEF, additional regional and municipal taxes adjusted for standard deductions and tax credits for dependents and earned income
Fees paid to occasional workers, professionals and self employed sub contactors
- Generally 20%. exemption for sub contactors on the Regime Forfettario
Dividends:
Resident individuals: 26 per cent
Resident corporations: generally exempt
Interest:
Resident individuals: 26 per cent
Government bonds: 12.5 per cent
Royalties:
Resident individuals: 20 per cent
Resident corporations: generally exempt
Non-Resident Withholding Rates
- Non resident employees and freelance contractors: 30 per cent (subject to exemption under an applicable double tax treaty).
Dividends: 26 per cent (may be reduced under applicable double tax treaties or EU directives)
Interest: 26 per cent (subject to treaty relief)
Royalties: 30 per cent on 75 per cent of the gross amount (effective rate: 22.5 per cent), unless reduced by treaty
Special rules may apply to entities in certain listed jurisdictions (tax havens).
An annual withholding tax return showing all payments of withholding tax made during the year must be filed. An annual certificate, the CU, must be issued following the end of the relevant year, by the due deadlines, showing gross amounts due, amounts withheld (including social security payments for employees).
Treaty Relief and EU Directives
Italy has an extensive network of double taxation treaties that may reduce or eliminate withholding taxes on cross-border payments. Under the EU Parent-Subsidiary and Interest-Royalties Directives, qualifying payments between associated EU entities may be exempt from withholding tax, subject to minimum shareholding and holding period requirements. The recipient of amounts due will need to claim, and provide advance evidence of entitlement to exemption from, or a reduced rate of, withholding tax. The payer is not obliged, under Italian to exempt or reduce a payment pursuant to a double tax treaty or EU directive. If they proceed so to do, they do so at their own risk, and subject to subsequent enquiry or audit from the Italian Tax Agency who will be concerned to check that conditions for exemption/a reduced rate will apply, usually by reference to supporting documents. If withholding of tax is made in excess of the amount due by virtue of a treaty or EU directive, then a claim for refund can be made to the Italian Tax Agency, but this might be a lengthy procedure.
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