In Italy, most taxes are imposed by the central state except for some local tax and duty which are imposed at the regional, provincial and municipal level. Taxation is not regulated by a single code but by various laws – although corporate and personal income taxes are both embodied by the same text of law. As a general rule, taxes are known by their acronyms.
The method of taxation is based on self-declaration by taxpayers, who report their profits and earnings in a tax return. The tax revenues are then assessed by the Italian tax authorities.
The tax policy goals of recent years have focused on:Read more

- Raising revenues to fulfil international fiscal targets;
- Tackling tax evasion;
- Simplifying the tax system.

There are five agencies managing the Italian tax system:

  • the Tax Authority (“Agenzia delle Entrate”), regarding the assessment and collection taxes;
  • the custom agency (“Agenzia delle Dogane”) which supervises the customs formalities;
  • the territory agency (“Agenzia del Territorio”) which supervises all areas connected with real estate and territory;
  • the state property agency (“Agenzia del Demanio”), involves in real estate.
  • the Agent for tax collection (“Equitalia”), which provides coercive collection of taxes on behalf of all Italian Public Entity.
  • Each agency is represented in the territory by local offices.

Recent developments

  • IRAP: full deduction, from tax year 2015, the cost of labor relative to employees hired with permanent contracts;
  • In order to prevent evasion of VAT, from 1 January 2015 it is introduced in relations with the Public Administration a new mechanism called "split payment". It is a system of payment of VAT, which applies in cases where the customer is one of the followings objects: Public authorities, Chambers of Commerce, local authorities, health care organizations, public agencies. The new mechanism is not triggered at the time of billing, but in the next phase Payment by the customer that, with the new provision, should be divided into the two amounts: the tax is to be paid to the supplier, and the tax must be paid directly to Tax Authority;
  • Tax credits for investments in Research and Development;
  • “Patent Box” on patents, trademarks and intellectual properties, that provides a facilitate taxation for the income derived from the right to use patents, trademarks and intellectual properties;
  • Increase of rates regarding the social security contributions (INPS);
  • “Voluntary Disclosure”: introduced from January, 1, 2015, which allows to regulate the investments held abroad and not declared to the Tax Authority, by resident in Italy.

MAIN TYPES OF ITALIAN BUSINESS ENTITIES
There are two major subsets that are grouped lucrative companies:

- Partnership;
- Corporation.

There are two elements that differentiate the first type from the second one: the degree of financial autonomy and the recognition of legal personality by the legislator. Let us see them in turn. Read more

Corporations are characterized by perfect patrimonial autonomy. For this reason, shareholders’ obligations are limited to the each one’s respective quota. Furthermore, shareholders’ creditors cannot claim company’s assets, but they can foreclose shareholders’ shares or profits arising from their share quota.
Partnerships are instead characterized by imperfect autonomy. This entails that partners are liable for the company’s obligations, although some exceptions are granted by the law. Partnerships are nonetheless characterized by legal subjectivity. This means that they are a separate entity from the shareholders; they are holders of legal rights and their own assets.

Partnerships are:
- the simple company (S.s.);
- the general partnership (S.n.c.);
- the limited partnership (S.a.s.).

Corporations are:

- the corporation (S.p.a.);
- the limited liability company (S.r.l.);
- the simplified limited liability company (S.r.l.s.);
- the partnership limited by shares (S.a.p.a.).

Finally, it is important to note two other types of business entity: co-operative societies and consortium organizations. Co-operatives are societies which are characterized by mutual objects. Consortiums are instead formed by entrepreneurs involved in the same branch.

CORPORATE TAXES
Company taxation has been subjected to several reforms. Since the end of 2003, a radical reform of corporate taxation introduced a new corporate income tax known as "IRES".
In order to make the Italian tax system closer to other EU countries, the tax reform introduced the participation exemption regime on dividends and capital gains. A consolidation tax regime for groups was also enacted. Read more

Corporate tax rate:

IRES: 24%;
IRAP: from 3,9% to 4,82% depending each Region.
 
