ITALIAN INDIVIDUAL TAXATION Antonio Uricchio Università di Bari
Subjects to be analyzed • INCOME TAX • OTHER TAXES ON INCOME • SOCIAL SECURITY CONTRIBUTIONS • TAXES ON CAPITAL • INHERITANCE AND GIFT TAXES • INTERNATIONAL ASPECTS
Taxable persons (1) Resident individuals are subject to individual income tax (Imposta sul reddito delle persone fisiche, IRPEf) on their worldwide income. Non-resident individuals are taxable on their income arising in Italy. Resident individuals are those who for the greater part of the tax year: • are registered in the Italian civil registry; or • have a residence or domicile in Italy, as defined in the Civil Code. “Residence" is the place of habitual abode; "domicile" is the place where an individual has established his principal centre of business and interests (centre of vital interests).
Taxable persons (2) An anti-avoidance provision applies to Italian nationals who claim to be residents of tax havens. Accordingly, an Italian national is deemed to be resident in Italy if he emigrates to a country considered to be a tax haven, even if his name is removed from the Italian civil registry. This is a rebuttable presumption: the burden of proof that actual residence is outside Italy is shifted to the taxpayer. For this purpose the Ministry of Finance has published a list of countries considered to be tax havens. Spouses are taxed separately on their earned income. Furthermore, each spouse is taxed on half the income from community property and on half the income of minor children. Income from general or limited partnerships resident in Italy is attributed to each partner in proportion to his share in the profits, without regard to the actual receipt thereof. Under certain conditions, limited liability companies and limited liability cooperatives owned by not more than 10 or 20 individuals, respectively, may opt to be treated as flow-through entities. In such a case, the income of the entity is attributed directly to the members.
Taxable income: general features (1) Resident individuals are subject to individual income tax on their worldwide income, which falls under any of the following categories: • income from immovable property; • investment income; • income from employment; • professional income; • business income; and • miscellaneous income.
Taxable income: general features (2) The aggregate taxable income is calculated by adding the net income of each category; only losses arising from carrying on a business or exercising an art or profession may be deducted. Exempt income and income subject to a final withholding tax are not taken into account in determining aggregate income. Capital gains on the disposal of shares and other securities and on the transfer or redemption of debts or debt claims may be subject to a substitute tax that replaces the individual income tax. Payments on termination of an employment and capital gains on the disposal of a business may, at the taxpayer's option, be taxed separately. Under the separate taxation, the taxable base for the termination payments is computed by deducting EUR 309.87 per working year from the termination payment received. The tax rate applicable to the taxable base is the average of the income tax rates applicable to an income of reference which is computed as follows:net termination payment/number of working years x 12 The average of the income tax rates applicable to the income of reference may be determined by using the following method of calculation: income tax on the income of reference/income of reference x 100
Taxable income: general features (3) The following items of income received by a resident individual are not subject to tax: • some contributions or premiums related to a work relationship; • some benefits in kind related to a work relationship; and • some capital gains on immovable property
Employment income: salary Income from employment consists of all compensation, in cash or in kind, including gifts, received during a tax year in connection with employment. Pensions of all types and equivalent allowances are deemed to be income from employment. Taxable income from employment does not, however, include: • mandatory social security contributions paid by employers and employees; • contributions, up to EUR 2,065.83, for medical assistance made to entities or funds whose sole purpose is social welfare in accordance with the provisions of labour contracts or agreements; or • premiums for life and accident insurance paid by the employer, up to EUR 1,291.14 or 2% of the annual gross salary. No deductions for expenses are allowed from employment income. As a general rule, all reimbursements by the employer are taxable for the employee, with the exception of the refund of travelling expenses, subject to certain limits and conditions.
