Personal income tax (IRPEF)
Personal income tax in Italy is progressive.
The requirement for this tax is the possession of income, in cash or in kind, falling into one of the categories provided by law. The tax period corresponds to the calendar year.
Persons liable for tax
The following persons are liable to tax:
- individuals residing in Italian territory in respect of the entire income owned;
- individuals not residing in Italian territory solely for the income produced in Italy.
Tax on income of Italian residents
According to the Italian law, an individual qualifies as a resident of Italy for income tax purposes in a tax period (i.e. the calendar year) if at least one of the following alternative conditions is fulfilled for majority (183 days) of the same tax period:
- they are registered in the Official Register of the Italian resident population (anagrafe della popolazione residente);
- they have their residence in Italy for civil law purposes. Residence is defined as the place in which the person has his habitual abode;
- they have their domicile in Italy for civil law purposes. Domicile is defined as the place in which a person established the main seat of his business and interests.
Notably, there is no split-year concept for residence purposes under Italian tax law. Therefore, in case at least one out of the above three alternative conditions is fulfilled for the greater part of the tax period concerned, the individual is deemed to be a resident of Italy for the whole tax period (calendar year). On the other hand, if none of the three conditions is met for the greater part of the tax period, the individual is to be regarded as a non-resident for the whole tax period.
Tax assessment basis
Tax is applied to the overall income, i.e. the sum of the income of each category, minus any losses deriving from the practice of arts or professions and/or commercial businesses. The relevant categories include:
- land income, relating to land and buildings situated on the Italian territory;
- capital income;
- income from employment;
- income from self-employed;
- company income;
- sundry income, not acquired from the exercise of business, arts or professions.
Once the gross overall income has been determined, any deductions stipulated by law are applied. The gross tax is calculated by applying the increasing rates by income increments to the net overall income.
Regarding capital gains and losses from financial assets and real estate, in Italy they are taxed. Tax rates vary based on factors such as asset type, ownership duration, and residency status. We discuss capital gains and losses taxation in Italy and reporting requirements for foreign-held assets of residents.
Capital Gains and losses Taxation
Individuals pay a 26% flat tax rate on capital gains from financial assets. However, some assets, like Italian government bonds and bonds of foreign states with exchange of information agreements, have a 12.5% tax rate. Non-EU funds and dividends and capital gains from partnerships in blacklisted jurisdictions may not qualify for the lower rate.
Capital gains from real estate owned for more than five years or inherited are generally exempt from income tax. Other assets, like artwork, are not taxed unless they are part of a business or professional activity.
Capital losses on financial assets can offset capital gains of the same category for up to five years. An optional regime allows certain assets to be taxed on an accrual basis, and accrued capital losses can offset certain income from financial assets.
Reporting Obligations on Foreign-Held Assets for Residents
Residents in Italy must report foreign-held assets. This requirement also applies to entities holding foreign assets if the resident qualifies as the beneficial owner for Italian anti-money laundering purposes. The definition of beneficial owner has broadened following EU directives.
In 2021, the tax authorities ruled that resident beneficiaries of non-resident trusts must report trust assets as beneficial owners since 2017. Failure to comply may result in severe penalties and criminal sanctions.
Tax in Italy on income from employment and self-employement
Income taxation in Italy is levied on both employment and self-employment income. For employees, income tax is withheld from their salary by the employer, with rates ranging from 23% to 43% depending on the level of income.
Self-employed individuals, on the other hand, are responsible for paying their own income tax, with rates ranging from 15% to 43% depending on their level of income. In addition to income tax, both employees and self-employed individuals may be subject to social security contributions. It is important for individuals to understand their tax obligations and seek professional advice to ensure compliance with tax laws and to optimize their tax situation.
Personal income tax rates in Italy
- Up to EUR 15,000: 23%
- From EUR 15,001 to EUR 28,000: 27%
- From EUR 28,001 to EUR 55,000: 38%
- From EUR 55,001 to EUR 75,000: 41%
- Over EUR 75,000: 43%
For tax calculation purposes, tax deductions are available to reduce overall taxable income.
Deductions are usually equal to 19% of the charges borne, reducing the gross taxation applicable.
The following regional and municipal IRPEF surcharges may apply:
- a regional of between 1.23% and 3.33% (established by the regional government on a yearly basis);
- a municipal surcharge comprised of a first rate established each year by the state and applied throughout the national territory and a second rate not exceeding 0.8% p.a. established by the individual municipality (under some circumstances the rate could rise further by a further 0.3%).
