Compliance with Tax and Social Regulations
Moving to Italy as a digital nomad comports the payment of income taxes, social security contributions according to the rules applicable to your specific situation.
It is clear, from the tenor of the digital nomad visa/permesso legislation that Italy intends digital nomads to comply with their obligations in terms of tax and social security. Apart from the usual penalties that apply for failing to comply, it is is clearly the Italian government’s intention that applications for renewal of stay permits will not be entertained in the event of failure to comply in full with tax and social security obligations.
Coming to work from Italian soil, on the whole, means that you are going to be liable to Italian income taxes and social security contributions on your earnings. Some relief may be available via special tax regimes, but these all come with specific terms and conditions for access.
Timing the Move to Italy
Moving to Italy as a digital nomad requires some careful advance thought about the timing of the move bearing in mind the following factors, for example;
- timescales for your employer (if you are working under a contract of employment) to register for social security in Italy – this is a red tape laden procedure that can prove challenging in terms of turn around times;
- timescales for registration with the Italian Tax Agency as self employed if you are offering freelance type services – you have 30 days from the start of commencement of work from Italian soil;
- identifying your first year of tax residence bearing in mind that you are, on the whole either tax resident or not, for a whole Italian tax year;
- identifying if a favourable tax regime such as the Impatriates Regime, or Regime Forfettario, will apply to you – these come with rigorous eligibility requirements;
- identifying the first tax year in which the Impatriates Regime will apply to earnings;
- if you move during the course of the year you need to check if you will have overlapping periods of tax residence (depending on the applicable tax period in your previous country of residence) and the impact of this;
- a complex foreign tax credit offset procedures where you are liable to tax in two countries on the same earnings;
- timescales to complete the immigration process (digital nomad visa, issue of stay permit, registration as resident with your local authority);
- the timing of liability to wealth tax on foreign assets.
Income Tax
An individual’s tax obligations will depend principally on :
- whether the individual is tax resident or not for any tax year – the test is a 183 day series of sub-tests applied tax (calendar) year by tax). If you are considered tax resident for any year then you will be liable to tax on worldwide income, i.e. earned income as well as e.g. rental income, investment income, etc. received at any time in that tax year. You will also be liable to report your foreign assets and where applicable, pay wealth taxes on them in an annual tax return, along with your income.
- regardless of residence status, whether the individual is deemed to have taxable Italian source income. Whether income is determined to have an Italian source income or source depends on the specific definition of Italian source income. This definition includes earnings from employment or self employment where the services are provided from Italian soil.
These general rules may be impacted by the terms of one of Italy’s double tax treaties, if applicable.
Since your habitual abode is one of the sub-tests of residence you need to take care, where renting accommodation in Italy as part of the digital nomad visa application process, that the property cannot be considered your habitual abode until you make the move to Italy. This can best be done by ensuring that you also have residential accommodation outside Italy which can be considered your habitual abode up the date of transfer of residence.
Registering as resident with your local municipality (Comune) after the move may be required – almost certainly in order to renew your stay permit. Being tax resident for any Italian tax year may a condition of accessing a special tax regime (see below).
How tax is calculated
The calculation of your tax depends on how your income sources classified within the Italian system. The first distinction to be made is between:
- income from employment (e.g. where you are working under a contract of employment whether it be for an Italian or non Italian employer);
- income from self employment – e.g. where you are providing services as a freelancer or contractor under a contract for the provision of services.
The distinction between these two categories will generally depend on the substance of the relationship.
An individual’s tax obligations will then depend on :
- whether the individual is tax resident or not for any tax year – the test is a 183 day series of sub-tests applied tax (calendar) year by tax);
- regardless of residence status, whether the individual is deemed to have taxable Italian source income. Whether income is determined to have an Italian source income or source depends on the specific definition of Italian source income. This includes earnings from employment or self employment where the services are provided from Italian soil
These general rules may be impacted by the terms of one of Italy’s double tax treaties, if applicable. You should never simply assume that a double tax treaty will apply in any given circumstances, and the rules need to be carefully checked.
Income From Employment
If you are working as an employee from Italian soil then you will in general be liable for income tax on earned income at scale rates.