Entities subject to the tax are:

- Corporate entities resident in Italy (stock companies, limited share partnership, limited liability companies, cooperative companies, mutual insurance companies and European companies);
- Private and public entities, other than corporate entities, resident in Italy, irrespective of the circumstance that its sole or main business purpose is the exercise of commercial activities;
- Companies and any other type of entity (with or without legal status), including trust, not resident in Italy.

The taxable basis is represented by the aggregate amount of the income earned by the taxable entity, on a worldwide or a territorial basis if the entity is a resident or not of Italy. The starting point in calculating the taxable basis is the amount of the profit or loss shown by the accounts of the entity. This profit (or loss) is then adjusted, increasing or reducing its amount, according to the provisions of the tax law governing the business income.
The main features of the determination of the business income, subject to corporate tax, may be summarised as follow:
- Expenses, receipts and, in general, any item of income concurs to the calculation of the taxable business income on an accrual basis, although various exceptions are provided for some items of income in favour of the cash principle (i.e. dividends, director's fees, etc.); furthermore, items of income, whose existence is not certain or the amount not determined, concur to the taxable income in the tax period when these conditions occur.
- Costs and expenses may be deducted only if they are borne in connection with the activity of a business that produces income and the latter is recorded into the profits and losses account for the relevant financial period.

Depreciation and amortisation
All fixed assets that are used in the business of the company, except land, are depreciable for tax purposes (for both IRES and IRAP).

For IRES, the maximum depreciation rates for fixed tangible assets are set forth in a Ministerial Decree. Such depreciation rates are different, depending on the type of asset and on the economic sector in which the company operates. In the event that financial accounting depreciation exceeds the amounts allowed for tax purposes, temporary differences arise. Tax depreciation of fixed tangible assets is allowed from the tax period in which the asset is first used. In the first tax depreciation period, the depreciation rate cannot exceed one-half of the normal rates.

An additional IRES depreciation is granted for new investments on fixed tangible assets purchased from 15 October 2015 to 31 December 2016. In particular, the relating cost is increased by 40%, bringing the taxable basis of the asset to 140%. The eligible assets are those whose tax amortisation rate is higher than 6.5%.

It is worth pointing out that a project aimed at achieving the grouping of the tax amortisation rates has been announced by the government. Timing for the implementation of such a project is still uncertain.

Land is not a depreciable asset. Amortisation of goodwill derived from an asset deal and amortisation of trademarks are deductible for an amount not exceeding 1/18 of the cost in any year.

Patents, know-how, and other intellectual property (IP) may be amortised over a two-year period.

Concession rights may be depreciated with reference to the utilisation period as determined either by law or in the relevant agreement.

For IRAP purposes only, depreciation and amortisation (other than as related to goodwill and trademarks) are deductible in accordance with the amounts reported in the financial statements, regardless of the limits outlined above.

Depreciation and amortisation
All fixed assets that are used in the business of the company, except land, are depreciable for tax purposes (for both IRES and IRAP).

For IRES, the maximum depreciation rates for fixed tangible assets are set forth in a Ministerial Decree. Such depreciation rates are different, depending on the type of asset and on the economic sector in which the company operates. In the event that financial accounting depreciation exceeds the amounts allowed for tax purposes, temporary differences arise. Tax depreciation of fixed tangible assets is allowed from the tax period in which the asset is first used. In the first tax depreciation period, the depreciation rate cannot exceed one-half of the normal rates.

An additional IRES depreciation is granted for new investments on fixed tangible assets purchased from 15 October 2015 to 31 December 2016. In particular, the relating cost is increased by 40%, bringing the taxable basis of the asset to 140%. The eligible assets are those whose tax amortisation rate is higher than 6.5%.

It is worth pointing out that a project aimed at achieving the grouping of the tax amortisation rates has been announced by the government. Timing for the implementation of such a project is still uncertain.

Land is not a depreciable asset. Amortisation of goodwill derived from an asset deal and amortisation of trademarks are deductible for an amount not exceeding 1/18 of the cost in any year.

