How Income is Taxed in Italy
In Italy, the tax authority is the Ministero dell’Economia e delle Finanze, the Minister of Economy and Finance. There are three levels of income tax in Italy: state, regional and municipal, each taxed at different rates. State income tax in Italy is progressive and in accordance with the table below:
Any amount of income over €50,001 remains taxed at 43%. In addition to the state taxes, there is a regional income tax which depends on the region of residence; this regional income tax rate ranges from 1.23% to 3.33%. Likewise, municipal income tax also depends on the municipality of residence. The municipal income tax rate ranges from 0% to 0.9% and municipalities are able to establish progressive tax rates applicable to the national income bracket.
Declaring Income in Italy
To declare their income, taxpayers can file either a Modello Redditi PF (Tax on Physical Persons) or Modello 730, which is a simplified tax return, on the basis of specific rules.
In order to file using the Modello 730 in Italy the taxpayer must meet three conditions: they must be Italian residents in the year of filing the Modello 730 and the previous one; the individual must have a withholding agent in Italy in the filing period for the Italian income tax return; and, the individual must have no VAT number (Partita IVA). The main advantage of using the Modello 730 return is that the taxpayer is not required to do any calculations. In Italy, the employer is responsible for reporting the balance that results from the tax return which is directly withheld or refunded (if the result is a credit) to the employee. If you are married you are able to file the Modello 730 (Form 730) jointly. This tax return has to be submitted to the Italian tax authorities by 30 September via electronic filing.
On the other hand, we have the Modello Redditi PF. This one is used if Modello 730 is not applicable and the taxpayer is responsible for filing it either by themselves or through a registered accountant, the latter is recommended in order to avoid any fines or penalties. This tax return must be submitted to the Italian tax authorities (Agenzia delle Entrate) by 30 November if you are filing electronically. Unlike the Modello 730, Married couples cannot file the Modello Redditi PF jointly.
Employers are also required to issue (by 31 March of the following year) an annual employment certification, called Modello CU, often shortened to just CU – standing for “certificazione unica.” This document certifies the amounts of the employee’s taxable income along with the withholding taxes applied during the fiscal year. This applies to both foreign citizens as well as Italians.
In case foreign individuals have no employment relationship with an Italian company, they are required to declare the income in the Italian tax return (through the so-called “self-assessment method” which will be described below).
Italy’s Tax on Foreign Income
It is possible that two countries consider you a tax resident at the same time. This would mean that both could require you to pay taxes on your total worldwide income. To prevent this, most of the time, many countries have double tax agreements, which generally provide rules for determining which of the two countries can treat you as a resident and thus who you are liable to for taxes. If you believe that your situation is more complex or that your country does not have a tax treaty with Italy then you should contact the tax authorities in one or both of the countries to ask for clarification.
Tax Exemptions in Italy
New high-earning (High Net-Worth Individuals) residents can take advantage of a specific tax relief scheme which concerns persons who specifically become resident in Italy for tax purposes. Those who sign up to the scheme are able to benefit from a substitute tax on income that was generated abroad by paying a flat tax of 100,000 euros each tax year instead of the standard progressive tax.
Italy’s tax system provides for many different tax regimes for people who decide to move to Italy to work or live. For example, professors and/or researchers, who are currently residing abroad and decide to move to Italy are able to benefit on income generated in Italy. One tax incentive is also in place for so-called “impatriates” workers, such as graduates who have worked abroad, students who have obtained an academic qualification abroad, managers, and workers who have high qualifications and specializations.
Penalties for Late Declarations or Not Declaring
Let’s have a look at the so-called “self-assessment” method, which works as follows:
- Two advance payments (30 June and 30 November of the current year). The first advance payment is 100% of the income tax balance of the previous year multiplied by 40%, so a payment of 60% by 30 June. The second is 100% of the income tax balance of the previous year multiplied by 60%, thus the remaining 40% is due by 30 November.
- One final tax balance (30 June of the following year). This final balance is the result of the actual income tax minus the two advance payments due by 30 June of the next year.
The tax authorities have the power to audit any taxpayer’s tax return within 31 December of 5 years after the tax return has been filed, so 6 years after filing for all intents and purposes. Taxpayers have the option to appeal within 30 to 60 days from the notification date of when the notice of assessment was sent. If a tax return has been omitted, the tax authorities may make an assessment within the seven years following the year when the tax return should have been filed. Failure to file tax returns may result in significant fines and penalties.
If the taxpayer has appealed the audit, then a judgment will be issued by the tax commission in your jurisdiction. If a petition is filed within 60 days from the date of the notification of the tax commission’s notice of judgment then it is possible to appeal against this judgment. The case will then be reviewed by the tax commissions and it is possible to appeal against this second judgment as well, but only on a point of law, not for any other reason.
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