Tax returns in Italy
Personal Income Tax and Company Tax
The personal income and corporate tax declaration in Italy
The most important tax and accounting obligations in 2020 are: Irpef, Irap and Ires, IVA.
Personal income tax (IRPEF, Imposta sul Reddito delle Persone Fisiche)
Irpef, is the acronym for Personal Income Tax, is the taxation applied to income produced personally, by an individual; the Italian tax authorities provide six different types of income in relation with the kind of taxpayers:
1) self-employment income: it is generated by means of work activities other than business or employee work, including: occasional services and coordinated and continuous collaboration if carried out habitually and professionally;
2) employee income: this category not only includes work services for other employees, but also homework, pensions and interest earned on work credits;
3) business income: it is resulting from the activity of commercial enterprises, therefore production of goods and services, transport, livestock and agriculture, banks, insurance companies and so on; sole proprietorships also fall into this category;
4) capital income: income from financial annuities and from dividends from participation taxed gross of production costs only when the amounts in question are collected;
5) land income: income deriving from buildings and land owned as property, usufruct and enfitèusi (enjoyment of the property, but obligation to improve the fund and pay the owner an annual fee);
6) different income: basically all types of income that do not fall into the previous categories, such as real estate capital gains, lottery winnings and illicit proceeds.
The taxpayers of the Irpef doing the payment are disciplined by article 2 of Presidential Decree No. 917 of 1986, they are:
- resident in Italy; anyone who produces an income both nationally and abroad;
- resident abroad: in this case, personal income tax is calculated only on income deriving from activities carried out in Italy.
- improper taxable subjects: they are the shareholders of joint stock companies that adhere to the so-called "taxation for transparency", it is the company that makes the tax return, but it is the shareholders who pay the tax in proportion to the participation fee.
Time for payment
The personal income tax is paid when the total amount exceeds the threshold of € 51,65; normally payment must be made by the deadline of 30th November, but if the advance payment exceeds € 257,52 the balance can be divided into two installments: the first must be paid by 30th June and must correspond to 40% of the total value; the second, of the remaining 60%, must be paid within the normal deadline of 30th November.
Income brackets and tax rates
The following table contains the expected rates and the calculation method, all the amounts are to be understood in euros.
The personal income tax is calculated on the basis of a percentage rate applied to the taxable income bracket to which it belongs, therefore it is a progressive tax; this tax burden is also due for income generated abroad.
Residence in tax heavens
In order to avoid to pay Individual Income tax in Italy, the following are the conditions for proving that an individual is actually resident in another country, even if it a country with preferential tax treatment:
- real residence: the individual resident there has to prove to the Italian Revenue Agency that he really live in that country by submitting the contracts for the supply of essential services (water, electricity, gas, etc.), naturally with the payment receipts which demonstrate a real and continuous use of the aforementioned services;
- activities: the interested individual has to deliver to the competent Italian authorities the documentation certifying the performance of an activity in that foreign country in which he is resident, for example: an employment contract;
- transfer of its own interests: the individual who wants to demonstrate that he is truly resident in a country with preferential taxation must demonstrate that he has actually transferred all his family, social and economic interests abroad; from 1st January 2017 the rules that guaranteed anonymity to those who had resources deposited in banking institutions abroad be effect of banking secrecy abroad have changed as consequence of bank exchange information signed by many countries;
- stay in Italy: an individual who is registered in the Italian registry for at least 183 days a year (184 in leap years), is considered to be resident in Italy even if the 183 days are not continuous; for this aim a simple domicile is also considered valid, in addition of course to residence.
