Taxes in Italy: Your Guide To Personal Income Tax, VAT, and Other Tax Categories

Taxes in Italy vary according to the taxpayer's income bracket and many other factors. If you live in Italy, understanding how much tax you pay in the country can be complicated, especially for those unfamiliar with tax matters. Still, it's fortunately not an insurmountable challenge!

In 2021, the tax burden in Italy reached 43.4% — one of the highest in Europe. With this in mind, it's especially important to understand how Italian taxation works, and what you can do to be frugal. This guide will give you a complete overview of Italian taxation, including VAT, corporate tax, taxes in Italy for foreigners, individual income tax, and much more.

Who Pays Tax in Italy?

Taxation in Italy is linked to who has tax residence in the country rather than to nationality. For example, an Italian citizen who works abroad may have to pay taxes only in the country where he resides for tax purposes. On the flip side, a foreign citizen with tax residence in Italy (or a foreign company with its tax office in Italy) will be subject to Italian taxation, even if they don't hold Italian citizenship.

This means that if you're an expat or foreigner in Italy, you'll pay taxes, provided you have tax residence in the country. But who exactly qualifies for tax residence? We explain below:

Who Has Tax Residence in Italy?

Tax residency is automatically obtained if a person resides in Italy (even if not continuously) for at least 183 days per year or 184 days per year during a leap year. This means you'll be liable to pay tax in Italy if you stay in the country for more than that period and, more particularly, if you meet one of the following criteria:

• You have either domicile or legitimate interest in Italy (which can be professional but also social, e.g. family ties);
• You physically reside in Italy, i.e., you live in the country.

Furthermore, if you're registered in the National Register of the Resident Population (ANPR), you'll be considered tax residents in Italy, regardless of how many days you live in Italy during the year. This topic is the cause of ongoing debate among Italian citizens (and those registered with ANPR) who work abroad and, in many cases, are subject to double taxation, i.e. both in Italy (their tax residence) and abroad (in the country where they work and earn an income).

To overcome this problem, Italy has entered into agreements with many countries not to impose double taxation on Italian workers abroad. The Ministry of Economy and Finance keeps a list (in Italian) of these countries.

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If I Work in Switzerland, Do I Have To Pay Taxes in Italy?

Many so-called "cross-border workers" work in Switzerland but live over the border in Italy. In particular, these workers live in the provinces of Varese and Como in Lombardy, but also Sondrio, Bolzano, Valle D'Aosta, and even Verbano-Cusio-Ossola in Piedmont.

With so many cross-border workers, the question of double taxation has naturally arisen. However, the Italian and Swiss governments solved the issue in 2021 by signing a double taxation treaty. According to the new agreement (proposed by the Italian government and accepted by the government of the Swiss Confederation), 80% of the withholding tax levied on the income of new cross-border commuters who work in Switzerland is no longer levied by Switzerland. In contrast, Italy itself taxes those workers like normal, thereby eliminating double taxation.

However, this agreement doesn't affect all Italian citizens who work in Switzerland, only those who start working in Switzerland after the ratification of this agreement are considered new cross-border workers and only those who live within 20km of the border are affected.

IRPEF: Personal Income Tax in Italy

IRPEF is an acronym that stands for Imposta sul reddito delle persone fisiche in Italian, meaning "Tax on personal income" or, simply, "income tax". The IRPEF is normally the most common among all taxes in Italy because it affects all Italian tax residents who earn an income. In Italy, the percentage of IRPEF is not fixed but progressive, meaning different rates and brackets depend on the taxpayer's income.

According to the 2022 Budget Law, these percentages are in force for four different income brackets:

1. Up to €15,000 per year: 23%
2. From €15,000 to €28,000 per year: 25%
3. From €28,000 to €50,000 per year: 35%
4. Above €50,000 per year: 43%

In addition, for income of up to €8,500 earned per year, the IRPEF doesn't apply due to deductions.

Income Tax Brackets: How Are They Calculated?

The above list can be confusing and doesn't tell the full story. Therefore, an additional explanation on calculating the income tax brackets is needed for clarification. If a person were to have an income of €60,000 per year, would they pay 43% of the entire amount?

