Overview
This is a very general guide and only intended to give some basic background information. It should not be seen as a substitute for specific advice.
Table of Contents
Tax residence
Impact of tax residence
Individuals who are tax-resident in Italy for tax purposes are subject to Italian income tax on their worldwide income.
Non-resident individuals are liable to tax only on certain income and gains from Italian sources. The Italian Tax Code contains a precise definition of Italian source income, including income from employment of self employment where the relevant services are performed from Italian soil so it is important to check that definition
Definition of Italian Tax Residence
Art 2 of the Tax Code in its current, post 2023 version, provides that you are considered tax resident in Italy if, for the greater part of the tax year (more than 183 days or 184 in a leap year), you:
- are physically present on Italian territory; OR
- have your centre of vital interests – defined as the centre of your affections – spouse, close family – in Italy, OR
- have your habitual abode in Italy; OR
- are registered as resident in the list of resident population (anagrafe) maintained by your local authority (Comune) – this is a presumption of tax residence, not an absolute test and can be overcome, if the facts and circumstances allow, e.g. by the terms of an applicable tax treaty.
This means that you will be a tax resident of Italy for any Italian tax (calendar) year, if you meet any one of the above tests for more than 183 days (184 in a leap year). If you do not meet any of the tests, you are not an Italian tax resident for that year – it is an “all-in all-out” test. If you are tax resident in Italy for a particular Italian tax (calendar) year then you are liable to tax on worldwide income (possibly subject to the terms of a double tax treaty (see below) on all income received from 1 January of the relevant year, and to Italian wealth taxes on assets held from 1 January of the year onward.
In general, the “clock resets” at the end of each tax year. So if you leave Italy on 30 July of one year, and return on 30 June of the following year, such that you do not meet test 1 – physical presence, and providing you do not meet any of the other tests in either year, you will not be considered as tax resident for the whole of both of the relevant years. In these circumstances however, the issues of centre of vital interests, habitual abode and registration as resident come into play. Even if you are physically present outside Italy for an extended period, it is still possible to meet the Italian test of tax residence by virtue of your centre of family interests, habitual abode or maintaining your registration as resident with the anagrafe.
A day under the test of tax residence includes any fraction of a day during the tax year – so days of arrival and days of departure count as a whole day. The days do not need to be consecutive in the tax year.
The tests are alternative so meeting any of them will make you tax resident in Italy (or presumed to be tax resident in the case of test no. 4) for a particular tax year.)
Dual Tax Residence
The impact of a DTA
Expats, nomads and the geographically mobile in general potentially have a problem as they can be treated as tax resident in two countries. Other countries have their own definition of tax residence which may not be in line with Italy’s definition. If you are resident in Italy as well as another country, under the relevant definitions of tax residence in each country, you can check if there is a treaty for the avoidance of double taxation (commonly referred to as the double tax treaty or double tax agreement “DTA”). If there is a treaty there will likely be a “tie-breaker” clause which might apply to you.
The tie breaker, if applicable, can operate to make you a tax resident in just one of the two countries. But the tie breaker clause operates solely for purposes of the DTA. That means its operation is limited to providing a single country of tax residence so that the rest of the treaty – the articles dealing with how various different types of income (business income, capital gains, dividends, interest, royalties, income from employment and self employment, pensions and miscellaneous income) are liable to tax between the two jurisdictions. These clauses are designed to avoid taxpayers being taxed twice on the same income and need to do so based on a single country of residence.
What this means is that the while the tie-breaker clause can make you a tax resident in only one country, it does so within the specific terms of the DTA. Wealth taxes are not specifically covered by the Treaty. If the DTA operates to make tax resident outside Italy, that does not necessarily mean that you are exempt from Italian wealth taxes. Many of Italy’s tax regimes require a certain period of non tax residence outside Italy – it would be reasonable to assume that the only applicable definition of tax residence for these purposes, is the Italian test of statutory tax residence, without the application of the terms of a double tax treaty.
Note that the tie-breaker clause will only come into play exclusively if you are tax resident in the other country and you meet all the conditions under local law to be able to access the treaty. That means at the very least that you are a tax resident of the other country under that country’s test of tax resident. Some of Italy’s treaties have special rules for taxpayers to access treaty benefits (for example, meeting a “substantial presence” test in the case of the U.S. In short, if you meet the Italian test of tax residence and are claiming that you are not Italian tax resident for any year based on the DTA , the starting point is to ensure, by reference to professional advice in the other country, certification of the relevant tax authority to the effect that you are a tax resident of their country, and documented evidence that the tie-breaker rally does resolve in favour of not being tax resident in Italy. Penalties under Italian law for failure to file for taxes and pay income and wealth taxes as a resident, if not justified by the extremely technical terms of a treaty, are significant. You should never assume that a double tax treaty applies.
