Personal Taxes - Income Tax, Capital Gains & Inheritance Tax - in Italy

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Personal Taxes - Income Tax, Capital Gains & Inheritance Tax - in Italy

Disclaimer
Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of Italian tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.

Income Tax in Italy

In Italy the two main income taxes are: 

• the personal income tax (imposta sul reddito delle persone fisiche or IRE) 
• the corporate income tax (imposta sul reddito delle società or IRES)

In addition to these there are some substitute taxes for certain types of income (for example on certain financial income and capital gains) and there is the regional tax on profitable businesses (imposta regionale sulle attività produttive or IRAP), which is applied to the value of the net profit of businesses and professionals.

Personal Income Tax (IRE)

The IRE is a personal tax with progressive income tax brackets which is calculated on the total worldwide income of anyone who is resident in Italy and on the income produced in Italy of persons who are not resident in Italy.

Who is a resident for tax purposes?

From a tax point of view a person is considered resident in Italy if for the majority of the year (that is for a period of 183 days or more even if they are not consecutive) they:

• Are registered as resident at the Municipal Registry (Comune)
• Have their domicile in Italy (this has a different meaning from the English term and means that they have established in Italy the main centre of their own business and interests)
• Have their residence in Italy (habitual residence)

What is meant by taxable income?

Taxable income can be subdivided into the following income categories:

• Income from property
• Unearned income (from capital)
• Income earned as an employee
• Self-employed income
• Business income
• others

In relation to persons not resident in Italy it is necessary to consult the international conventions on double taxation agreed between the various States, but generally any income produced in Italy is taxable in Italy.

By way of example, the following are considered produced in Italy:

• Property income from properties situated in Italy (for example rental received solely from owning buildings or land is subject to IRE)
• Income from self-employed work or from a business or work carried out in Italy
• Unearned income or income as an employee paid by an Italian resident
• Remuneration for collaboration or for intellectual work paid for by a resident

How is Income Tax Calculated?

To calculate personal income tax it is necessary to start with the total income which is made up of the sum of the various incomes calculated separately for each of the above categories.

The total income is then reduced by any tax-deductible burdens (expenses) and allowances to arrive at a figure for the taxable income.

On the taxable income the gross tax is calculated by applying the progressive IRE rates which correspond to the various income brackets.
The gross tax is then reduced by any applicable deductible burdens.

Deductible Burdens and Tax Allowances

Tax allowances include the so-called "no-tax area", (a deduction of between €3,000 and €7,500 to avoid taxing those on low incomes), as well as allowances for dependant family members (dependant wife and/or children).

Some deductible burdens (oneri deducibili) are expenses which can be used to reduce the total income. For example: some types of medical expenses, national insurance contributions, donations to religious institutions, donations to universities, research bodies and associations for the protection of assets of artistic interest, the cadastral income (income deriving from the value of any land owned) of the main residence are considered to be deductible burdens.

Some deductible burdens are expenses which can be used to reduce the amount of the gross tax due. Again by way of example: medical expenses, passive interest on mortgages, education expenses, donations to Bodies or Foundations for research, for performing arts, for social purposes, donations to political parties.

Each type of expense has its own rules for the deductions. For example: from rental property income a fixed amount of 15 percent of the income is deducted for expenses, while from business and self-employed income the expenses sustained for the carrying out of the activity are deducted. Some unearned incomes are taxed only on 40 percent of the amount.

The majority of these burdens are not deductible from the income of non-residents.

Rates

The IRE rates for 2006 range from 23 percent, for the income bracket up to €26,000, to 43 percent for the income bracket over €100,000.

Payments made from income

There are regional additional taxes (rates from 0.9 percent to 1.2 percent) and provincial taxes (0.2 percent) that must also be paid.

Tax Returns and payment

The tax return is the document with which taxpayers communicate to the Financial Administration the income obtained in a certain tax period.

The tax period is the calendar year (1 January to 31 December). The deadline for submission of the tax return is 31 October of the following year, and the deadline for payment of the taxes, as calculated by your accountant, is 20 June the year after that.

It is also possible to pay before 20 July or in instalments (interest will be charged for this). On the above-mentioned dates and before 30 November a down payment of the taxes for the current year must be made.

Apart from certain specific cases of exemption, persons, both resident and non-resident who have received income taxable in Italy within a particular tax period, must submit the tax return and pay the taxes due.