Employment income: benefit in kind (1) As a general rule, benefits in kind are taxable in the hands of the employee if their amount exceeds, in the tax period, EUR 258.23. Benefits in kind include those received by family members of the employee and the right to obtain them from third parties. The following are not included in the taxable income: • food served in canteens or equivalent services (up to a daily ceiling); • transportation between home and work, even if contracted out to third parties; • the value of services provided by the employer for the benefit of all employees for education, recreation, health and religious purposes and social assistance; • exceptional and non-recurring payments (up to an amount of EUR 258.23) to all employees or specific categories of employees;
Employment income: benefit in kind (2) • the value of the shares offered to all employees up to EUR 2,065.83, subject to the condition that the shares are not repurchased by the employer or otherwise transferred within 3 years (if so transferred, the exempt value is taxable in the period in which the transfer occurs); • the difference between the value of the shares on the date of assignment and the price paid by the employee, provided that the amount paid by the employee be equal at least to the fair market value of the shares at the date on which the shares were offered, and subject to the condition that (i) the option cannot be exercised before 3 years from the offer have elapsed, (ii) the employee maintains for at least 5 years shares representing at least the difference between the fair market value of the shares at the time of exercise and the price paid by the employee, and (iii) at the time of exercise the shares are listed on a regulated market. The exemption does not apply if the shares held by the employee represent more than 10% of the voting rights or of the capital of the issuing company. The last two exemptions also apply to shares issued by a resident or non-resident company controlling, or controlled by, the employer, or by a company controlled by the same person controlling the employer.
Employment income: benefit in kind (3) Benefits in kind are deemed to constitute income equal to their market value, with some exceptions. Where a car or motorcycle is made available by an employer to an employee, the taxable benefit is equal to 50% of the amount determined on the basis of published tables assuming a yearly use of 15,000 km. With respect to a low-interest loan to an employee from an employer or through financing agreements with a third-party lender, the taxable benefit is equal to an amount corresponding to 50% of the difference between the legal rate of interest and the actual rate of interest in force at the end of each year.
Employment income: pension income Pensions are generally taxed as employment income. However, periodical payments made by pension funds on the basis of private insurance policies are taxable only for 87.5% of their gross amount. Lump-sum payments from pension funds are subject to separate taxation: the taxable base is limited to that part that exceeds the individual's contributions to the fund, provided that they do not exceed 4% of his annual income. A deduction is granted from the lump-sum payment up to EUR 309.87 for each year of employment, but only in proportion to the part of the termination payment that was contributed to the fund.
Employment income: director’s remuneration Remuneration paid to the members of the board of directors and the supervisory board is taxed as employment income. It is taxed as professional income (see above) if the functions carried out by the director or supervisor are typical of their professional activity.
Business and professional income (1) Professional income is derived from habitual independent activities other than business activities, e.g. from exercising an art or a profession. Taxable income is the difference between any fees received and related expenses, including: • hotel, restaurant and entertainment expenses, deductible up to 2% of the fees received in the tax year; and • depreciation on fixed assets used for the profession. Depreciation on vehicles that for the greater part of the tax year are not used exclusively for a profession is only allowed up to 50% of the costs recognized for tax purposes. Business income is generally taxed at the progressive rates of individual income tax.
Business and professional income (2) Individuals who set up a new business or professional activity may opt for their income (if their proceeds are not more than EUR 30,987.41 for services and EUR 61,974.83 for other activities) to be subject to a 10% substitute tax, if certain requirements are met. The incentive is available for the first 3 years of activity. Individuals already carrying out small activities (proceeds not more than EUR 25,822.84) may opt for a 15% substitute tax. No time limitation applies.
Investment income (1) As a rule, income from immovable property is determined on the basis of the cadastral value by applying the schedule of estimated values established for each category and class or, with respect to buildings with a special or particular purpose, by a direct estimate under the cadastral law. A deduction up to the cadastral value may be claimed from the aggregate taxable income derived from owner-occupied dwellings. If the dwelling is let, the taxable base is the higher of (a) its cadastral value or (b) its rental value reduced by the maintenance expenses up to a maximum of 15% of the rental value. A further flat deduction of 30% of the taxable income as determined above is provided for rentals of dwellings located in major cities, if rents are those that have been agreed upon between the landlords' and tenants' associations.