The tie breaker clause
Italy’s DTA’s vary somewhat, as they are all the result of negotiations between the two contracting states (albeit often based on a standard model drafted by the OECD.) Typically the treaty tie-breaker clause will state that where a person is a tax resident of both Contracting States, then his or her residence status is determined as follows:
- s/he shall be deemed to be a resident of the country in which s/he has a permanent home available;
- if s/he has a permanent home available in both, s/he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (center of vital interests);
- if the state in which they have their permanent home or center of vital interests cannot be determined, they will be resident in the state in which they have their habitual abode;
- if the individual has a habitual abode in both Contracting States or in neither of them, s/he shall be deemed to be a resident of the Contracting State of which they are a national;
if s/he is a national of both Contracting States or of neither of them, the tax authorities of the two States shall settle the question by mutual agreement.
Italian Tax For Non Residents
Liability on Italian Source Income Only
An individual who is not tax resident in Italy (under the definition in the Italian Tax Code) will, in general, be liable to tax only on their Italian source income. They will not be liable to report foreign assets and pay wealth taxes on them, as long as the tax withheld is, under Italian law, a final withholding tax.
This article contains more information on the technical definition in the Italian Tax Code of Italian source income.
Withholding Tax
For the non-resident, most Italian tax liabilities will be satisfied by a way of withholding tax at source. The payer (e.g. bank, employer, publisher) will deduct from any payment of income the tax due, according to Italian withholding rules. On the whole this is a final, definitive tax, so that no return is required to be completed. The applicable rate of tax depends on a series of factors, principally the type of income and whether a double tax treaty reduces (or even exempts) the withholding tax applied at Italian statutory rates.
However receipt of the following type of income may require a non resident to file an Italian tax return:
- Income from employment where the employer is not tax resident in Italy and where you are not being paid through an Italian payroll;
- Income from self employment for services provided in Italy (in which case it will probably be necessary to register for VAT at the outset);
- Income from rental of Italian real estate (even if the rent is paid subject to deduction of Italian tax at source);
- Income from rental of plant or equipment.
Italian Income Tax
Income Liable to Tax at Scale Rates
The Italian Tax Code classifies Income into different categories and then sets out the rules for taxation of that kind of income. The following types of income are, in general, liable to income at scale rates:
- Income from employment
- Pension income
- Income from self -employment (unless a flat rate regime applies)
- Income from occasional services of self employment
- Investment income not eligible for a flat rate of tax
- Miscellaneous Income
Substitute/Flat Rate Tax
There are a number of substitute tax/flat rate regimes – such as
- 5%/15% flat tax on gross income (reduced by a coefficient) on profits from self employment up to Euro 85,000 per annum;
- 7% flat tax for pensioners taking up residence in a small town in certain Regions of southern Italy for the first time;
- Euro 200k annual flat tax in place of tax at marginal rates and of substitute tax on non Italian source income
- 9-15% for income paid by Italian approved pension funds;
- 12.5% interest on government bonds;
- 26% on investment income, dividends, interest and capital gains, excluding income from non EU harmonized investment funds and ETF’s.
- 26% on capital gains on the sale of real estate (usually gains on pretty held for less than 5 years and not occupied as a primary residence);
- 21% -26% flat tax on gross rents received for qualifying rental income from Italian real estate;
Some of these regimes apply automatically in certain circumstances while others will apply at the option of the taxpayers (sometimes to be made in advance).
Tax Due at Scale Rates
National income tax (IRPEF)
Income is subject to income tax at the national, regional and municipal levels. The standard national income tax (IRPEF) rates are shown here.
Regional income tax
As part of a programme of devolution of tax raising powers to local authorities, Italy has instituted a regional income tax the rate of which can range from 0.7% to 3.3% of income depending on the Region in which you are resident, taxable income and family circumstances.
Municipal income tax
Depending on your Municipality (Comune) of residence, the additional municipal tax ranges from 0% to 0.9% of income.
Non-residents with a liability to income tax in Italy (e.g. on Italian source salary or pension) must also pay the Regional and Municipal taxes.
