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The Taxation in Italy

During a foundation you must also consider several tax aspects. In fact, the tax system can greatly influence the assessment which has to be to be made about the different legal forms. Below, we offer an overview of the Italian taxation system.

In Italy, the taxes are divided into direct taxes (affecting the wealth when it is produced also called income tax) and indirect taxes (affecting the wealth when it is used; transfers or purchases). In this section we only discuss the most important direct taxes, which can be divided into IRPEF (income tax), IRES (formerly IRPEG) and IRAP (local tax).

IRPEF

The income tax (IRPEF) must be paid by all taxpayers which are residents of Italy. It is applied to all types of income produced anywhere in the world. The following incomes are subject to the tax:

  • Income from employment, or the amounts resulting from one or more employment relationships
  • Income from self-employment, or to those received by professionals such as accountants, doctors, shopkeepers, architects or lawyers
  • Land income derived from ownership of land
  • Income from capital such as those derived from the possession of government bonds, stocks or bonds
  • Other income, i.e. all types of income that do not fall into the above categories (e.g. casual work or from winnings or awards).

The personal income tax is progressive and applies to income received by individuals on the basis of the income brackets method that start from 23% to 43%.

 

IRES

The IRES (corporate tax) is a tax introduced by the Legislative Decree no. 344/2003, in lieu of the Tax on corporate income tax (IRPEG). This tax meets the need to implement the general principle of taxation on income produced by companies and other entities, not being in any way attributable to natural persons, on which the IRPEF could not be strucked. In summary it can be said that the corporate income tax is a tax:

  • that applies, in a unified manner, to all income owned by the company or by the legal body as well as the personal income tax applies to all income of natural persons 
  • is proportional and non-progressive as in the case Irpef. In this sense the tax increases proportionally with respect to the taxable income.
  • that is in general, applicable on all income owned by the debtors.
  • that is direct, because it affects immediately the total income.

The prerequisite for this tax is identical to the one of IRPEF and consists in the possession of income, in cash or in kind, in the categories provided for in the Income Tax Code (art. 72).

Not subject IRES:

  • partnerships, or residents in Italy, whose income are allotted to individual members and declared for income tax
  • organs and government departments, although having legal capacity
 

IRAP

The regional tax on productive activities (IRAP) is a local tax levied on the net value of production derived in each Italian region by resident companies and by PEs of foreign companies engaged in business activities. The taxable base of this corporate tax is almost exclusively driven by the statutory accounts, for which the law indicates the items comprised in the base. Net added value of production comprises the value of production minus certain costs of production.

 

Tax Calculation

The taxes on business income varie depending on the taxpayer and they can be summarized the following:

 

Type of tax Sole Proprietorships Partnerships* Corporations
IRPEF

X

   
IRES      X
IRAP  X  X  X

*In this case, the personal income tax is allocated to the individual shareholders regardless of the actual perception.

 

The personal income tax (IRPEF) rates and the total income brackets, for the year 2016 are:

Income Brackets

Rate

Tax due

Till 15.000 EUR

23%

15.000 x 23% = 3.450 EUR

From 15.000,01 EUR to 28.000 EUR

27%

3.450 EUR + 27% of excess

From 28.000,01 EUR to 55.000 EUR

38%

6.960 EUR + 38% of excess

From 55.000,01 EUR to 75.000 EUR

41%

17.220 EUR + 41% of excess

Over 75.000,01 EUR

43%

25.420 EUR + 43% of excess

Remember that the personal income tax rates are calculated only on the excess part of the previous income bracket!

 

The IRES (corporate income tax rate), which was established by Law 244/2007, with effect from 1 January 2008, is 27.5%.

 

The ordinary tax rate of the IRAP is 3.9%, although the region may increase or decrease the rate by up to 0.92%.

 

 

 

 

In partnerships, the member is always subject to taxation of the entire income, both in the case in which the gain is distributed or in which it's set aside. Instead, in corporations, the member is subjected to tax only on the profits actually distributed. For this reason, for example those who have high personal incomes will have to set up a corporation in order to declare only the profits actually distributed by the company. Instead, opting for a partnership, you will receive from the company a part of the income proportional to the share of participation, regardless of the actual distribution of profits. Therefore, it is very important to distinguish between partnerships and corporations.