Patents, know-how, and other intellectual property (IP) may be amortised over a two-year period.

Concession rights may be depreciated with reference to the utilisation period as determined either by law or in the relevant agreement.

For IRAP purposes only, depreciation and amortisation (other than as related to goodwill and trademarks) are deductible in accordance with the amounts reported in the financial statements, regardless of the limits outlined above.

Finance leasing
Leasing expenses booked in the profit and loss statement pursuant to Italian GAAP are fully deductible from the IRES taxable base if the relevant agreement has a minimum duration period. In particular, if the agreement is executed as of 1 January 2014, the duration required is the following:

  • For fixed tangible assets, at least half of the depreciation period as set forth in the above Ministerial Decree.
  • For real estate, at least 12 years.

Longer minimum duration periods are provided for financial leasing agreements executed before 1 January 2014.

Interest expense
Generally, interest expense is fully tax deductible up to the amount of interest income. Thereafter, excess interest expense is deductible at up to 30% of the gross operating margin (interest deduction capacity) as reported in the financial statements. Gross operating margin is defined as the difference between operating revenues and expenses excluding depreciation of tangible and intangible assets and charges for leased assets as stated in the profit and loss account for the year.

Net interest expense in excess of the yearly limitation is carried forward indefinitely. Hence, net interest expense not deducted in previous years can be deducted in any future fiscal year as long as total interest in that year does not exceed 30% of gross operating margin. If net interest expense is lower than the annual limit (i.e. 30% of gross operating margin), this difference can be carried over to increase the company’s interest deduction capacity in future years.

As of FY 2016, the inclusion of dividends received from their foreign subsidiaries in the computation of the ‘earnings before interest, tax, depreciation, and amortisation’ (EBITDA), used to determine the interest expenses deductibility limit, is allowed.

Moreover, the limits on the deductibility of interest expenses related to bonds not traded in 'white list' countries are repealed. Following to this amendment, the aforesaid interest expenses will be subject to the ordinary deductibility limits provided for tax purposes.

Where an election is made for the domestic tax consolidation regime (as discussed in the Group taxation section), the net interest expense limitation applies to the consolidated tax group. As a consequence, if a company participating in a tax group has an excess interest deduction capacity, this excess may be used against the interest deduction deficit in another company belonging to the same tax consolidation group. Under specific conditions, non-resident subsidiaries can also be ‘virtually’ included in the tax consolidation for the sole purpose of transferring their excess capacity over 30% of gross operating margin in order to increase the overall interest deduction capacity of the Italian group.

The above-mentioned rules are not applicable for financial institutions, such as banks and insurance companies, where the deductibility of interest expense (for both IRES and IRAP purposes) is limited to a fixed amount of 96% of the interest expense shown in the income statement of these entities. Starting from FY 2017, holdings and banks will be allowed to fully deduct interests.

In 2016, the tax authorities provided some general guidelines regarding leveraged buyout (LBO) operations. The latter shall be considered legitimate and interests arising from related acquisition financing shall be considered, in principle, deductible within the ordinary limits (30% of EBITDA, transfer pricing rules, etc.).

Allowance for Corporate Equity (ACE)
The ACE is a deduction that corresponds to the net increase in the equity employed in the entity, multiplied by a rate yearly determined by the Ministry of Finance. This rate is equal to 4.75% for FY 2016 (previously 4.5%).

The relevant increase is determined by the equity contributions and by the retained earnings (except profits allocated to a non-disposable reserve) less the following items:

  • Reductions of the net equity with assignment to shareholders, including, in particular, dividend distribution.
  • Investments in controlled companies.
  • Certain intra-group business acquisitions.

If the allowance for a year is higher than the net IRES taxable base, the difference will be carried forward to the next periods.

To calculate the equity increase, the reference equity is disclosed in the financial statements for the fiscal year current as at 31 December 2010, net of the profits for the same year.