If you are working remotely for a non Italian employer, you employer needs to consider its obligations as such under Italian law, in terms of whether it needs to register for Italian social security, withhold Italian tax on payments of salary and fringe benefits, as well the other ramifications deriving from having an employee based on Italian soil.
See this blog post for more information on working for a non-Italian employer from Italian soil.
If you are not paid via an Italian payroll (which will likely depend first on the social security position – see below), and Italian income tax has not been withheld on payments of salary and benefits, then you will need to report your earnings via an Italian annual tax return, paying
- the income tax due for the prior year;
- plus any payments on account of the current year tax liability;
- minus any payments on account of the prior year liability paid during the prior year.
This means that in your second year of working in Italy you will experience the “double whammy”. You have to pay, usually by the end of June of the year after you first start working in Italy, all of the tax due on salary and benefits received in your first year of working (a year in which you have made no payments on account) along with payments on account of the year 2 liability.
In year 3 you will be able to offset the payments on account made in year 2 reducing the tax due on year 2 income and you will make payments on account of the year 3 income.
Payments on account are generally calculated as 40% of the prior year tax liability, due end June and 60% due by the end of November.
See the example below for an simplified illustration of how this works.
In the context of a digital nomad the Italian rules can be impacted – usually for the year of arrival or departure – by the terms of one of Italy’s double tax treaties. These can, if certain terms and conditions are met, operate, for example, to exempt income from employment, where:
- you are are tax resident in a treaty partner country;
- you are working for less than six months in any tax year (some treaties refer to a single six month period);
- you paying tax on the relevant earnings in the country of residence; and
- where the cost of your employment is not borne by an Italian business.
The benefits of the Impatriates Regime can apply to income from income from employment. The reduction has been stated to apply only for purposes of income tax, and not social security contributions.
Example Tax Timing - Non Payroll Employees
Assume the following simplified case where income tax (IRPEF plus additional Regional and Municipal taxes) is estimated at 30% of taxable income. The taxpayer starts working in Italy in Year 1 and is not on an Italian payroll, so they must file an annual tax return and make payments accordingly. If they were on an Italian payroll, tax would be withheld monthly.
| Year | Taxable Income (€) | Tax Due (€) | Offset from Prior Year Payments (€) | Payments on Account Due This Year (€) | Tax Payable in Year (€) |
|---|---|---|---|---|---|
| Year 1 | 50,000 | 15,000 | 0 | 0 | 0 |
| Year 2 | 52,000 | 15,600 | 0 | 15,000 | 30,600 |
| Year 3 | 55,000 | 16,500 | −15,000 | 15,600 | 17,100 |
Notes:
- Year 1: First year working in Italy. No tax is payable during the course of the year where the employer does not have a permanent establishment in Italy. No payments on account are required.
- Year 2: Taxpayer pays Year 1 tax (€15,000) plus payments on account of Year 2 (€15,000, based on Year 1's tax liability).
- Year 3: Taxpayer offsets prior year’s payments on account (€15,000 made in Year 2) against tax due on Year 2 income (€15,600), and makes payment on account of Year 3 based on Year 2's tax (€15,600).
- Applicable Tax Rate: The table above assumes, an effective overall rate of tax of 30% for simplicity. The actual applicable rate of tax will depend on a series of factors, e.g. amount and type of earnings, place of residence in italy, FX rates if paid in non euro currency, applicable tax rates and bands for the year, and applciable deductions and credits.
Additional Info: Payments on account are generally 40% by the end of June and 60% by the end of November (based on the prior year's liability). NB: For self-employed individuals, the split is 50/50.
Warning:This is a much simplified example of what can turn out to be an extremely complex position where, for example, a taxpayer moves midway through a tax year, has other income (especially foreign-source income), or experiences other cross-border complexities. Appropriate personalised professional advice is always highly recommended to forecast liabilities and timings, allowing the taxpayer to set aside funds from earnings in order to meet obligations when due.The example does not include social security contributions as the payment of employer's and employee's contributions is a liabilty for the employer who absent any specific exemption must register with the social security authorities and pay the contribuitions.
