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:

  • natural persons resident on Italian territory in respect of the entire income owned;
  • natural persons not resident on Italian territory solely for the income produced in Italy.

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 most part (183 days) of the same tax period:

  • he is registered in the Official Register of the Italian resident population (anagrafe della popolazione residente);
  • he has his residence in Italy for civil law purposes. Residence is defined as the place in which the person has his habitual abode;
  • he has his 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.

The rates currently in force (2020) are as follows:

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 comprising 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%).

Expatriates benefiting from the dedicated Italian special tax regime

The Italian Government has adopted a new scheme 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.

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.

Contact us for more information about personal income tax in Italy.

 

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