A series of deductions can be applied to the total income indicated in article 11 TUIR (Consolidated Income Tax Law):
- charges on property income: weighs on the income of real estate, ie fees, censuses, contributions to mandatory consortium;
- photovoltaic, thermal and thermodynamic systems: the Irpef 50% deduction for the construction of a photovoltaic system for the production of electricity has been confirmed by the Budget Law 2020; the deduction applies to a maximum expenditure of € 96.000 and is discounted over 10 years; the plant must have a maximum power of 20 kW;
- energy saving: the budget law 2020 has confirmed a whole series of incentives to encourage better exploitation of energy by tax allowances of up to 75% on the costs incurred;
- restructuring bonus: has been extended for 2020, it is a tax deduction of 50% of the expenditure incurred and the extension of tax relief, also of 50%, for the purchase of furniture and appliances is also envisaged;
- mortgage deductions: for those looking for a loan for the purchase of their first home, both interests and management expenses can be deducted from Irpef;
- discounts for the purchase of first home: in the case of purchase of the first home, especially for young couples, there are a whole series of Irpef concessions, starting from the deduction of the passive interest of the mortgage; it is possible also to deduct 19% of the commission expenses of the realtor agency service for a maximum expenditure of € 1.000;
- health costs: medical and assistance costs incurred by disabled people subject to disability or impairment can be deducted if they are serious and permanent;
- separation allowances: in the calculation of personal income tax, allowances paid to the ex-spouse are considered deductible charges, amounts paid by testament or modal donation, the checks to parents, sisters and brothers or other family figures, such as in-laws;
- investment on innovative SMEs: a 30% Irpef discount is available for those investing in highly innovative companies;
- return: in the event that amounts subject to taxation that have contributed to forming income in previous years are returned to a person, then these sums can be considered deductible charges;
- contributions: all social security and welfare contributions can be deducted, both those required by law and those paid voluntarily provided that the whole does not exceed 12% of the total income, in any case no more than € 5.164.57;
- donations: to developing countries can be deducted from the functional income base for the calculation of personal income tax, but the total amount must not exceed 2% of the total income;
- indemnity for loss of goodwill: in the event of termination of the lease of urban properties, if not used as a home, the allowances for loss of goodwill paid by the tenant are considered deductible from the calculation of the personal income tax;
- adoption fees: 50% of the expenses incurred by the adoptive parents for the procedures necessary to complete the path of adoption of foreign minors can be deducted;
- defensive charges: cash disbursements for the payment of defensive charges against persons admitted to legal aid;
- main house: in calculating the value of personal income tax, the main home can be deducted if it contributes to the total income, the amount of the deduction corresponds to the cadastral value of the property;
- deductions for food for medical purposes: for those suffering from congenital metabolic pathologies (for diabetics, celiacs and in general those who are victims of serious food allergies), deduction is 19%.
The Corporate Income Tax in Italy: IRES (Imposta sul Reddito delle Società)
It is the income tax of corporations in Italy, it is due by:
- entities and joint stock companies, cooperative and mutual insurance companies that carry out commercial activities and are resident in Italy;
- it also due if there is no residence in Italy but at least a part of the commercial activity is carried out in Italy;
- public and private bodies of a non-commercial nature but residing on Italian territory, including trusts resident abroad.
Not all the operating costs are deductible, therefore in general to obtain the value of the tax to pay it is better to use special software
Currently the rate for the payment of Ires corresponds to 24%.
About the deductions, it is quite complex and the list of deductible expenses varies from year to year, so it is not possible to establish in advance what can be deducted and what cannot; some examples: remuneration of directors; everything related to the company car fleet, from purchase to common operating expenses, such as fuel costs, are considered to be deductible charges of 20% .
IRAP (Imposta Regionale sulle Attività Produttive)
The IRAP is an acronym for Regional Tax on Productive Activities, it is an additional corporate tax charged on business activities applied to turnover and not to operating profit, it is paid by companies and freelancers, as well as the bodies (also public administrations) and agricultural producers (in some cases, they may be exempted), all those who exercise even a non-commercial.
Each region in Italy provide its own IRAP rate (in Italy there are 19 regions and 2 special provinces which which each year states the rates of IRAP), please check it a the weblink of the Ministry of Finance in main regions the rate concerning ordinary activities is 3,90%.
The taxable amount for the calculation of the IRAP varies according to whether the taxable person is:
- commercial enterprise;
- agricultural producer;
- non-commercial body and / or public body;
- banks and / or insurance companies.
In the case of a commercial company, the taxable amount is calculated on the difference between the items that can be classified in the value of production , based on what is established in the financial statement format referred to in the Civil Code, and those that can be classified in the cost of production .
The production costs do not include employees' wages, accrued credits and the interest of any leasing payments.
For agricultural producers the taxable amount is determined as the difference between the amount of the fees and the amount of the purchases made for the agricultural production itself; it is possible to choose to calculate the taxable amount like a commercial enterprises.
The agricultural producer exempted from VAT is also exempt from IRAP.
Tax rate and calculation
The same tax dates of IRPEF and IRES apply to the payment of IRAP .
Commercial companies must now make the payment through the F24 Model in two installments (16th June and 30th November of the year of competence).
The payment for the balance of the previous year must also be paid on 16th June, it is possible to decide to pay within 30 days following that date with an increase of 0,4%.
Also municipalities can decide to charge its own Irap rate (sovraimposta comunale).
Read more here.