A Guide to Italian Taxes
“Italy has completely changed the fiscal rules, and now our taxation system is one of the most modern in the world. But no one realized that because we did not reduce taxes.” —Vincenzo Visco, Italian treasury minister, September 2000
Four years after that speech, the Italian finance minister had just quit Silvio Berlusconi’s government, which failed to deliver on pledges to cut income taxes. The plan was to bring in just two rates: 23% on taxable earnings up to $120,000, and 33% on any excess. It was expected that about 99.5% of Italian taxpayers would fall into the category declaring income up to $120,000, and thus pay taxes at the 23% rate.
The plan never went into effect. As of February 2006, the new rates for personal income tax are listed below.
As things stand, the personal income tax rate can be as much as 43% for high earners. Italy has a multitude of taxes, so if you are thinking of carrying out any form of business here, we highly recommend that you seek professional guidance from a tax accountant ( commercialista).
The law provides for a system based on five taxes: the imposta sul reddito (income tax); the imposta sulle società (corporate tax); the imposta sul valore aggiunto (VAT or sales tax); the imposta sui servizi (tax on services); and the accise (excises).
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Italian individual income tax is called impostasulredditodellepersonefisiche, or IRPEF. Tax rates are progressive and range from 23% to 43%. Additional taxes are due at the regional (0.9% to 1.4%) and local (0.1% to 0.8%) levels.
If you’re a foreign resident working in Italy, you’re only taxed on the income earned in Italy. However, if you’re an Italian resident, spend more than 183 days a year in Italy, and your “center of economic interest” (i.e. your business and investments) is in Italy, your worldwide income is subject to IRPEF.
After allowances have been taken into account, rates are on a sliding scale. They are currently as follows:
- 23% for amounts up to $36,000
- 33% for the next band from $36,001 to $39,300
- 39% for amounts between $39,301 and $119,200
- 45% for amounts $119,201 and over.
But expect more changes. There have been talks about bringing in three levels of tax instead of the two that were originally supposed to be introduced, but so far this has not happened. Plus, there will be new rules for deductions and allowances. A series of deductions from taxable income relating to the taxpayer’s family situation and home, health care, education, training, and research activities have already been implemented. The deductions include university tuition fees, medical expenses, life insurance, and burial expenses.
Resident individuals are liable for IRPEF on their worldwide income. Non-resident individuals are subject to IRPEF only on income arising from Italian sources. For income tax purposes, individuals are considered resident if their habitual abode is in Italy, the center of their interests is in Italy, and they are registered as resident for the greater part of the tax period in public records.
The following income is considered to be produced within Italy:
- Income from employment and self-employment derived from services performed in Italy
- Income from capital paid by the state or an establishment in Italy
- Business income from a permanent establishment in Italy
- Pensions paid by the state or by an Italian company
- Income from patents, trademarks, and know-how if paid by the state or by Italian residents.
In a nutshell, income of all kinds—derived from all sources—received by persons resident in Italy are taxable in Italy. So, too, is any income received by non-residents from an Italian source. This general rule is subject to the provisions of international tax treaties, of which Italy has signed up to over 100. This prevents the double taxation of expatriates.
Whether you pay U.S. or Italian taxes on your worldwide income comes down to which country you decide to make your fiscal domicile; in other words, where you are resident for tax purposes. If you live permanently in Italy, and your residence is considered to be your fiscal domicile, you must pay taxes to the Italian government on your worldwide income. Basically, you are considered an Italian resident if you spend more than 183 days each year in Italy.
According to the American Citizens Services (ACS) department of the U.S. State Department, living or earning income outside the U.S. does not relieve a U.S. citizen of the responsibility of filing tax returns. However, Italy’s double taxation agreement with the U.S. ensures that you will not be taxed twice on your income. This would include Social Security pensions, which are subject to U.S. withholding tax.
U.S. citizens living or working abroad may also be entitled to various deductions, exclusions, and credits. Along with federal tax forms, the ACS can provide a list of U.S. tax practitioners working in Italy.
Visit IL’s real estate section for information on Italian real estate taxes.
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