Tax Resident in Italy Doing Business Through a Non Italian Company
Modern information technology permits people to work from a laptop or computer wherever they find themselves. In the circumstances, you might think that using a foreign company can help reduce your tax burden. For the self-employed – freelances/contractors – it is tempting to bill clients through a foreign company, possibly in a low-tax jurisdiction, especially if the clients themselves are outside Italy.
If you are tax resident in Italy you are in general liable to tax on your world-wide income unless you are protected by a double tax treaty. As a tax resident of Italy you are also subject to a series of rules designed to prevent avoidance of Italian tax and obligatory social security contributions through the use of non Italian companies. Whilst the guidance and jurisprudence might be limited in an international context, the Tax Agency can challenge the issues of invoices to the company by its owner/manager who has registered as self employed in italy. The penalties in the event of a successful challenge will be steep and can involve criminal aspects for fraudulent invoicing.
So careful planning and set-up are required to see if this of structure is going to be cost effective in terms of tax, social security and compliance obligations. While working through an owner/managed limited liability company may be appropriate in other jurisdictions around the world, in an Italian context that may not be so. As a general rule it is much simpler (and hence less expensive in terms of professional fees for support navigating through the rules in the presence of a corporate structure) to set up as self employed in Italy taking advantage of one of the special regimes for the self employed (see below) if available. The flat tax Regime Forfettario may not be available for owners of limited liability companies carrying on the same line of business due to anti-income splitting rules.
This note applies to the self employed. If you are interested in the issues working as an employee of a non Italian company, see this article.
Anti Tax Avoidance Rules to Stop Use of Foreign Companies to Shift Profits Abroad
If you are working from a fixed base in Italy (including your home), the Italian authorities have power, under “taxable presence” or “permanent establishment” (PE) rules to apply Italian income tax to the profits, and Italian VAT to billings, of the foreign company, to the extent that the profits derive from an activity carried on through that PE and VAtable supplies are made from Italian soil. The definition of PE is precise, but basically means a fixed base in Italy from which the business is carried on. The Italian Government, like most European countries, is concerned to ensure that tax revenues from people working from Italian soil, are not lost. The definition in Italian law of PE has recently been extended to counter perceived abuse, in particular from people carrying on “online” or web-based businesses (digital nomads).
Another armament in the weaponry of the authorities, in the context of foreign owner-managed companies, is the power the Italian authorities have to deem the foreign company to be tax resident in Italy, if the company is effectively managed from Italian soil. A foreign company will be deemed tax resident in Italy if its place of effective management, in the sense of the “continuous and coordinated taking of strategic decisions affecting the company as a whole”, is carried on in Italy. If the company is considered tax resident in Italy under this rules then it must comply with all the Italian rules in terms of, for example, preparation and filing of annual financial statements, corporate and regional tax filings and payment, the issuance of electronic invoices via the Italian government e-invoicing portal, withholding tax reporting and payments, and VAT obligations. The Italian Tax Agency are empowered to raise assessments for a certain number of years after the relevant tax year, so an audit can involve extra tax and steep penalties over several tax years, if the company is proved not to be compliant with its obligations under Italian law.
The Italian authorities also have the power to impute the profits of controlled foreign companies (CFS’s) in low tax jurisdictions (generally countries where the rate is less than half the Italian one) to an Italian tax resident controlling shareholder.
Tax Inefficiencies in Using Non Italian Companies
Using an “offshore” (for that is how it is seen by the Italian authorities) company also limits what you can actually do with the profits you make. If you take a dividend (or indeed realise a capital gain from disposal of shares or liquidation) from a non Italian company while tax resident in Italy, you will be liable to tax on the amount received (or the gain) at a 26% flat rate. This will be on top of any corporation tax or corporate income tax paid by the company on the profits out of which the dividend is paid. Add into the mix recent moves by the Italian Tax Agency to deny credit for foreign tax on dividends received by Italian residents, the risk of double taxation is high.
If you take income from the foreign company by way of salary or director’s fees, you will be liable to Italian income tax at scale rates on amounts received, and the company may well be liable to Italian social security, requiring it to register as an employer in Italy, in respect of emoluments paid to a director, where the director is working from Italian soil.
The Italian Tax Agency in one official ruling has stated that it would seek deny the benefit of the Impatriates Regime to an individual moving to Italy, setting up an Italian limited liability company to receive tax advantaged director’s fees. The Tax Agency view has not been confirmed by the tax courts, but the position of the Tax Agency, which sees the insertion of owner/managed limited liability companies for no commercial as purpose as tax avoidance, is clear.
