Recently, the Italian government has made a number of amendments on the reformed tax system, most importantly on corporate taxation. The changes have touched different aspects of the tax system.
What does this mean for the citizens and foreign investors in the country?
The current changes are by no means detrimental. On the contrary, they have made running a business and living in the country much easier. Before we move on to the amendments on the corporate tax system, let's first explore how the Italian corporate income tax (IRES) works.
What does IRES entail?
If you are planning to invest in Italy, it is important that you understand taxation on businesses. The IRES is equivalent to 27.5% of the worldwide income of all the companies based in Italy. An extra 6.5% is levied on companies in the energy sector and have registered with gross revenues of about €3 million in the previous year, as well as a tax base of €300,000.
The amount is calculated yearly. You are allowed to pay the dues in the form of instalments as agreed with the tax office. You can pay in advance or settle the entire payment at once. The amount that one pays depends solely on the type of business. Corporate organisations pay by instalments based on their tax period. For instance, as mentioned earlier, resident companies in the country serving the energy sector, are subject to additional tax charges.
Usually, for large commercial establishments, the tax period goes hand in hand with the financial year. For individual entrepreneurs, the tax period corresponds to their calendar year. It is worth noting that the IRES custodians demand all resident companies to pay taxes on income earned in the country and overseas whereas foreign countries only pay taxes for the earnings accrued from Italy.
Latest changes on IRES
Currently, the taxation authority in Italy has made some changes in IRES, in a bid to encourage companies and individuals, both local and foreign, to invest in the country. They have done this by reducing the corporate tax rate to 27.5%. This is a bit lower than the previous rate. Companies registered in Italy or overseas, are allowed partial exemption of about 95% on the capital gains they acquire after selling equity investments.
There is also partial exemption of 95% on dividends made from equity assets in organisations both abroad or in Italy. A ceiling on the interest expense deductibles for all companies has also been implemented. Group companies may also benefit from the group taxation procedure. They can determine the single taxable income for their parent company based in Italy. The government has also gone a step further to make start-ups rise to the top, easier. They are exempted from paying taxes on capital gains they have reinvested.
Other Corporate Taxes
Individual income tax (IRPEF)
This is paid on any income earned in Italy or abroad for the residents. If you are a foreigner, you are charged on any income you earn in the country.
Regional Business Tax (IRAP)
This tax is charged locally on businesses operating within the Italian regions. Foreigners only become candidates of IRAP, if they generate value of production, from companies established within the territory.
The VAT rate in the country is 22% and it is charged on the sale of all goods and services, within the Italian territory.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.