A special tax scheme (Regime Forfettario) offers a flat rate on gross income for taxpayers looking to get themselves registered for VAT and start a self-employed business or profession.
The various schemes for small taxpayers (the Regime dei Minimi/Regime Forfettario) have seen a number of changes over the years and some of the old rules may continue to apply to people who started out in earlier years.
But from FY 2016 onward there is only one regime open to new taxpayers – the Regime Forfettario This Scheme was updated in December 2018, with the main result that the annual threshold for eligbility was increased to Euro 65,000. It was further updated at the end of 2022 with the result that the annual threshold is now Euro 85,000. The 5% reduced rate for the first five years remains for start-ups. Please get in touch with us if you want to check if you qualify.
The Flat Rate Tax Scheme is optional, so taxpayers (who are not already registered under an older scheme) should indicate in advance when registering for VAT, and must confirm the option in their first annual tax return after registering, whether they wish to take the benefit of the scheme. If they do not then they will be subject to tax on their net profit at the usual scale rates.
Requirements for the flat rate scheme
To benefit the following conditions must be met:-
- The gross income (i.e. the amount invoiced to clients, not your taxable profit after deduction of costs) must not exceed the Euro 85,000 annual threshold. This threshold is applied pro rata according to the number of days that you are registered for VAT in any year, so if you register for VAT on 1 July of any year the threshold will be reduced approximately one half (depending on the actual day count) for the relevant tax year.
If a taxpayer carries on more than one activity, separate VAT numbers if the activities fall within separate ATECO codes. The gross income threshold will be applied to total income higher or highest. - Staff related costs must be below Euro 5,000;
- Deprecation of assets used in the business must not exceed Euro 20,000
- Individuals who are not tax resident in Italy for the relevant tax year must derive at least 75% of their income from sources within Italy;
- Taxpayers must not carry on business under any other special regime or under a special VAT regime (e.g. margin scheme for works of art, second hand vehicles etc.);
- Taxpayers must not carry on business of the purchase and sale of real estate, developable land and new vehicles;
- Taxpayers must not be members of partnerships, professional associations nor must they be members of limited liability companies which have opted for the regime of imputation of taxable profits to the shareholders;
- Taxpayers must not have received income from employment (and that includes pension income) in excess of Euro 30,000 for FY 2024 and FY 2025 or 35,000 (for FY 2026) in the previous year, unless the employment has terminated.
Flat rate – ATECO Codes
The Regime Forfettario provides for income tax at a flat rate of 15% on gross turnover reduced by a coefficient. The coefficient depends on the ATECO code applicable to the activity being carried out. The ATECO Codes are a list of industry sectors maintained by the Italian government statistical service, ISTAT.
A list of ATECO Codes in English can be found here
The rate is reduced to 5% for a new business activity – defined as one being carried out for the first time and not an extension of a previous business carried out under the ordinary regime or a prior special scheme. The reduced rate applies to the first five tax periods. this means that if you start a new activity later on a tax year you will use one of the reduced rate years for a partial year.
The applicable ATECO Code will also determine the applicable social security regime and whether it is necessary to register with the Italian Business Registry.
Flat rate taxation
The Regime Forfettario provides for income tax at a flat rate of 15% on gross turnover reduced by a coefficient. The coefficient depends on the ATECO code applicable to the activity being carried out. The ATECO Codes are a list of industry sectors maintained by the Italian government statistical service, ISTAT.
A list of ATECO Codes in English can be found here
The rate is reduced to 5% for a new business activity – defined as one being carried out for the first time and not an extension of a previous business carried out under the ordinary regime or a prior special scheme. The reduced rate applies to the first five tax periods. this means that if you start a new activity later on a tax year you will use one of the reduced rate years for a partial year.
Other Advantages of the special regime
Apart from the reduced rate of tax the regime offers the following advantages:
- No VAT needs to be charged on invoices issued and there is no VAT reporting/compliance – e.g. no annual VAT return, statutory VAT ledgers;
- Simplified bookkeeping – no need to register invoices and receipts, purchase and sales invoices in statutory registers;
- There is no need for clients to withhold tax on payments of fees – this represents;
- Exemption from the “Spesometro” – the rules that work to stop excess tax deductions for costs in relation to gross income and the parameters deriving from industry sector studies;
- Exemption from sector study reporting;
- Exemption from reporting transactions with tax havens;
- Exemption from regional production tax (IRAP).
Potential Disadvantages of the regime
- You cannot deduct actual costs sustained. There is a lump-sum deduction according to the coefficients;
- You need to attach a 2 Euro stamp to each invoice issued if it exceed Euro 77,47. There is a way to do this online, but otherwise stamps need to be purchased and affixed to invoices,
- You cannot recover VAT on items your purchase . This means that the VAT on purchases of e.g. stationery, IT equipment, telecommunications etc. cannot be reclaimed and become a cost. That VAT is of course not deductible for tax purposes as there is a lump-sum deduction in the coefficient for expenses;
- The VAT treatment of cross border services is not clear – it appears that INTRASTAT forms still need to be completed for intra EU supplies and it is possible that a reverse charge needs to be applied on purchases from VAT registered businesses outside Italy;
- You cannot claim deduction for expenses available for deduction (e.g. alimony, medical and vets bills, mortgage interest, and the various home improvement, energy refurbishment incentives) unless you have other income. This is because the flat-rate regime gives rise to a substitute tax and not IRPEF;
- If you suffer withholding tax at source – i.e. where you have a client in a jurisdiction that requires withholding of tax on payments to contractors, you can not get credit for that tax.
Social security
The new regime does not provide any reduction in the rates of contributions. Social security will be applied at normal rates to the gross income reduced by the coefficient.