Investment income (2) Effective for tax periods starting on or after 1 January 2004, Italy applies a classical system of taxation of corporate profits. The former imputation system is abolished and replaced by a 95% participation exemption for corporate shareholders and a 60% exemption for individual shareholders who hold the participation in a business capacity. Individual shareholders not holding the participation in a business capacity are also entitled to the 60% exemption if they own more than 2% of the voting power or 5% of the capital in listed companies, or more than 20% of the voting power or 25% of the capital in other companies (substantial participation). Otherwise, dividends derived by individuals are subject to a final withholding tax at a rate of 12.5%.
Investment income (3) Interest from domestic and foreign sources is generally subject to a final withholding tax (see futher). The term "interest" for individual income tax purposes has a broad meaning: it includes the proceeds from zero bonds and deep discount and similar instruments. No expenses are deductible from dividends and interest in determining the taxable base. Income derived from royalties on copyrights, patents, trademarks, know-how and similar rights is taxable as professional income (see above) if received by the author or inventor and as miscellaneous income if received by other persons. A flat 25% deduction for expenses is allowed from the gross amount if the recipient is the author or inventor or if the assets which produce the royalty income were acquired for consideration.
Capital gains: business gains Capital gains derived in the course of a business or profession are taxable as ordinary income of those categories. Capital gains, including goodwill, derived from the disposal of a business owned for more than 5 years are taxed separately. The tax is calculated by applying to the amount received the rate applicable to half the aggregate net income of the taxpayer during the 2-year period prior to the year in which the amount is received. If in 1 of the 2 previous years there was no taxable income then the rate applicable to the aggregate net income of the other year must be used. The first tax rate in the scale must be used in the absence of taxable income in both of the 2 years. Rollover relief applies where a business is transferred either by gift or by succession upon death.
Capital gains: immovable property Capital gains derived (other than in the course of a business or profession) by individuals on the disposal of immovable property situated in Italy are taxed as miscellaneous income. However, such gains are exempt from tax if the seller has held the property for more than 5 years. Gains on land zoned for construction do not qualify for this exemption. In the case of capital gains derived (other than in the course of a business or profession) by an individual taxpayer on the disposal of immovable property and land zoned for construction within a 5-year ownership period, the taxpayer may elect to be subject to a substitute tax at the rate of 20% instead of the normal progressive income tax. Capital gains on residential buildings that have been mainly used as the principal dwelling of the owner are not subject to tax. Also, capital gains on land and buildings acquired by way of inheritance or donation are exempt.
Capital gains: shares and other securities Gains on the alienation of shares, financial instruments assimilated to shares and interests in resident companies or partnerships that are held by an individual in a business capacity are tax exempt for 60%, provided (i) the participation has been held at least from the first day of the 12th month preceding the alienation (the LIFO method applies), (ii) the participation is classified as financial assets in the first balance sheet closed after the acquisition and (iii) at least since the beginning of the third tax period preceding the alienation the participated company has been engaged in a business activity. Individual shareholders not holding the participation in a business capacity are also entitled to the 60% exemption if, in any 12-month period, they alienate more than 2% of the voting power or 5% of the capital in listed companies, or more than 20% of the voting power or 25% of the capital in other companies and provided the amount held has exceeded the above thresholds at least once in the 12-month period. Otherwise, capital gains derived by individuals are subject to a substitute tax at a rate of 12.5%.