Net operating losses

Tax losses can be carried forward for IRES purposes and used to offset income in the following tax periods without any time limitation.

Tax losses can only be offset with taxable income for an amount not exceeding 80% of the taxable income. Thus, corporations are required to pay IRES on at least 20% of taxable income.

Note that losses arising in the first three years of activity can be offset with 100% of taxable income.

For IRAP purposes, tax losses may not be carried forward.

Specific (tax anti-avoidance) rules limit the carryforward of tax losses in the event of:

  • change of control and
  • an effective change of the main activity (performed by the company carrying forward the losses).

The aforementioned changes must occur together in order for the limitations to be applicable. The change of the main activity is relevant for these purposes if it takes place in the tax period in which the change of control occurs or in the two subsequent or preceding periods.

Specific anti-abuse provisions are also applicable to net operating losses in cases of merger or demerger.

In Italy, tax losses may not be carried back.

Transfer pricing
Income derived from operations with non-resident corporations that directly or indirectly control the Italian entity, are controlled by the Italian entity, or are controlled by the same corporation controlling the Italian entity have to be valued on the basis of the normal value of the goods transferred, services rendered, and services and good received if an increase in taxable income is derived there from. Possible reductions in taxable income as a result of the normal value rule are allowed only on the basis of mutual agreement procedures or the EU Arbitration Convention.

The normal value is the average price or consideration paid for goods and services of the same or similar type, carried on at free market conditions and at the same level of commerce, at the time and place in which the goods and services were purchased or performed. For the determination of the normal value, reference should be made, to the extent possible, to the price list of the provider of goods or services, and, in their absence, to the price lists issued by the chamber of commerce and to professional tariffs, taking into account usual discounts.

Penalty protection regime with transfer pricing documentation support
Transfer pricing rules provide for a penalty protection regime in case of transfer pricing audit, provided that the taxpayer has prepared proper documentation detailing the compliance of inter-company transaction to the arm's-length principle.

The Regulation applies to transactions incurred between Italian entities and non-resident entities belonging to the same group (transfer pricing rule are not applicable to domestic transactions). No specific methods have been introduced to test the arm’s length of transactions; reference is made to the OECD guidelines. An exception exists for corporations involved in on-line advertising and related ancillary activities that are required not to use cost-based indicators for transfer pricing purposes, unless an advance pricing agreement (APA) has been defined with the tax authorities on this.

On the base of the transfer pricing Regulation, taxpayers can obtain penalty protection if they provide the Italian tax authorities with:

  • Documentation to support the inter-company transactions drawn up in the specific format detailed in a Regulation issued by the Italian tax authorities and drawn up in Italian. The tax authority confirmed that information in annexes (inter-company contracts and transactions diagram) can be in English.
  • Notification that documentation has been prepared and available by checking the box in the annual corporate income tax return.

The information required is based on the EU Code of Conduct for Transfer Pricing documentation.

Based on the group structure, a Master File and/or Country File have to be prepared.

Italian-based groups and Italian sub-groups owning non-Italian subsidiaries must produce both a Master File and a Country File. Italian subsidiaries of multinational groups need to produce a Country File only.

The sub-group provisions are onerous, especially so where they relate to branches. Where a foreign entity has an Italian branch but the company itself is also a holding company, a Master File is required for the foreign entity’s subgroup, even if there is no holding directly attributed to the branch.

Sub-holding companies based in Italy with at least one non-Italian subsidiary, which need to produce a Master File, may instead produce the Master File for the entire group in English. If it does not contain all the information in the Italian Regulation, they will need to supplement it.

Documentation must be signed by the legal representative of the company and provided to the authority upon request within ten days. Also, an electronic copy must be provided at authority request.

Small and medium companies (defined as those with an annual turnover of less than EUR 50 million) need to update the economic analysis only every three years, provided that no significant change in the business occurred. Otherwise, it is necessary to update the economic analysis each year.

