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. 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 through the use of non Italian companies.
So careful planning and set-up are required if this kind of structure is going to be effective.
Anti Tax Avoidance Rules to Stop Individuals using a Foreign Company to Shift Profits Abroad
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.
So careful planning and set-up are required if this kind of structure is going to be effective.
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. The definition of PE is precise, but basically mans a fixed base in Italy from which the business is carried on. The Italian Government, like most European countries, are concerned to ensure that tax revenues from people working, especially in the digital economy, 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 case of foreign owner-managed companies, is the power the Italian authorities have to tax the foreign company as if it was 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.
The Italian authorities also have the power to impute the profits of controlled foreign companies (CFS’s) in low tax jurisdictions (basically 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. These remain inside the company until distributed. If you take a dividend (or indeed a capital gain from disposal of shares or liquidation) from a non Italian company while resident in Italy, you will be liable to tax on the amount received 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.
In other words using a non Italian company to run your business whilst resident in Italy may not actually make in sense in tax 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 – income tax at a little under 4% (for the first five years) on gross income and social security at a little over 20% of gross income where gross income in less than Euro 85k per annum;
- exclusion of 50% of income in calculating the income tax base for new tax residents (employees/self-employed) for the first five years – possible extendable for people putting down roots in Italy);
- exclusion of all non-Italian income in exchange for a Euro 100k (Euro 125k for couples) per annum flat tax;
- flat 7% tax on pension income (for people becoming resident in small towns in the South of Italy;
- identifying if there are any other special tax regimes (e.g. for royalties) that might make an alternative structure.
Further Information and Assistance
Having said that using a foreign company can present advantages, possibly in terms of social security, healthcare and pension planning for the globally mobile, and for people in Italy for short periods of time, rather than presenting an overall saving of tax. If particular facts and circumstances permit, a viable and compliant structure can be implemented and maintained.
Should you require any assistance with your personal or business tax, or if you want more information regarding the above, please reach out to our experts.
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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.