Corporations

The Public Limited Company (S.p.a.), the Limited Liability company (S.r.l.) and all the resulting forms, e.g. the S.r.l.s. (Simplified Limited Liability Company) belong to the corporation category. Essentially it is legal form assumed by medium and large companies operating in various production sectors. In these companies the element of capital has a conceptual and normative prevalence compared to the subjective element represented by their members. The partners are liable for the debts of the corporation within their equity,aside from the exceptions defined by law.

Depending on the specific types of a company, the participation of shareholders in the share capital can be represented by shares or quotas.

Corporations are required to pay IRES and IRAP.

 

  IRES IRAP
S.p.A. It is paid by the company It is paid by the company
S.r.l. It is paid by the company It is paid by the company
 

Partnerships

The Italian partnerships are characterized by the imperfect autonomy of the assets. It implies that the assets of the partnership and the ones of its partners are joined together. The partners are, jointly and severally liable (without limits) for the obligations of the partnership, aside from the exceptions defined by law or by the same partners. This category includes the general partnership (S.n.c) and the limited partnerships (S.a.s.).

 

   IRPEF  IRAP
 S.n.c. The tax rate is progressive and based on the total income. The withholding taxes incurred by the company are granted to the shareholders and retrieved at the time of the declaration of their income. Any losses are also charged to the shareholders. Paid by the company. The company income is distributed among the shareholders as of the incorporation act. Although it's not distributed.
 S.a.s. The tax rate is progressive and based on the total income. The withholding taxes incurred by the company are granted to the shareholders and retrieved at the time of the declaration of their income. Any losses are also charged to the shareholders. Paid by the company. The company income is distributed among the shareholders as of the incorporation act. Although it's not distributed.
 

Sole Proprietorship

Under certain conditions, sole proprietorships can access the favorable tax regime said "Regime dei minimi (Subject to minimum)", which provides a fixed rate of 5% applied on income (revenue minus costs).

To access this taxation regime must apply:

  1. Unable to earn revenue exceeding EUR 30,000 .-- 
  2. Do not carry out export sales
  3. No specific expenses for employees, in coordinated continuous collaboration or project workers;
  4. No purchases of capital goods in a three-year period superior to EUR 15,000 .--
  5. In the three years prior to commencing the business activity, the entrepreneur has not exercised any artistic, professional or business activities, including forms of associations or family
  6. The exercised professional activities shall not constitute mere continuation of other activities previously carried out in the form of paid employment or self-employed
  7. Where the activity is the continuation of an enterprise carried on by another entity, the amount of its revenues in the previous tax period must not exceed EUR 30,000 .--

In addition, the tax system allows the issue of invoices without VAT.

If the sole proprietorship does not meet the requirements to this tax regime, it's worth to check if it can take advantage of the so-called "Regime agevolato (soft regime)", which provides a fix tax rate of 10% applied on the income deriving from the activity.

To access this taxation regime must apply:

  1. No compensation higher than Euro 30,987.41 shall be made for self-employment; Revenues from services superior to Euro 30,987.41; Revenues from other activities superior than Euro 61,974.83
  2. In the three years prior to commencing the business activity, the entrepreneur has not exercised any artistic, professional or business activities, including forms of associations or family
  3. The exercised professional activities shall not constitute mere continuation of other activities previously carried out in the form of paid employment or self-employed
  4. If the company is a mere continuation of an enterprise carried on by another entity, the amount of revenue realized by the latter in the previous tax period must not exceed the limits indicated above.

Even with this tax regime, the invoices are issued without VAT.

 

The professionals with a VAT number (Partita IVA) with the following features can file their VAT declaretion (dichiarazione IVA) independently or together with the modello unico within two scheduled dates:

  • engaged in self-employment activities
  • supply of goods
  • providing services
  • companies

The VAT return (dichiarazione IVA) serves to establish the balance payable for the current year and the VAT down payment for the following year. The subjects are required to file all the VAT number holders with one or more ATECOFIN activities codes. 

Not all are obliged to compile the annual tax statement. In fact, by way of example, only taxpayers who carry out exempt transactions such as doctors or tourist guides, will prevent the completion of the VAT return. To find out which are the subjects exercising a profession that is exempted you can refer to Article 10 of Presidential Decree no. 633 1972 or see the dedicated article for VAT exempted professional services. Agricultural producers who already enjoy exemption under Article 34 of the DPR, or e.g. those who organize games, entertainment or shows.

 

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