Personal credits From 1 January 2007, the system of personal allowances has been repealed and the tax credits system has been reinstated. Under this system, the following amount can be deducted from the tax due (rather than from the taxable income): For a dependent spouse not legally or actually separated an amount varaible between 800 and 690 € depending on the amount of the income For each child: EUR 800 (EUR 900 for those under 3 years) increased by EUR 220 for children with disabilities. In the case of more than three children, the amount is increased by EUR 200 for each child after the first. The actual allowance is obtained by multiplying the above amount by the following formula: (95,000 - total income)/95,000. The amount of 95,000 is increased by 15,000 for each child after the first. For each dependent relative: EUR 750 x (80,000 - total income)/80,000. The above credits apply only upon the condition that the children and other dependants do not have an annual income exceeding in the aggregate EUR 2,840.51 before deductions.
Earned income credits A tax credit is granted to taxpayers deriving income from employment or pension. The amount of the credit depends upon the level of the aggregate income of the taxpayer. It is available for income not higher than EUR 55,000. The maximum credit is EUR 1,840 for employment income and EUR 1,725 for pension income. A tax credit is also available for persons earning income from self-employment or miscellaneous income. Such credit cannot be granted concurrently with the credit for income from employment. The credit is EUR 1,104 for income up to EUR 4,800. For income between EUR 4,801 and 55,000, the credit is calculated under the following formula: EUR 1,104 x [(55,000 - total income)/50,200]
Credit for expenses A credit equal to 19% of certain personal expenses is granted, including: • expenses for surgery, medical specialists and dental prostheses for the amount exceeding EUR 129.11; • interest paid on mortgage loans on owner-occupied dwellings, up to a maximum credit of EUR 686.89; • private life and health insurance premiums, up to a maximum credit of EUR 245.32; • expenses for secondary and university education, not exceeding the amount of state tuition fees; and • expenses paid to a real estate intermediary, up to a maximum credit of EUR 190. A tax credit is granted for certain expenses incurred for the refurbishment of the taxpayer's dwelling. The expenses in respect of which the credit is available are limited to EUR 36,000 per dwelling. The credit is equal to 36% of the expenses incurred. The credit must be spread over a period of either 5 or 10 years.
Losses Losses incurred in a small business or in a profession may be set off against the aggregate income of the same tax year. The term "small business" means an enterprise with annual turnover less than EUR 185,924.48 (enterprises engaged in services) or EUR 516,456.90 (enterprises operating in other sectors). No carry-over is allowed. Losses of a business other than a small business may be offset against other business income of the same year or be carried forward for 5 years. Losses incurred in the first 3 tax years of a business, however, may be carried forward indefinitely. Other losses may not be deducted or carried over.
Rates The following rates apply in tax year 2007: up to 15,000 23% 15,001 ‑ 28,000 27% 28,001 ‑ 55,000 38% 55,001 ‑ 75,000 41% over 75,000 43% The above rates are increased by a regional surcharge varying between 0.9% and 1.4%, depending on the region. They may also be increased by a local surcharge varying between 0% and 0.5%, depending on the municipality
Withholding taxes (1) Salaries and other remuneration from employment paid by companies, businesses and professionals are subject to an advance withholding tax, which is creditable against the recipient's income tax liability. The tax is withheld applying the ordinary income tax rates corresponding to the brackets adjusted according to the period for which the payment is made. Professional fees paid by companies, businesses and professionals are subject to an advance withholding tax at a rate of 20%. Interest on loans is subject to a 12.5% advance withholding tax, which is creditable against the recipient's income tax liability.
Withholding taxes (2) A final withholding tax of 27% applies to: • interest on current accounts with bank and post offices; and • interest on bonds, issued by banks and listed and unlisted companies, with a maturity of less than 18 months. A final withholding tax of 12.5% applies to: • interest on state bonds; • interest on bonds issued by banks and listed companies with a maturity of at least 18 months (in this case the withholding tax is replaced by a substitute tax of the same rate); and • interest on bonds issued by non-listed companies with a maturity of at least 18 months, provided that, at the date of issue, the interest rate was not higher than (a) 200% of the official discount rate, in the case of bonds listed on an EU-regulated market or (b) 166% of the official discount rate, in the case of other bonds.
