Tax Resident in Italy Doing Business Through a Non Italian Company
Modn 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. Many self employed people around the world work quite legitimately through a corporate vehicle, but the ramifications in terms of tax and social security in a specific cross border context can be complex.
If you are tax resident in Italy, for any applicable Italian tax (calendar) year, you are in general liable to tax on your world-wide income unless you are protected (usually partially) by an applicable 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 possibly payment of 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 might be 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.
This note applies to the self employed even if they are used to work through a corporate vehicle which they own and manage. . If you are interested in the specific issues around 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
Italian Taxable Presence
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 – (“stabile organizzazione”) 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 from Italian soil 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).
Corporate Tax Residence
Another armament in the weaponry of the authorities, in the context of foreign owner-managed companies, is the power the Italian authorities have to treat 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.
Controlled Foreign Companies (CFC’s)
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.
Social Security Contributions
Where personnel, including a director of the foreign company, are working in Italy, the structure is also expected to register as an employer with INPS for social-security contributions and with INAIL for compulsory workplace accident insurance, before work actually starts.
Consequences
Generally, where a foreign, owner-managed company is treated as tax resident in Italy or as having a PE here, the Italian authorities expect it to be regularised much like an Italian business. In practice this usually means:
- formal registration of the company or an Italian branch/PE with the Business Register (Registro delle Imprese);
- appointment of a legal representative; obtaining Italian tax codes and VAT number (codice fiscale /partita IVA) by filing a declaration of commencement of activity with the Agenzia delle Entrate;
- keeping full statutory accounts, filing annual Italian corporate income tax and IRAP returns on profits,
- complying with Italian tax and accounting rules generally (and in particular Italian VAT and electronic invoicing regulations);and
- setting up an Italian payroll to handle tax and social security payments.
At this point it makes sense to consider incorporating a new Italian limited liability company or alternative vehicle, after weighing up the pros and cons in terms of set up, maintenance and tax/social security.
Tax Inefficiencies in Using Non Italian Companies
Double Tax on Profits
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.
Social Security Contributions
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 Italian social security on your remuneration. The company will also 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 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 laws to prevent avoidance of social security contributions by taking earnings as profit distributions, 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.
Foreign Asset Reporting and Wealth Tax
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
Potential Loss of Access to Preferential Regimes’
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.
It is also a condition of eligibility for the Regime Forfettario, that the taxpayers does not own shares in an Srl or other corporate/partnership type vehicle carry on the same business as the registered self employed activity. It is an open point whether these rules also extend to foreign corporates/partnerships. But given the anti tax avoidance nature of the rule – i.e. to stop profit splitting so as to remain below the Regime Forfettario threshold, we believe that the Italian courts could take the view that ownership of a foreign company or partnership (which carries on the same type of business) also restricts access to the Regime Forfettario.
Foreign Withholding Tax
An important element in deciding how to structure the performance of personal services is whether your client is required to withhold tax at source on your income. If you are, for example, on the Regime Forfettario you simply cannot claim credit for foreign tax withheld on earnings. There is a short but growing list of countries that seek to impose upon the payer (the client) a requirement to apply tax at source on earnings – notable examples are the UK (IR35) and Canada (Regulation 109). Italy’s DTA’s generally exempt the self employed from a liability to tax in the country of their client where the supplier is resident in Italy, but usually there is an advance clearance process to be followed.
Foreign Tax Credit Mismatch
Doing business through a foreign company can create issues in obtaining credit for foreign taxes. the Italian authorities take that the view that even through a foreign company or partnership is tax transparent under local rules, any tax paid is liabiltiy of the entity and not the owner. such tax cannot be offset, in the view of the authorities, against Italian tax on earnings (or rather on the deemed dividends received). Mismatches in timing of tax liabilities and foreign tax credit offsets also create issues.
Tax Conclusions
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 may simply not actually make sense in tax, social security and tax/accounting compliance cost terms.
Alternatives
Given the “substance over form” approach of the Italian tax authorities using a foreign company through which services are provided from Italian soil, presents a series of potential inefficencies and risks of challenge, especially where the foreign company has no substantial presence (offices, staff, independent management etc.) At this point it makes sense to consider:
- registering as self employed (sole proprietor); or
- registering an Italian branch of the foreign company; or
- indeed incorporating a new Italian limited liability company or alternative vehicle, after weighing up the pros and cons in terms of set up, maintenance and tax/social security.
In terms of the first option it is worth looking at direct bill (i.e. no company) 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 – 300k (Euro 225k/350k 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 flat tax;
- 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 contact us.
5 responses
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.
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! 🙂