The transfer pricing adjustments arising on tax audits are also relevant for IRAP for companies’ financial years commencing on or after 1 January 2008. Moreover, penalties will not be levied in relation to the additional IRAP applicable to transfer pricing adjustments assessed by the tax authorities for the fiscal years from 2008 to 2012, unless the assessment has become final before 1 January 2014.

Relief from penalties is granted on the additional IRAP applicable to transfer pricing adjustments to taxpayers who have prepared transfer pricing documentation in line with Italian Regulation.

International ruling procedures are available, to agree transfer pricing methodology with the tax authorities.

The agreement executed between the tax authorities and the taxpayer is binding for the fiscal year during which the agreement is executed and for the following two fiscal years, unless significant changes in the circumstances relevant for the conclusion of the agreement executed by the taxpayer take place.

Inventory valuation
Italian tax law allows the application of all the most commonly used inventory valuation methods: last in first out (LIFO), first in first out (FIFO), average cost. For IRES only, the reference prices used to calculate the written down value of the inventory items cannot be lower than their market prices during the final month of the tax period. Companies operating in the oil and gas sector are required to adopt either average cost or FIFO for tax purposes.

CAPITAL GAINS TAXESRead more

Capital gains are generally taxable under ordinary tax rule. However, capital gains that are realised by Italy-resident corporate entities (including permanent establishments in Italy of foreign entities to which the shares are effectively connected) on the disposal of shares and financial instruments assimilated to shares are exempt from corporate tax for 95% of their amount (this is the "participation exemption" regime).

INDIRECT TAXESRead more

1. VAT = Italian rules governing VAT comply with the relevant EU Directives. The standard VAT rate is 22%. A reduced (10%) and a super-reduced (4%) rate exist.
2. Registration Tax = this is a transaction tax with a very broad scope, which applies to:  
a. the contracts, acts or agreements executed within Italy;
b. the contracts, acts or agreements executed outside Italy;
c. any oral agreement when aimed at transferring real properties or going-concerns located within  Italy;
d. the transfer or creation of rights over the same, as well as their lease or rent.
3. Excise Duties = excise duties are also levied by Italy, in accordance with the relevant EU law, on alcoholic beverages, manufactured tobacco product and energy products (motor fuels and heating fuels, such as petrol and gasoline, electricity, natural gas, coal and coke).

PERSONAL TAXESRead more

Individuals, residents or not, are subjected in Italy to a progressive personal income tax, known as "IRPEF".
An individual, whether a national of Italy or not, is deemed to be tax-resident in Italy if for the greater part of the calendar year, he/she is registered in the registry of population, or has his/her residence or domicile in Italy as defined in the Italian civil code.
Accordingly, the domicile is defined as the place where an individual has established his/her principal center of business and other interests, while residence in the place where he/she resides habitually.
The source of taxable income can be classified among various categories set out by the tax law. These categories are:
- Income from real property;
- income from capital;
- income from employment;
- income from independent work;
- business income;
- miscellaneous income.
The sources of income that do not fall within one of these categories are not subject to income tax. The personal tax basis is represented by the aggregate sum of the various sources of income earned by an individual and categorised as above. The taxable income may be subject to various deductions, such as personal/family allowances.

Main rates and bands:  Read more
The personal tax rates are progressive and range from 23% to 43% depending on the income band, with the top rate applying to incomes above EUR 75.000.
There are five income bands. The minimum rate is 23% and applies to income up to Euro 15.000. Then, for incomes of Euro 15.001 to Euro 28.000 the tax rate is 27%. For income of Euro 28.001 to Euro 55.000 the tax rate is 38%. For Incomes of Euro 55.001 to Euro 75.000 the tax rate is 41% and finally, the top rate of 43% applies above Euro 75.000.

NATIONAL INSURANCE
The Italian pension system may be described as a "two-pillar", consisting of a public compulsory scheme and of a private pension system. The public pension scheme is a compulsory, whereas participation in the private pension system is voluntary.
As a consequence, social contributions in Italy are paid by every self-employed individual and by every company, on behalf of its own employees. The public entity in charge of the collections of contribution is known as "INPS".