Tax on income of non-residents
IRPEF applies to resident and non-resident individuals.
Resident individuals are taxed on a world-wide basis, while non-resident individuals are taxed on the income produced within the Italian territory.
The following incomes are deemed to be produced in Italy:
- income from land and buildings;
- income from capital paid by the State, by resident persons (entities or individuals) or by permanent establishment in Italy of foreign entities, except interest and other income derived from bank/post deposits and current accounts;
- income from employment produced in Italy;
- income from independent business derived from activities performed in Italy;
- business income derived from activities performed in Italy through a permanent establishment;
- other income derived from activities performed/assets located in Italy and capital gains derived from the sale of participation in resident entities (exceptions: e.g. non-substantial participations in listed companies);
- income from participation in transparent Italian entities (e.g. partnerships).
Tax is assessed on the aggregate amount of the incomes indicated above (deductions and tax reductions may apply).
Non-resident companies and other entities, including trusts, with or without legal personality are subject to corporation tax (IRES, Imposta sul Reddito delle Società).
Tax is assessed on the income produced in Italy, except for exempt incomes and incomes subject to final withholding tax or substitutive tax.
For corporation tax purposes (IRES), the incomes indicated above are deemed to be produced in Italy; for non-resident companies and other entities, the business income includes capital gains and capital losses relating to assets used in commercial activities performed in Italy (even if not realized through permanent establishments), dividends derived from resident entities, other income derived from activities performed/assets located in Italy and capital gains derived from the sale of participation in resident entities.
Tax treaties, where more favourable to the tax-payer, override domestic provisions.
Resident Non-Domiciled (Res-Non Dom) program in Italy
The Resident Non-Domiciled (Res-Non Dom) program in Italy is designed to attract wealthy individuals and investors to become tax residents of Italy. Under this program, non-Italian residents can benefit from a flat tax rate of €100,000 on their foreign income, in addition to their income generated in Italy.
To qualify for the program, individuals must not have been residents in Italy for the previous nine years and must agree to remain in Italy for at least six months each year. The Res-Non Dom program offers significant tax benefits for individuals who meet the eligibility criteria, making Italy an attractive destination for high-net-worth individuals seeking to establish tax residency in a European Union country. Discover more.
Expatriates benefiting from the dedicated Italian special tax regime
The Italian Government has adopted a new program under which expatriates (non-residents taxpayers), residents in the EU or EEA (European Economic Area), will benefit from full deductions and allowances on their taxable income (so-called “Schumacher-rule”).
Under the new provision, non-resident taxpayers who respect this rule will be treated the same as Italian residents in respect of their tax calculations.
Inheritance and gift tax in Italy
Inheritance and gift tax in Italy is levied on the transfer of assets from a deceased individual to their heirs or from one person to another through a gift. The tax is calculated based on the value of the assets being transferred and varies depending on the relationship between the donor and the recipient. For Italian residents, inheritance and gift tax rates range from 4% to 8%, depending on the degree of kinship between the donor and the recipient, with spouses and direct descendants benefiting from lower rates. For non-residents, inheritance and gift tax is calculated based on the value of the assets located in Italy, and the tax rates are generally higher than for residents.
However, for Italian citizens and non-residents who inherit property located in Italy, there are additional taxes and reporting requirements that must be considered. In addition to inheritance tax, there is a cadastral tax, which is a property transfer tax based on the value of the property being transferred. This tax can range from 1% to 10% of the property value, depending on various factors, such as the location and intended use of the property. Furthermore, if the inheritance includes foreign assets or bank accounts, the heirs must report these assets to the Italian tax authorities and pay taxes on them.
Wealth tax in Italy
Italy does not currently have a wealth tax, although there have been discussions in recent years about introducing such a tax. Wealth tax is a tax on the net worth of individuals or households, including assets such as real estate, investments, and other assets. If implemented, a wealth tax in Italy would be levied on individuals with a net worth exceeding a certain threshold, with the tax rate varying depending on the level of wealth. While the Italian government has not yet implemented a wealth tax, it is important for individuals to keep abreast of any developments in this area, as such a tax could have significant implications for high-net-worth individuals and investors in Italy. It is recommended that individuals seek professional advice to stay informed about the potential impact of any future wealth tax on their financial situation.
Contact us for more information about personal income tax in Italy.