Modern information technology permits people to work from a laptop or computer wherever they find themselves. If you are tax resident in Italy you are liable to tax on your world-wide income unless you are protected by a double tax treaty. These can operate to make you tax resident in another country (if you are also considered tax resident there) or exempt certain types of income from Italian tax.
So, for the Italian tax-resident, it is tempting to bill through a foreign company, possibly in a low-tax jurisdiction, especially if clients themselves are outside Italy.
However 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 recently beefed up “permanent establishment” (PE) rules to apply Italian income tax to the profits of the foreign company if they consider the profits derive from an activity carried on through that fixed base. The Italian government like most European countries are concerned to ensure that tax revenues from people working especially in the digital economy 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 resident in Italy, if the company is effectively managed from Italian soil. 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 the Italian tax resident shareholder.
Having said that using a foreign company can present advantages, especially in terms of social security, healthcare and pension planning for the globally mobile, and people in Italy for short periods of time. If particular facts and circumstances permit and a viable structure can be implemented and maintained, then this is a route that may be open.
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.
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 – 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 65k per annum;
- exclusion of 50% (soon to be 70%) 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 not 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;
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.