Social security contributions are deducible from the taxable income on a paid basis – i.e. contributions on last year’s income are deductible from this year’s taxable base, after reduction of the coefficient.
Is the flat rate scheme for you?
Since you cannot deduct expenses the first thing to check is whether your tax deductible costs exceed the lump-sum deduction included in your applicable coefficient. For many professionals expenses on the whole will be anyway limited. Given that many costs are anyway subject to statutory limitations (e.g. telephony/internet, training, vehicle costs), the flat-rate deduction will typically be more attractive. A similar analysis applies to VAT. The irrecoverable VAT is not a cost that you can deduct when computing your income tax liability, as, again you have the flat-rate deduction.
The flat–rate scheme is therefore not appropriate for taxpayers with large cost structures, numerous employees, or who require premises or substantial plant and machinery to carry on their business. It may also not be beneficial for contractors billing or paying expenses to suppliers outside Italy.
In practical terms you should forecast the volume of turnover and expenditure to determine whether it is appropriate to apply the flat-rate scheme or stay within the ordinary system.
Another element to consider is the bureaucratic simplifications provided for by the flat-rate scheme: reduced bookkeeping and tax reporting requirements. However you are still required to issue electronic invoices via the Italian government portal, and of course, file an annual income tax return..
So for self-employed professionals, especially those starting up a new business for the first time the flat rate scheme will be attractive. This scheme however may not made a lot of difference in social security terms. You should discuss with your customer/clients as to whether you can add on an extra 4% to your invoices to cover this, and if you are a citizen of a country other than Italy you should explore whether you are entitled to remain within your home country’s social security system, especially if you intend to remain in Italy for a short period.
My disabled sister is resident in Italy & employs a full time carer.What are the current tax liabilities?
Her current tax liabilities will depend on her income and the extent of her disability. You can find a guide (in Italian but which can be translated with google into English of a sort) on benefits and tax breaks for the disabled here: https://www1.agenziaentrate.gov.it/web_app_entrate/agevolazioni_disabilita.html.
If you need any further advice use our client sign up form, ask the question and we will provide a quote for answering it.
Having worked as a teacher in Italy for numerous years with various occasional and indeterminato contracts, am I eligible to change to the flat rate scheme, despite continuing the same type of work? Thanks very much
Yes – there are a number of conditions – in particular you can’t be a shareholder in a company, and there are rules to counter people giving up employment and converting to self-employed. So if you meet the requirements then you can get set up under this regime.
You will need to consider carefully if you are entitled to the 5% reduced rate for the first five years or whether you will be subject to the standard 15% rate. This depends on what you have been doing in the past
Can I qualify for this tax regime if I provide freelance writing services to other companies in other EU states? I’m resident for tax purposes in Italy so will obviously be paying tax to Italy, but I will not have any Italian clients.
Hi Barry,
There is no bar, under the flat tax regime to your providing services to clients outside Italy. What is important is that you are resident in Italy and/or providing the services from a base in Italy. So as long the general rules apply then you can happily operate this regime. Not only will you be liable to the flat rate tax (5%/15% on the relevant percentage of gross income)you will also be liable to Italian social security (unless you are covered by a treaty (e.g with the U.S. and carry on paying social security abroad).
If you are billing in a currency other than Euro I generally recommend issuing a simple advice note – advising the client on what is due (or this can be done through any online platform that you are using) and then issue the Italian tax invoice in Euro (converted ideally at the Bank of Italy exchange rate on the day of receipt). Print a hard copy of that invoice and apply the 2 euro bollo stamp duty to your copy, inserting the bollo number on your pdf copy sent to the client.
Hello. Can you please clarify the points below regarding the forfettario regime?
1- Can I apply for the forfettario regime if I’m a shareholder / manager in a foreign company? If so, is there any limitation on the income that I make from this foreign company?
2- Can I register a business name with the forfettario regime i.e the invoices that I will submit to my clients will be in my business name instead of my name?
3- Can I apply for the forfettario regime if I move my tax residency to Italy but stay less than 183 days there?
You cannot apply for the regime forfettario if you are shareholder in an Srl (an Italian limited liability company). There is some doubt as to whether this applies to foreign companies, but given the spirit of the legislation – to stop people splitting income between a company and themselves so as to fall below the Euro 65k threshold, I think the Tax Agency would challenge your eligibility for the regime. You also need to be aware of the rules that will subject the foreign company’s profits to tax where the company has its principal place of management in Italy (which it very may well if you are tax resident here and are sole owner/director) or if it is carrying on business through a permanent establishment. In short owning shares in a foreign if you want to access the regime forfettario, is not compatible. Bear in mind that you must, as an Italian resident, disclose your shareholding in the foreign company in section RW of the annual tax return.
You can use any name or logo you like on the face of the invoice, subject to usual rules e.g good taste, not passing off as another business and not pretending to be limited liability company. For tax purposes though, you are self-employed and your trading name is irrelevant. You can register your trading name if you are required to be registered with the Chamber of Commerce or can elect so to do.
3) You can apply the regime forfettario as long as the work is carried on mainly from Italy, which I think means working from Italian territory for the greater part of the tax year.
Hi there. I suggest you explore an online all inclusive regime forfetario solution such as flextax.it. They are well used to setting up freelance workers such as yourself and will provide guidance on your Ateco (business sector) code and deal with the application on your behalf for a VAT number and registration with INPS, the social security authority.
Hi, if someone used to work as doctor abroad in one specialty and moves to Italy to work as doctor in another field, such as emergency room, is this person qualified for the forfetario regime of 5%? Medicine is such a broad profession, can it simply qualify as a continuation? Thank you