Administration For individual taxpayers, the tax year is the calendar year. Taxpayers who derive taxable income in excess of certain limits must file an annual tax return between 1 May and 30 June of the year following the tax year (31 July for electronic filing). In principle, the self-assessment method is used. The tax office is authorized to issue assessments to taxpayers who have not filed a tax return or whose tax return has not been prepared in accordance with the law. In such cases, the tax office estimates the taxpayer's income on the basis of the information in its possession. Taxpayers and tax offices are allowed to compromise on the amount of tax and penalties due. Individuals must make two advance payments of income tax during the tax year. The balance of the tax due, based on the results shown in the annual tax return, must be paid by 16 June of the following year. Any excess tax is refundable.
General feature For the regional tax on productive activities, see sledes on corporate income taxes. With respect to individuals, the tax only applies to those engaged in a business or profession
General features A complicated system of social insurance covering life insurance, health, maternity, disability, unemployment and family allowances is in operation for all employees. The contributions are withheld from the employees' salaries. The contributions are generally approximately 10% of the total gross salary, depending on the type and size of the business and the rank of the employee. A system of social insurance covering life and health insurance is also in operation for taxpayers engaged in a business or profession. The amount of contributions made varies according to earnings.
General features There is no net wealth tax in Italy. The municipal tax on immovable property is levied on the possession of immovable property (buildings, development land, rural land) located in Italy. The taxable base is the imputed income as determined by the immovable property registry, multiplied by a certain coefficient equal to 100 for residential property and to 50 for business property (with some exceptions). The rate ranges from 0.4% to 0.7% depending on the municipality. This tax is not deductible for income tax purposes.
General features Inheritance and gift taxes have been reintroduced with effect from 1 January 2007. Under the new legislation, the inheritance and gift tax applies as follows (per beneficiary): • transfers to the spouse and of direct descendants or ascendants are subject to tax at a rate of 4% on the value of the inheritance or the gift exceeding EUR 1 million; • transfers to brothers and sisters are subject to tax at a rate of 6% on the value of the inheritance or the gift exceeding EUR 100,000; • transfers to all other relatives up to the fourth degree, or relatives-in-law up to the third degree, are subject to tax at a rate of 6% on the entire value of the inheritance or the gift; • transfers to any other beneficiary are subject to tax at a rate of 8% on the entire value of the inheritance or the gift.
Resident individuals: foreign income and capital gains (1) A resident individual is taxable on his worldwide income. Foreign-source income from immovable property which is used in the course of a business or the construction or trade of which is the object of a business is deemed as business income and is subject to tax accordingly. In all other cases, income from immovable property is added to the taxable income of the resident owner for whom the taxable base is calculated by the rules of the country within which the property is located.
Resident individuals: foreign income and capital gains (2) Dividends received by resident individuals from participations in non-resident companies are taxed as follows: (1) if the participation is not held in a business capacity and is not a substantial participation, it is taxed by way of a 12.5% final tax withheld by the resident intermediary through which the payment is made (a 12.5% substitute tax applies on the income declared on the tax return if the payment is not made through such an intermediary); (2) if the participation is a substantial participation (see above) not held in a business capacity, only 40% of the income must be included in the taxable income of the recipient and is assessed to income tax at the ordinary graduated rates. The income is, however, subject to a 12.5% advance withholding tax applied on the 40% of the income; (3) if the participation is held in a business capacity, only 40% of the income must be included in the taxable income assessed to income tax at the ordinary graduated rates.
Resident individuals: foreign income and capital gains (3) Regarding (2) and (3), the rules do not apply if the distributing company is able to deduct fully or partially the dividend paid in its state of residence, or if it is a resident of a state or territory which has a privileged tax regime for CFC purposes, unless, in the latter case, a ruling has been obtained that the holding in the CFC does not achieve the localization of income in such a state or territory. If the rules do not apply, a 12.5% advance withholding tax applies on 100% of the income (reduced by the amount already subject to tax under CFC rules, if any) in the hands of the recipient. Unilateral relief provisions apply in the form of an ordinary tax credit: any foreign withholding tax may be credited against the Italian individual income tax due, up to the amount attributable to the foreign income. In the case of partially exempt income, the creditable foreign tax is reduced proportionally to the income taxable in Italy.