Exemptions from filing a tax return

Exempted from the obligation to submit a tax return are those who:

• do not carry out a business or professional activity
• have not received any income
• have only received income already taxed or exempt

Simplified Tax Return

Employees and pensioners may submit a simplified form instead of the ordinary tax return. This is done with the assistance of the employer or a Fiscal Assistance Centre (Centro di Assistenza Fiscale), who will also deal with any balance of taxes due.

Note: All the above-mentioned rules are in force and apply to both residents and non-residents.

Sanctions

There are sanctions for non-payment or late payment of taxes (from 10 percent to 30 percent) and for non-submission or late submission of the tax return.

Tax on Income from Capital

Income from capital is the proceeds received from the investment of capital.

The taxation system varies depending on the different types of income. In the majority of cases the proceeds of financial activity are not declared on the tax return but are subject to a withholding tax of 12.5 percent or 27 percent.

Alternatively, an investor can opt for a regime of managed saving (risparmio gestito) or organised saving (risparmio amministrato). In such cases it is the bank or the authorised intermediary who carries out the payment of the taxes due.

Interest

For residents interest on a bank account or post office account and the interest on bonds and similar instruments with an expiry of less than 18 months is subject to a withholding tax of 27 percent. Interest on bonds and similar instruments with an expiry after 18 months are subject to a substitute tax of 12.5 percent.

For non-residents there are specific cases of exemption. Such exemptions apply when the income is received by people resident in countries with which conventions are in force to avoid double taxation and which allow an adequate exchange of information. The interest on bank accounts or post office accounts of non-residents is excluded from taxation.

Dividends

Dividends paid out by a limited company to shareholders are subject to different taxation regimes depending on the type of shareholding (qualifying or non-qualifying) and on the entity paying out the dividend (quoted or non-quoted company).

Qualifying shareholdings are those above a minimum percentage of the share capital, which varies from 3 percent to 25 percent, depending on the type of company. Non-qualifying shareholdings are percentages of share capital lower than the above-mentioned.

Dividends received from a qualifying shareholding in a resident company are subject to taxation on 40 percent of their amount and they must be declared in the person's income tax return.

Dividends from non-qualifying shareholdings are subject to a withholding tax of 12.5 percent.

For non-residents, in general, there is a withholding tax of 27 percent but the earner has the right to reimbursement of up to four ninths of the deduction of the tax paid abroad on the same income.

For income paid to savings shareholders (azionisti di risparmio) (a different category from the ordinary shareholders with limited powers to participate in the meetings) there is a withholding tax of 12.5 percent.

Capital gain

The capital gain from the transfer of qualifying shareholdings is taxable to the extent of 40 percent and must be declared in the tax return.

The capital gain from the transfer of non-qualifying shareholdings is subject to a substitute tax of 12.5 percent.

Other types of capital gain are subject to a substitution tax of 12.5 percent.

There are special rules for shareholdings in companies resident in countries with privileged tax systems.

There are exclusions and exemptions for non-residents if they satisfy specific subjective and objective conditions.

Inheritance Tax & Gift Tax

There is no longer any tax on inherited property, regardless of its value and the relationship between the deceased and the heirs.

On immovable property and real property rights, the cadastral tax (imposta catastale) and land registry tax (imposta ipotecaria) must be paid at the rates of one percent and two percent, respectively, of the cadastral value of the property or the real property rights included in the inheritance.

If one of the beneficiaries satisfies the conditions for the main or only residence (prima casa), the cadastral and land registry taxes due on an inheritance or a gift are a fixed amount of €168 each.

In relation to gifts, the rules vary depending on the degree of kinship and the value of the gift. There are no taxes payable on gifts in favour of a spouse, descendants or other relatives up to the fourth degree.

Gifts in favour of persons other than those mentioned above are subject to taxes on the transfer if the value of the share due to each beneficiary is greater than €180,759.91. In this case registration tax is applied to the part that exceeds this value for the corresponding deed of transfer.

Further Information

• Italian Ministry of Finance & Economy: Ministerio dell'Economia e della Finanze (in Italian)
• See also AngloINFO INFOrmation Page Taxes on the Purchase of Property in Italy

Prepared by Avv. Giammarco Muzj and Dott.ssa Ilaria Mecatti
JMU – Law Firm. 80 Via Cavour, 50129 Firenze
Tel: 055 268549, e-mail, Website
Copyright © Giammarco Muzj and Ilaria Mecatti 2006-2009 All Rights Reserved