The answer, fortunately, is no. A taxpayer with an income of €60,000 will pay taxes as follows:

• For the first €15,000, the tax is 23%, therefore €3,450;
• For income between €15,001 and €28,000, 25% will be taxed (equalling €3,250);
• For income between €28,001 and €50,000, 35% will be taxed (equalling €7,700);
• For income ranging from €50,001 to €60,000, 43% will be taxed (equalling €4,300).

Therefore, a person with an income of €60,000 would pay €18,700 in personal income tax.

Other Taxes on Individuals in Italy

The IRPEF isn't the only tax that an Italian taxpayer will normally pay, and there are other common ones too. We go over them below:

VAT

As in many countries, VAT (Value Added Tax) is a tax that all people who spend money in Italy pay indirectly. It's essentially a sales tax that's applied every time you purchase goods or services with an Italian merchant.

VAT in Italy is 22%, but for some products, the percentage drops drastically. For example, for basic food items, the VAT is 4%, and for health products, it's 5%. Many other non-essential items come with a VAT of 10%.

RAI License

In the eyes of many Italians, the RAI license fee is seen as a tax. It comes to €90 per year and is paid in 10 different instalments through the electricity bill. The RAI fee is applied to anyone who owns a television (the Revenue Agency assumes that you have a television in your place of residence).

If you don't have a television, you'll need to notify the Revenue Agency by completing and sending this document (in Italian).

University and School Fees

School fees in Italy are charged for the fourth and fifth years of high school, as well as for non-compulsory school. These taxes are payable by those who have children enrolled in the last two years of high school and include the enrollment fee, attendance fee, the fee for the eligibility, supplementary, license, maturity, and qualification exams. Finally, there is also a fee for the issue of the related diplomas.

University enrollment involves the payment of additional fees, the amount of which varies according to the university chosen and in many cases according to your ISEE (Equivalent Economic Situation Indicator).

Taxes for Companies in Italy

Most companies pay two taxes in Italy: the IRES and the IRAP. However, other taxes apply depending on the type of company in question.

IRES: Corporate Income Tax

IRES stands for Corporate Income Tax and is a tax that's applied to a company's income. Internationally, this tax is synonymous with corporate taxation. Unlike the IRPEF, the IRES is set at a fixed rate, which is 24% (as of 2022).

Here's a list of the types of companies that pay corporate tax in Italy:

• Joint-stock companies (S.p.a)
• Limited liability companies (S.r.l.)
• Limited partnerships for shares (S.a.p.a.)
• Cooperatives;
• Mutual insurance companies;
• European companies;
• European cooperatives resident in Italy;
• Public and private entities resident in Italy;
• Public and private entities not resident in Italy but only for income produced in Italy.

The list doesn't include sole proprietorships, self-employed workers, and freelancers (which we'll discuss later).

IRAP: Regional Tax on Productive Activities

The IRAP is a regional tax that's levied at a single rate, which in 2022 is 3.9%. However, each region can decide to increase or decrease it by one percentage point. Therefore you can safely assume that the IRAP in Italy ranges from 2.9% to 4.9%, depending on the region. To find out the exact amount, we recommend inquiring on the institutional website of your region and, in case of doubts, contacting a qualified accountant.

As of 2022, the IRAP doesn't apply to sole proprietors, self-employed workers, and freelancers.

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Other Corporate Taxes

IRES and IRAP are the main taxes that a company must pay. However, others depend on the type of company. For example, the annual fee to the Register of Companies can be considered a real tax for companies, which varies according to the kind of company.

Furthermore, if the company's ownership is divided into several partners and it produces profits, a withholding tax of 26% is applied at the time of distribution.

Taxation VAT Number: Flat-Fate and Ordinary Regime

The VAT number is necessary for a company or for any person doing business in Italy as it's used for the purposes of indirect taxation (VAT) we discussed earlier. The number consists of 11 digits and, on the EU level, it's useful for identifying a tax entity.

With that being said, it's good to keep in mind that in Italy, the VAT number can refer to a self-employed person, an individual firm, or a freelancer, and it can commonly be found on invoices, for example.

Are VAT numbers taxed like companies or like individuals? Yes and no. Italy has set up an ad hoc flat tax regime for those who don't exceed a certain annual income. (For all others, the ordinary tax regime is used, which follows the income tax brackets mentioned earlier.)

