A strong economy, business-friendly environment, strong domestic market, government support, and a high quality of life. These are some of factors the that contribute to Italy‘s appeal as a prime destination for businesses seeking growth and access to international markets.
Before starting business operations in Italy, it’s important to understand the country’s corporate tax regime.
In Italy, businesses are subjected to two primary taxes, namely:
- Corporate Income Tax (IRES: Imposta sui redditi delle società)
- Regional Tax on Production Activities (IRAP: Imposta Regionale sulle Attività Produttive)
The current national Corporate Income Tax rate is 24%, while the regional rate for IRAP varies across regions but generally ranges around 3.9%.
Here are some other key points about corporation tax in Italy.
Italian taxable income
Italian Corporations are taxed on their net taxable income, which is calculated by deducting allowable expenses from the company’s revenues. Various deductions, tax credits, and incentives may be available to businesses.
Tax filing
Italian Companies are required to file an annual tax return, report their income and expenses, and pay the corresponding taxes. The tax year generally follows the calendar year, but there are options to use a different fiscal year.
IRAP
The is Italian regional tax that is levied by the jurisdiction where taxable production activities occur.
If a taxpayer operates in multiple regions, the taxable income is attributed proportionally based on the cost of employees working in each region. IRAP applies to various entities, including commercial companies, partnerships, agricultural producers, and individuals receiving company or self-employed income. However, it does not apply to certain entities like mutual investment funds and pension funds.
Expense deductibility
Under Italian corporate taxation, while determining the taxable income, various expenses can be subtracted from the profit disclosed in the profit and loss statements. The deductibility of expenses varies, with some being fully deductible, others partially deductible, and some not deductible at all.
In general, expenses incurred for business purposes are fully deductible from the profit. However, if costs are incurred for both business and personal reasons, the deductibility percentage is reduced.
Eligible expenses include depreciation, labor costs, other taxes (limited for IRAP), provisions, telephone costs, car-related costs, gifts, and entertainment expenses.
Tax regarding Controlled Foreign Companies in Italy
When an Italian company control a foreign enterprise that meets certain criteria, it is obligated to incorporate the taxable income proportionally based on its ownership percentage.
The criteria include a lower effective tax rate than in Italy and more than one-third of revenues derived from passive income.
Transfer pricing
Italy has transfer pricing rules that is aligned with OECD guidelines, which apply to transactions between foreign companies and Italian enterprises, as well as transactions involving both Italian and foreign companies.
The arm’s length principle is followed, ensuring that transactions are conducted independently without one party influencing the other. Proper documentation complying with the arm’s length principle is required, and penalties may apply in case of transfer pricing audits.
Taxation on Dividends
Dividends from resident companies in Italy are taxed at 5%, while dividends from companies in countries with preferential tax systems are fully taxable.
Dividends paid to EU (European Union) companies that have agreed to exchange information with Italy are subject to a withholding tax rate of 1.2%.
Also, individual dividend income is subject to a substitutive final tax of 26%. Specific rules apply to dividends from low tax countries and non-resident recipients.
Taxation on interest in Italy
Regarding taxation on interest in Italy, any interest obtained from bank deposits and current accounts is subjected to a substitutive final tax rate of 26%. Additionally, other interest obtained from loans, deposits, and current accounts is subject to an advance withholding tax of 26%.
Interest paid to non-residents follows the same rates as for resident individuals.
Participation exemption
Under Italian corporate tax, the participation exemption provision enables up to 95% tax exemption on capital gains arising from the sale of company holdings, given specific conditions are met. However, capital losses cannot be deducted.
To be eligible for the exemption, requirements includes continuous ownership, classification as fixed asset investments, and the subsidiary’s engagement in actual commercial activities.
Tax transparency option
Tax transparency in Italy refers to a system where the taxation of a company’s profits is attributed to its shareholders rather than the company itself.
For this:
- Shareholders must be limited liability companies, cooperatives, or mutual insurance companies residing in Italy.
- Shareholders must also possess a stake ranging from 10% to 50% in terms of both voting rights and profit-sharing.
Additionally, dividends from profits during the option period are tax-free.
Tax Consolidation in Italy
Italian Domestic Tax Consolidation
This is an optional system that allows groups of companies to consolidate their taxable income for a period of three years. Under this system, the controlling company must have a direct or indirect ownership stake exceeding 50% in the subsidiary’s share capital and profits.
Holding company must also submits consolidated earnings return and pays group taxation (IRES).
World Tax Consolidation
The World Tax Consolidation in Italy offers an elective framework enabling an Italian-based regulating company to combine the income of its non-resident subsidiaries for a duration of five years. This consolidation allows for proportional inclusion of income from non-resident subsidiaries.
It’s major requirements include controlling company in Italy and inspection of balance sheets.
Double Taxation Treaties
Italy has signed double taxation treaties with many countries to prevent the same income from being taxed twice. These treaties provide rules for allocating taxing rights between countries and reducing the impact of double taxation.
It’s important to note that tax laws and regulations can change over time. For the most accurate and up-to-date information, it is recommended to consult with professionals or refer to the official tax authorities in Italy.
To establish an Italian company, or for more information about corporation tax in Italy, Please contact Damalion now.
