Different Tax Return Forms in Italy
There are two primary forms that must be filled out in Italy: Redditi PF and Form 730. The former stands for Tax on Physical Persons (redditi per le persone fisici) and is the income tax that each person must pay to the Italian government and must be submitted electronically by November 30 of the year following the closing of the tax period.
Form 730, on the other hand, must be submitted by 30 September of the year following the tax year and is a simplified income form that is only usable by some categories of citizens, for example, a married couple filing their taxes jointly, or any person who does not hold a VAT number (partita IVA).
If you are not eligible for submitting Form 730, then you must instead submit the Redditi PF.
In Italy, taxes are often split into multiple payments with different deadlines.
Regional income tax depends on the region of residence, meaning that each region is able to change the amount that its residents pay: usually wealthier areas pay higher rates. Regional income tax rate ranges from 1.23% to 3.33% generally. Likewise, municipal income tax depends on the municipality of residence and their tax rate ranges from 0% to 0.9%; Municipalities can establish progressive tax rates applicable to the national income bracket.
Below, the table shows the standard income tax rates per income bracket:
|Income in Euros (€)||Rate Applicable to Income Level (%)|
|15,001 – 28,000||27%|
|28,001 – 55,000||38%|
|55,001 – 75,000||41%|
|75,001 and above||43%|
Residents’ total income is made up of all income, regardless of where it comes from. Certain expenses can be deducted and reduce total income, like social security and welfare contributions or donations to nonprofit organizations. Gross tax is calculated by applying the rates per bracket to total income (from the table above), with a net of deductible expenses. Personal income tax is calculated by subtracting the deductions provided for by law from the gross tax: for example, deductions for spouses, children (aged 21+) and dependent family members and deductions for certain types of expenses incurred during the year (such as a percentage of health and education expenses, interest on mortgage loans, and so on.) Any tax credits—if you overpaid for some reason during the previous year you receive a “credit” from the Italian government—due should also be deducted.
For nonresidents, their total income is made up only of the income that they earned while working in Italy. Nonresidents can only deduct certain expenses from their total income, such as donations to nonprofits, or expenses for employed work, or building renovations. Their gross tax is calculated in the same way as residents—by applying the rates per bracket to their total income, after removing any deductible expenses. They cannot make deductions for family responsibilities.
Tax Exemptions, Reductions and Deductions in Italy
Newly domiciled individuals, that is, people who have recently moved their tax residence to Italy, pay a reduced tax rate for a brief period.
US citizens resident in Italy who earn under approximately €100,000 per year (the number tends to fluctuate) do not pay additional taxes to the United States as well; usually, you are exempt from paying taxes to the US but high-income-individuals are still subject to taxes if their income exceeds that amount each year. The Foreign Earned Income Exclusion allows you to decrease your taxable income by the first $107,600 (for 2020) earned as a result of your labors while a resident of a foreign country; You can exclude $108,700 (for 2021) on your tax return.
There are deductions in place that can be applied to your income, including the following:
- Charitable contributions;
- Family allowances;
- Social security contributions;
- 19% of medical expenses over €129.11;
- 19% of interest paid for loans for real estate (principal residence only, limited to €4000);
- 19% of secondary tuition expenses.
Italy taxes capital gains, interest and non-qualified dividends at 20% flat rate. “Qualified” dividends (i.e. an investment of more than 25% in an unlisted company) are subject to the ordinary tax rate on 49.7%.
Interestingly, some executive managers in the financial sector are subject to an additional 10% tax on income in the form of bonuses or stock options.
There are no foreign exchange controls or restrictions on repatriation of funds. Both residents and nonresidents may hold foreign currency within and outside of Italy, and direct and indirect investments may be made in the form of any currency. However, any funds or bank accounts held outside Italy or repatriated into Italy without a bank intermediary must be declared for tax purposes.
On the bright side, currently there are no inheritance or gift taxes in Italy. If you plan ahead and employ a good accountant then you should easily be able to take advantage of these and similar strategies to minimize or even eliminate any US expat taxes.
Italy and certain other countries have what is called a “Totalization Agreement.” This means that between the countries involved the individual taxpayer pays taxes to the country only in which they are a tax resident, i.e. the country they spend at least 183 days each year in.
This Totalization Agreement has been in effect since November 1, 1978. It covers the United States and Italy, improving Social Security protection for people who work or have worked in one or both countries. Without this agreement, many people would not be eligible for monthly retirement, disability or other benefits under the Social Security system if they chose to retire in one of those countries. Additionally, this means that you only pay Social Security taxes to one of the two countries, not both.
Though you are not required to pay taxes in both countries, you are still obligated to declare their taxes in both countries. The United States likes to know about its citizens’ financial situations regardless of their tax status or their location around the world. If you are a citizen or permanent resident of the United States then you are obligated to file US expat taxes in Italy, with the IRS each year no matter what country you live in. In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with amounts over $10,000.
Italian corporate entities are subject to a corporate income tax (imposta sul reddito sulle società), usually referenced as IRES, as well as a regional production tax (imposta regionale sulle attività produttive) or IRAP. The standard rates for IRES and IRAP respectively are 24% and 3.9%. Certain entities are subject to different IRAP rates, for example, banks, financial entities and insurance companies. Each region has the power to increase or decrease IRAP rates, but only very slightly.
Regarding IRES taxable income, it’s determined by the worldwide taxation principle. This means that the location/jurisdiction where the income is produced does not matter; the only important thing is that the income is legally attributable to an Italian resident entity, and thus the income is taxed in Italy. IRES is taxes on the total net income after it has been adjusted for specific tax rules. Importantly, nonresident companies are taxed only income earned in Italy.
The IRAP taxable base, depending on the nature of the business carried out by the taxpayer, can be calculated in a number of different ways. However, risk liabilities and extraordinary items cannot be taken into account when calculating the IRAP taxable base. IRAP is levied on a regional basis: regions can increase or decrease the standard IRAP rate by up to 0.92%. If a company has facilities in different regions they must allocate their overall taxable base to the different regions based on the employment costs of personnel located at those sites.
Tax consolidation is available to domestic groups, that is, an Italian parent company and its resident subsidiaries which are under either its direct or indirect control. This control requirement is met when the parent company holds more than 50% of the share capital in another company and is thus entitled to more than 50% of that company’s profits.
Here is a quick overview of the rates, though they can change a little:
- Corporate income tax rate 24%, plus regional tax on productive activities (3.9%)
- Branch tax rate 24%, plus regional tax on productive activities (3.9%)
- Capital gains tax rate 24%, plus regional tax on productive activities (3.9%)
There is, of course, the possibility of going deeper into all of this information, breaking down each of these numbers. For a detailed account of what can be deducted, and some of the more minor benefits it is best to contact an accountant. It’s important to keep in mind that these numbers are subject to change based on new legislation.
Would you like to learn more about this topic? Then check our related articles such as, Capital Gains Tax in Italy, Living (and paying taxes) in Italy with a green card and Establishment of tax residence: investigative activities