Resident individuals: foreign income and capital gains (4) A circular letter issued by the Ministry of Finance has clarified that the 12.5% final or advance withholding tax mentioned above applies on the income effectively paid to the resident individual, i.e. as reduced by the withholding tax possibly levied by the state of residence of the paying company. If such withholding tax is higher than the one allowed under the applicable tax treaty and the resident individual holding a non-substantial participation receives a refund of the difference, this amount is treated as a dividend for tax purposes, whilst in case the resident individual holds a substantial participation, the 12.5% advance withholding tax is applied on the amount effectively received but 40% of the gross amount of the income will be included in the taxable income of the recipient, who will be granted a credit up to the maximum withholding tax allowed under the relevant treaty.
Resident individuals: foreign income and capital gains (5) Foreign-source interest received through resident intermediaries, such as banks and other financial institutions, is subject to a final withholding tax (or an advance withholding tax in case of interest derived in the course of a business) at the following rates: • 12.5% on interest on bonds and other securities with a maturity of at least 18 months; and • 27% on interest on bonds and other securities with a maturity of less than 18 months.
Resident individuals: foreign income and capital gains (6) When not received through a resident intermediary, the interest (other than interest derived in the course of a business) is subject to a substitute tax at the same rates as the withholding tax. Both in the case of the final withholding tax and the substitute tax, no foreign tax credit is granted. However, the taxpayer may opt to include the interest in his taxable income subject to the income tax rates and thus benefit from the foreign tax credit. Foreign-source interest income derived in the course of a business is added to the taxable business income of the recipient. Foreign-source royalties derived in the course of a business are added to the taxable business income of the recipient. Non-business royalties derived by residents may be classified as professional or miscellaneous income.
Resident individuals: foreign income and capital gains (7) Business and professional income earned abroad is included in the taxable income of those categories. Capital gains on foreign-situs assets that are used in a business or profession are included in business/professional income. Foreign-source capital gains on shares and other securities derived by private individuals are treated in the same manner as domestic gains. The 60% exemption is subject to the condition that at least since the beginning of the third tax period preceding the alienation the company has not been a resident of a state or territory which has a privileged tax regime for CFC purposes, unless a ruling has been obtained that the holding of the shares in the CFC does not achieve the localization of income in a state having a privileged tax regime.
Resident individuals: double taxation relief International double taxation is avoided by an ordinary foreign tax credit. The mechanism is the same as for companies
Resident individuals: special rules for expatriates Income derived by employees from an activity permanently performed abroad is taxable on the basis of salaries determined annually by a decree of the Ministries of Labour and Social Security, instead of the salary actually received. This applies only if the activity performed abroad is the exclusive object of the employment and the employee stays abroad for more than 183 days in the contractual year. Employment or professional income derived by researchers who start working in Italy between 2 October 2003 and 1 October 2008 and therefore become resident in Italy for tax purposes will be exempt for 90% from income tax and fully exempt from the regional tax on productive activities. This regime only applies for 3 tax years.
Non-resident individuals: general rules Non-resident individuals are subject to individual income tax on income from Italian sources. The tax is computed in the same way as it is for resident individuals. As a general rule, income tax is assessed on the aggregate income derived from Italy. However, investment income and professional income are subject to a final withholding tax or to a substitute tax. Where the withholding or substitute tax is not applied, the non-resident is, upon filing a tax return, subject to taxation at the ordinary income tax rates
Non-resident individuals: employment income Income from employment (including pensions) is subject to taxation in Italy if the work is performed in Italy. Pensions, similar allowances and termination payments are also subject to taxation in Italy if paid by the state, residents of Italy or Italian permanent establishments of non-residents.