Tax Treatment of Certain Types of Income/Gains
Pension and retirement income
The treatment of foreign pension income and income from foreign retirement accounts is complex. In Italy it is the State (through the national social security institute, INPS, that has traditionally catered for the citizen’s pensions.
Retirement benefits received from a State Pension Scheme or from an employment related occupation will typically be taxes as income from employment at scale rates plus the Regional and Municipal additional taxes.
Employer occupational pension schemes and private pension arrangements offered by financial institutions (the most common of which in an Italian context are regulated Italian schemes with their own specific tax rules) make up a relatively small percentage of the overall pension provision. The relevant income may be treated as income from capital liable to substitute tax, depending on the exact nature nature of the pension fund.
Capital Gains
There is no special capital gains tax. Capital gains on disposal of shareholdings and other securities and financial products are in general taxable at the general flat substitute 26% tax rate often withheld at source if there is an Italian financial intermediary involved, otherwise reportable in the annual tax return.
Capital gains from real estate are exempt tax if the real estate does not constitute of developable land and has been held for at least five years at the time of sale. Residential property occupied as a registered (with the Municipality/Comune) principal private residence in Italy is exempt from tax on any capital gain regardless of the period of ownership. If you are liable to tax on the capital gain it is liable to tax at marginal income tax rates with an option to pay 26% substitute tax.
Special Regimes
There are number of favorable tax regimes designed to attract people to come and live in Italy.
Tax Treatment of Certain Types of Income/Gains
Deductions From Taxable Income
There is a long list of expenditure which can be deducted from total income. Some of these are deductible from total income and some operate as a tax credit reducing the tax bill. Most of the expenditure is subject to a cap or limitation. The list includes:
- Social security (pension and welfare) contributions and certain contributions to supplemental pension providers
- Alimony paid to a separated or divorced spouse resulting from a court order • Expenditure for real estate agency fees
- Contributions to ONLUS (charities), nonprofit organizations, research institutes and scholastic and religious entities
- Medical and veterinary expenses
- Expenditure for international adoption of children
- Interest on the main mortgage, agricultural loans
- Fees and commissions paid to real estate agents
- Rent paid for a principal private residence
- Expenditure for renovation of buildings and energy saving or earthquake prevention measures
- Cost of high-efficiency energy kit (fridges, freezers dish-washers ovens heaters etc.),
- Cost agricultural machines, earth movers etc.
- Safety installations
- Qualifying Life insurance premiums
- School fees
- Expenses for sporting activities of children
- Expenses for students living away from home
- Charges for caregivers
- Funeral expenses
- Costs of purchase of musical instruments
Standard Tax credits
Italy has a number of standard tax credits which can be taken as a deduction in computing the tax payable. The available tax credit gradually reduces to zero as taxable income increases so that the credits are withdrawn for taxpayers earning over €50,000.
These tax credits allow a person in full time employment or a pensioner to earn €8,500 per year without any liability to tax. A self-employed person can earn up to €4,800 annually without a tax liability. The tax credit decreases in line with taxable income so that people earning over Euro 50,000 lose the tax credit.
Tax Management
Filing of Returns
The Italian income tax return (the form “PF” or “730”) must be filed with the tax authorities usually by the end of September after the end of the tax year (calendar year), but the deadlines can be extended.
Payment of taxes
For most employees and pensioners (with Italian employers/providers) tax is withheld at source by the employer/pension provider and there may be no need to file a return unless the taxpayer has other income or deductions that cannot be put through the payroll.
The self employed (who anyway are subject to a flat rate 20% withholding tax where they are providing services to Italian business) and others with income that is not fully taxed at source will pay tax as follows:
- Approximately 50% of the prior year income tax liability in June of the current tax year on account of the current year;
- Approximately 50% of the prior year income tax liability in November of the current tax year on account of the current year;
- A final payment by way of the outstanding balance for the previous year June of the following year.
This system means that especially for the self-employed starting up in Italy you will no tax payment deadlines in the first year, but in the second year, you will have a “double whammy”, paying the tax due on the previous year’s income at the same time as payments on account of the second year. You should set part of your income aside to be able to meet that tax liability.
Filing of Returns
Failure to file a tax return under Italian can constitute a crime and severe penalties can apply. Similarly, strict penalties including criminal penalties apply to failure to make payment of tax of larger amounts. For smaller amounts the rules provide for administrative penalties and interest on late payment as well as a series of opportunities to self-disclose, mistakes, omissions from the tax returns and underpayments, subject to payment of penalties in a significantly reduced amount.
