As an employee, tax is that little thing that chips away at your pay-cheque each month. As an employer, it’s a whole different ball game – especially when it comes to business taxes in Italy.
These days, Italy is a country where the majority of businesses are small to medium enterprises, but it wasn’t always this way. Prior to the reforms Matteo Renzi made in 2014, Italy wasn’t such an attractive place for foreign investors to set up a business due to the red tape and structural issues which were often found. However, those days are in the past.Nowadays, the country operates on reciprocity within the market, and so businesses can only be set up by an expat in Italy if an Italian citizen has the ability to set up a company in that expat’s home country. There are a few exceptions to this rule, such as for citizens from within the EU (European Union) and EEA (European Economic Area), refugees or people coming from countries which have made an international agreement with Italy.
When setting up a business in Italy, you’ll first need to distinguish whether you’ll be setting up a representative office, a branch or a company, as there are various types of legal structure for each of these, and each comes with its own approach to taxes.
A representative office is registered to a foreign company rather than being registered in Italy and is forbidden from conducting business activities. Instead, a representative office exists purely for advertising, research and promotional activities.
A branch is a unit of a company, rather than a separate legal entity, and does not operate organisational or decision-making autonomy. Branches must submit an annual report together with a VAT and income tax return.
Any business which is not classified as a branch or representative office is classified as a company and is therefore liable to Italy’s taxation system, including corporate tax. The authority responsible for the taxation system in Italy is Agenzia Delle Entrate (ADE). The ADE has been set up so that most taxes can be declared at tax service centres, online, in banks or at the post office. However, depending on which organisational structure you choose when setting up your company, there may be slight differences in how you submit your taxes. Therefore, it’s worth checking which is the most suitable method for your company type.
It’s worth noting that the Italian tax year is different to that of many other countries; instead of running from April to March, its tax year runs from the 1st of January to the 31st of December. Tax payments are made in two instalments; the first, of around 40 percent, must be paid by the 16th of June, and the second, of the remaining 60 percent, must be paid by the 30th of November.
The type of company structure you choose when setting up a business will determine the taxes for which you’ll be liable.
If you’re setting up a capital company, there will be two different profit taxes you will need to pay: a regional tax (IRAP) on added value which has been produced by business activities in Italy, and a corporate income tax (IRES) on global income. The IRES was established by legislative decree in 2004 to modernize the tax regime of capital companies and has replaced the income tax on all legal persons living and working Italy, including expats and native Italian people. This is known as the IRPEF. The IRES corporate income tax is both personal and proportional, and the rate is currently 24 percent, as per the 2016 Stability Law.
It’s worth noting that all capital companies are required to submit an annual tax return to declare Value Added Tax (VAT), Italy Regional Production Tax (IRAP), IRES and Corporate Income Tax (IRES), and that these taxes have to be paid separately.
All persons in the partnership are required to submit a UNICO società di persone tax return. Dependant on their shares and benefits, each partner will need to file taxes for IRPEF (income tax on legal persons) and/or IRES (a corporate income tax on global income), or they will have to pay tax on the regional production activities known as imposta sulle attività produttive regionale (IRAP)
Sole proprietorship is subject to an individual income tax known as IRPEF, or imposta sul reddito delle persone fisiche. The IRPEF tax applies when benefits exceed a set amount, and is deducted at a progressive rate of 23 to 43 percent.
If you’re looking to set up a smaller company in Italy then you will be required to complete the UNICO persone fisiche (IRPEF) every year, which is Italy’s tax on legal persons.
VAT, known in Italy as the Imposta sul Valore Aggiunto (IVA) is a consumption tax which is deducted at a rate of 22 percent. Rates can vary depending on region, and reduced VAT rates of ten percent apply for pharmaceuticals, events, transport, restaurants and hotels, while a reduction of four percent applies for books, foodstuffs and medical supplies.
Once general business taxes are paid, there will also be taxes required if/when you decide to hire employees. If you do choose to take on staff, you will need to deduct an income tax from their monthly gross salary and pay this sum to the treasury. In Italy, preparing and finalising payrolls, tax returns and social contribution statements can be notoriously complicated, so it’s advisable to hire a qualified firm or accountant to help you process this.
All employees will need to be registered with the Istituto Nazionale per l’Assicurazione contro gli Infortuni sul Lavoro (INAIL). This is the National Institute for Insurance against Accidents at Work, and it is there to protect both workers and employers against the risk of occupational accidents or illness. Contributions to this are based on a workforce’s salary and are made by the employer, with rates varying between 0.3 and 13 percent.
Employers will also need to register their employees with the Istituto Nazionale della Previdenza Sociale (INPS), which is Italy’s social security taxation system. Employers contribute to this system, which is designed to benefit employees in their time of need, whether that be unemployment, death, sickness, frailty, old age or a maternity/paternity leave. In addition to this, employers must also contribute to their employees’ pension schemes (IVS) alongside the employees.
Setting Up The Paperwork
In order to set up a business in Italy, you will need to have a bank account and an accountant, and if you do not have a notary, then you will also need a lawyer. The notary is responsible for ensuring that the company is registered on the companies’ register, which is held by the chamber of commerce of the municipality where the business is incorporated. In order to set up a business, you will be required to draft a memorandum and articles of association.
The notary or lawyer must be present to certify the signatures of the shareholders or to draft the incorporation agreement. All businesses are required to be registered on the Italian Business Register known as Registro Imprese. This will need to be done at the local tax office and the local chamber of commerce.
Once the above has been completed, the company will immediately receive a tax identification number, a VAT number and a reference number. After that, the company will officially exist and within 48 hours you will receive documentation from the Accident Insurance Office (INAIL) as well as the National Institute of Social Security (INPS) and your business will be ready to begin!