Income From Self Employment
If you are working as a self employed consultant from Italian soil on anything other than an occasional basis, you need to register (within 30 days of commencement) with the Tax Agency, obtaining a VAT number – an identification code which identifies your freelance business activity. As a “sole proprietor” you generally have the option between:
- the Regime Forfettario – a flat 5% (for the first five years, then 15%) on pre-determined percentage of gross billings. This is the usually the best choice if applicable and if your annual billings are under Euro 85,000 per annum – https://taxing.it/small-taxpayers-flat-rate-tax-regime/; or
- the Regime Semplificato – the standard tax normal tax regime applicable to business where turnover in a tax year does not exceed €500,000 in the case of services and €800,000 in the case of all other activities. Tax is due on profits (gross income less qualifying deductible expenditure) at scale rates. Additional Regional and Municipal Taxes will likely apply depending on where you register as resident.
The Regime Forfettario is only available if you are either tax resident in the relevant year or derive more than 75% of your earnings for the year from the relevant Italian business activity, togehter with any other Italian source income. There also other conditions of access. The Euro 85,000 annual threshold for access is reduced pro rata according to the time between registering for VAT at the outset and the end of the calendar year.
This blog post has more information on the Regime Forfettario.
The Impatriates Relief may be available, if the general terms and conditions are met, which gives you a maximum 5 year 50% or 60% (depending on whether you have a dependent child) reduction in computing profits liable to tax (and social security).
The Impatriates Relief requires that you are tax resident for each year and work for the greater part of each year from Italian soil. A minimum four year minimum stay applies (stay less and you will lose the relief from the outset). For a full description of terms and conditions of access to the the Impatriates Regime, see this blog post. https://taxing.it/tax-break-to-attract-human-capital-to-italy/
On both regimes you need to comply with Italian rules on the issue of electronic invoices via the Italian government portal. You should factor in the cost of professional assistance with all of your Italian tax and social security compliance, filing and payments.
On the Regime Semplificato you are potentially required to add Value Added Tax (VAT) to your services. Whether you need to do will depend on a series of variable, such as the business activity you are going to be conducting, the kind of client (private or business) and where clients are located. You may need to factor in whether you are required to register for VAT, or similar, in the country in which your clients are located, especially where you are billing private clients.
Social Security
Working from Italian soil means, according to the default rules, that you are liable to make payment of Italian social security contributions, the bulk of which are, in general, contributions into the Italian state pension scheme.
Different schemes apply to employees compared to the self employed. The rates, thresholds, minimum contributions, if any will depend on a series of factors.
See this blog post for more information.
In certain specific circumstances, reduction or exemption from Italian social security contributions may apply under the terms of a specific social security agreement or EU regulations where you are also covered by the social security regime of another country (and obtain the relevant certification).
Wealth Taxes
For any year for which you considered tax resident in Italy you will generally be liable to Italy’s foreign asset reporting obligation and payment of wealth taxes.
See this blog post for more information.
Leaving Italy
See this blog post for more information about things to think about when you depart.
Checklist for Digital Nomads
- Tax Residence – will your visit to Italy involve you meeting any of the tests of tax residence for any year?
- Timing – when are you intend to move to Italy. As a general rule, your tax and social security affairs will be greatly simplified by timing the move as near a calendar year end as possible
- Are you going to be working under a contract of employment or as a freelance worker?
- If employed:
- is your employer aware of their obligations to account for Italian social security (and deal with other ramifications of having an employee in Italy)?
- where is your employer based?
- If self employed:
- What is your annual turnover (gross billings) going to be?
- What your business expenses might be (as a starting point, as a percentage of gross income)?
- what kind of services will you be providing?
- where are your clients located?
- How long do you to propose to stay in Italy?
- What special tax regimes might be available
- How long you are intending to stay in Italy?
How We Can Help
By moving to Italy you move into a complex world of tax and social security. If you are self employed and can access the Regime Forfettario matters are considerably simplified. You may be able to low cost online compliance support services. as a very general rule of thumb (there are many, many variables in the calculation, on the Regime you should be able to count on a maximum overall combined rate of Italian tax and social security around 25% of gross earnings.
If you cannot access the Regime Forfettario, e.g. because your earnings will be over the Euro 85,000 threshold, if you can access the Impatriates Regimes, the overall maximum blended rate will be much the same.
The complexities for those working remotely for a non Italian employer are many. In some cases EU regulations or a social security agreement might ease matters, but the general rule is that having an employee working from Italian soil requires registration by the employer (or the use of an Italian employer of record – EoR).