VAT Number on a Flat-Rate Basis

The flat rate scheme is a subsidized tax scheme that gives you access to a flat rate of 15% regardless of how much your income is. However, there are requirements, which we explain below:

• Your annual income must be less than €65,000.
• Expenses for any collaborators, employees and ancillary work must not exceed €20,000 annually.
• You must be resident in Italy or in a member state of the European Union or in a state adhering to the Agreement on the European Economic Area and you must derive at least 75% of your revenues in Italy.
• You don't have to have a business already started and you don't have to participate in partnerships, professional associations or family businesses.
• You cannot initiate sales operations of buildings or portions of buildings, building land or new means of transport, unless these operations are only occasional (we recommend asking an accountant for more information if you're in doubt).
• You cannot exercise the freelance profession exclusively or predominantly with an employer (or company attributable to the same person) with whom you had professional relationships in the two previous tax periods.
• You must not have earned €30,000 in employment income in the previous year unless that employment relationship is terminated.
• Unlike the ordinary tax regime, it's not possible to reduce the amount of taxes to be paid by incurring business expenses.

It's also worth adding that Italy has established a fixed rate (15%) that also includes any professional costs.

In summary, for a VAT number that doesn't bear many business expenses, the flat-rate regime is much cheaper than the ordinary regime, which, as we've seen, has a minimum tax rate of 23% up to €15,000, while the subsequent brackets are more consistent.

Furthermore, flat-rate VAT numbers don't have to apply VAT on the invoice, thus becoming more competitive, since you won't have to ask your customers for the 22% surcharge.

VAT Number in a Subsidized Flat-Rate Regime

Anyone who applies for a VAT number with respect to the aforementioned requirements will pay a tax rate of 5% for the first 5 years — a useful incentive aimed at supporting startups in Italy.

VAT Number in the Ordinary Regime

If you don't meet the aforementioned requirements, you enter the ordinary regime, i.e. you follow the brackets of the IRPEF rates we discussed earlier.

Starting from 2022, sole proprietorships, self-employed workers, and freelancers enrolled in the ordinary regime no longer have to pay the IRAP and the IRES taxes. (Those to whom the flat-rate scheme is applied were already exempt from paying these taxes.)

Real Estate Taxes: IMU, TARI and Energy Consumption

Real estate taxes apply to all persons and companies that own property. There are different types of real estate taxes depending on your property and where it's located, but the best known are certainly the following:

• IMU (Single Municipal Tax): This is a municipal tax and replaced the former ICI in 2014, while from 2020, it also incorporated the TASI, which consequently no longer exists. The IMU isn't paid by those who own only one property where they also reside (unless it is a property with historical significance).
• TARI (Tariff on Waste): This is the municipal tax on the collection and disposal of waste. The amount depends on the square meters of the property and its type (in fact, even shops pay the TARI).
• Energy Consumption: This is a tax paid directly through the electricity and gas bills.

Inheritance Tax in Italy

The inheritance tax concerns all those who receive assets as an inheritance. Since 2017, it has been possible to pay it online. Inheritance tax in Italy is quite heavy, and even donating money to another person (even if they're a relative) could be taxed if it exceeds a certain amount. To get a better picture of how this tax works, we'll use information from the Ministry of Economy and Finance's website, which offers a complete overview of the rates on inheritances and donations:

• 4% is taxed on transfers that exceed the total net value of €1,000,000 (to be applied only on the excess) to a spouse or relatives in a straight line (ascendants and descendants).
• 6% is taxed on transfers that exceed the total net value of €100,000 (to be applied only on the excess) to brothers or sisters.
• 6% is taxed on transfers of any amount to other relatives up to the fourth degree, of related collateral up to the third degree.
• 8% is taxed on transfers of any amount to all other subjects.

Taxes on Trading in Italy

The tax on financial income in Italy is 26%, while the rate is 12.5% for government bonds. Furthermore, it is necessary to pay 0.2% on the IVAFE balance, the tax on the value of financial assets held abroad.

If you invest through a withholding agent (which may be a bank, for example), the trading taxes will be automatically deducted from your account by the withholding agent. On the other hand, if your broker doesn't act as a withholding agent, it's advisable to enter the trading account during the tax return phase and pay the trading taxes independently.