Local Property Taxes
Italian homeowners or occupiers are liable to IUC (Imposta Unica Comunale – Single Municipal Tax). This tax comprises three different local taxes, all of which are paid to the local municipality (commune):
IMU (Imposta Municipale Unica – local municipal tax)
This is a tax on the value of the real estate derived from cadastral (land registry values) Exemption is generally available for a principal private dwelling at which the owner is registered as resident.
TARI (Refuse/Garbage Tax)
Your municipality’s web site should contain details of these taxes. For smaller municipalities you may need to enquire. Depending on your municipality you may not receive a reminder or notice to pay these amounts until they have fallen past due. It is up to you to inform yourself regarding payment.
Foreign Asset Reporting And Wealth Taxes On Foreign Assets
Italian resident taxpayers must report foreign assets including real estate, bank accounts and and financial assets in the section RW of the annual tax return. Penalties for failure can be steep.
In addition to the reporting requirement there are two taxes on foreign assets. These are generally described as wealth taxes, although the primary intention is to ensure that there is no tax incentive for Italian residents to invest abroad.
IVIE (tax on the value of foreign real estate) applies to IVIE is payable at the rate of 1.06% of the value as defined. The rate is reduced to 0.4% in limited cases for buildings used as a main residence. The value or tax base depends on the location and type of property but typically is a foreign land registry value or purchase cost rather than market value.
IVAFE applies to foreign bank accounts. For current and savings accounts held abroad the rate is a fixed Euro 34.20 per foreign account. No tax is due if the average balance over the
year shown in the bank statements is lower than Euro 5,000 taking into consideration all accounts held abroad with the same financial institution.
Financial assets held abroad, are liable to tax at a 0.20% rate on the market value. However, the tax only applies to “financial products” i.e. tradeable assets and typical investments to which a 0.2% stamp duty would apply if the asset were purchased through an Italian financial intermediary. The rate is 0.4% for assets listed in certain “tax haven” black listed jurisdictions.
Inheritance/Gift tax
Italy operates a tax on inheritance and gifts. The tax applies on the transfer of certain non-exempt assets from one individual. The rate at which it applies and the threshold over which it applies depend on the relationship between beneficiary and the deceased or donor.
In summary, where the transfer is made in favor of:
- a spouse or a child, the tax is imposed at the rate of 4% on the value of the assets in excess of the tax-free threshold of €1 million per heir or per gift;
- a sister and brother, the tax applies at the rate of 6% on the value of the gift or inheritance exceeding €100,000 per heir/gift;
- other family members up to the fourth degree, tax applies at the rate of 6% on the entire value;
- other beneficiaries not mentioned above the tax applies at the rate of 8% on the entire value transferred.
Special rules apply to value assets assets, especially real estate there is a list of assets, including government bonds and the benefit of life insurance policies which are outside the scope of the tax.
Social security contributions
Social security contributions for employees are in due in the range of 30% to 40% of gross remuneration with the employee responsible for 9-10% of the total and the employee for the balance. The self-employed are liable to social security at a rate of around 26% on profit, or official profit if they are taxed on a lump sum regime.
Value-added tax (VAT)
Italian VAT applies to the supply of goods and services in Italy. A VAT registered business adds VAT onto its invoices at the relevant percentage – the standard rate is 22%. The VAT collected from the customer/client when the bill is paid, must be paid over to the government within certain deadlines. From the VAT payable to the government, the taxpayer is allowed to deduct the VAT paid on supplies or goods or services purchased for use in the business. Thus, the tax due to the government is the difference between the tax on invoices issued (the outputs) less the VAT paid on invoices received (inputs). The total of outputs minus inputs represents the value added and the basis for the tax payable.
As mentioned, the standard VAT rate is 22%. Reduced rates are provided for specific supplies of goods and services, such as:
- 4% for basic essentials – food, bread, and agricultural products.
- 10% for hotel, restaurant and tourist services, domestic energy utilities , pharmaceuticals and certain real estate refurbishment costs.
- Certain supplies of goods and services are exempt from VAT (e.g. public postal services, hospital and medical care, education, financial and insurance services). Businesses making exempt supplies cannot recover the input VAT on their services.
People who are on a lump-sum regime although registered for VAT are not required to charge their customers/clients with VAT. They cannot recover the VAT paid on purchases.