The overall cost of Italian social security for company directors is generally higher than for the self employed, and the company may need to register with the Italian social security authorities to account for employer’s and employees social security, with extra compliance costs. In an all Italian context social security, under law to prevent avoidance of social security contributions by taking earnings as profits, is often due on the profits of an owner managed company to the extent that these are not reduced by fees paid to the director. The social scheme applicable to director’s fees “the gestione separata” is different to the scheme applicable to profits, resulting in a more complex pension position than if you simply contribute to the gestione separata as a freelance worker, and may comport the payment of annual minimum contributions, even if profits are below the relevant thresholds. These rules sit uneasily in the context of foreign companies presenting grey areas and an uncertain position. That uncertainty gives extra impetus for the authorities to claim that a non Italian company is either tax resident in Italy or operating via a de facto Italian branch or permanent establishment.
The ownership of shares in a foreign company is reportable in an Italian tax resident’s annual tax return, under Italy’s foreign asset reporting and wealth tax rules.
Adding in the costs of maintaining a company outside Italy, as well as the above considerations may mean that using a non Italian company to run your business whilst resident in and/or working from Italy simply does actually make sense in tax, social security and compliance cost terms.
Alternatives
So before proceeding with using an non-Italian company to bill your clients it is worth looking at the alternatives such as:
- flat tax Regime Forfettario for freelancers/contactors- income tax at a flat rate of 5% for the first five years, if you are setting up a new activity, otherwise 15% on a percentage of gross income and social security at a little over 26% of gross billings minus the flat rate deduction, where gross billings in a year are less than Euro 85k per annum;
- exclusion of at least 50% of earned income in calculating the income tax base under the Impatriates Regime, for new tax residents for the first five years;
- exclusion of all non-Italian source income in exchange for a Euro 200k (Euro 225k for couples) per annum flat tax. Note however that the general principle is that earned income where you are working from Italian soil may be liable to Italian tax under normal rules on top of the Euro 200k;
- identifying if there are any other special tax/social security regimes (e.g. for royalties) that might make an alternative form of doing business attractive.
- using an Italian company or partnership, possibly with a “transparent” taxation regime, so that profits are not subject to tax twice, – once at the entity level, and again on distributions.
Further Information and Assistance
Should you require any assistance with your personal or business tax, or if you want more information regarding the above, please reach out to us.
7 Comments on Living in Italy – Working Through a Foreign Company
I like your informative post. Find remote jobs with remotejobs.today Would you be willing to do a write up on your blog?
Thank you. My write-ups are on my web-site – feel to post a link, or an article on a specific topic.
Hi, thank you for this useful post. I married an Italian and we plan to move back to Italy soon. I am not an EU citizen. I have been working remotely for a Canadian company for 2+ years. Do I need to pay tax for my job after residing to Italy? Thank you.
Hi Chienpei
The general rule is that if you are working from Italian territory then you are liable to tax on your income. If you are hired as an employee of the Canadian company, then your employer needs to think about accounting for social security contributions – the simplest way of doing that is to get in touch with a company providing the service to non Italian employers eg. https://www.peoitaly.com/
Thank you, crjamie! 🙂
Hi,
I am an Italian citizen living in South Africa and wanting to relocate to Italy.
I will be working remotely and be getting paid from my South African company, into either my South African bank account or my Italian bank account (once set up)
Do I qualify for the new Tax Regime (50% of earnings)?
I have a Diploma from a South African institution..
I will be dealing predominantly with South African Clients, with all to do with their international logistics needs.
In theory yes, but all of the black and white conditions, need to be checked – especially whether the diploma meets the definition of Tax Agency’s requirements per the legislation for high qualification or specialization requirements (a minimum three year degree or higher educational qualification attested by the country of origin and recognized in Italy). We are still working through the rules and await tax agency guidance. If you did the qualification in South Africa the Italian Embassy or consulate in South Africa may be able to advise better and anyway they will need to attest the qualification.
https://taxing.it/italian-impatriates-regime-2024/
And if you are working as an employee of a South African company, your employer will likely need to register as such in Italy, so as to pay social security, accident at work insurance and generally comply with all the obligations as any Italian employer has to. See this link. https://taxing.it/working-in-italy-for-a-foreign-company/
If you are self employed then you will be liable for own social security and will need to register your new activity with the Tax Agency and social security authorities.