Taxation on individuals in Italy

Individuals in Italy are subject to individual income tax (IRPEF), a progressive tax that applies to the aggregate taxable income of the taxpayer. In particular, five income bands have been envisaged, each of which has a corresponding tax rate that varies from 23% to 43%. Individuals are also subject to a regional tax on productive activities if they derive business or professional income. The standard rate is 3.9%.

Taxable persons and territoriality rules

Resident individuals are subject to IRPEF on their worldwide income. Non-residents are taxable on their Italian sourced income. An individual is deemed to be resident in Italy if, for the greater part of the tax year (183 days), certain conditions are met.

Allowances, credits and deductions

A system of tax allowances that are different according to the type of income received is provided. Other allowances equal to 19% of certain personal expenses are granted. Only the deductions of expenses related to business income and income from independent work are allowed.

Capital gains

(a) Business gains: Capital gains realised – in the course of a business or profession – on the disposal of the business are included in the taxable base and subject to ordinary taxation.

(b) Real estate: In general, capital gains arising from the transfer of real estate within five years of the acquisition and not derived in the course of a profession or business are taxed as miscellaneous income (the seller may elect to have the capital gain subject to a 20% substitute tax rather than ordinary taxation).

(c) Shares and other securities: Capital gains on disposal of shares realised by resident individuals are subject to a 12.5% substitute tax levied in case of “non-qualified” participation. A 50.28% exemption applies to capital gains on the disposal of “qualified” participation (if the shareholder holds more than 2% of the voting power or 5% of the capital in listed companies, or more than 20% of the voting power or 25% of the capital in other companies). Capital gains on disposal of shares realised by individuals in a business capacity are included in the taxable base for the 49.72% of their amount and subject to ordinary taxation.

Filing and payment requirements

For individual taxpayers, the tax year is the calendar year. Taxpayers who derive taxable income in excess of certain limits must file an annual tax return between May 1 and June 30 of the year following the tax year in which the income is derived (July 31 for electronic filing). In principle, the self-assessment method is used. The tax authorities are allowed to issue assessments to taxpayers who have not filed a tax return or whose tax return has not been filed in accordance with law. Two advance payments of IRPEF shall be made by the taxpayer during the tax year. Any excess tax is refundable.

Real estate/habitation tax

The ICI is levied on the possession of immovable properties located in Italy. The rate ranges from 0.4% to 0.7% depending on the municipality. Under certain conditions, exemption from ICI is granted.

Stock option, profit sharing and savings plans

Regarding stock option plans, the difference between (i) the value of the shares assigned and (ii) the price paid by the employee, is included in the taxable income. Stock grants in favour of employees are treated as employment income based on the fair market values of the shares at grant date. However, an exemption from income tax and social security charges applies for awards up to €2,065.83 (US$2,741) per year per employee, if certain conditions are met.

Taxation of benefits in kind

As a general rule, benefits in kind are taxable in the hands of the employee according to their market value (with certain exceptions) if their amount exceeds, in the tax period, €258.23.

Dividends

A 50.28% exemption for individual shareholders holding the participation in a business capacity applies. For individuals holding the participation not in a business capacity (i) dividends are subject to a 12.5% substitute tax in cases of “non-qualified” participation (ii) dividends are included in the taxable base for the 49.72% of their amount and subject to ordinary taxation in cases of “qualified” participation.

Withholding taxes

Salaries and other remuneration from employment paid by companies, businesses and professionals are subject to an advance withholding tax, which is creditable against the recipient's income tax liability.

Non-resident individuals

Non-resident individuals are generally subject to IRPEF on income from Italian sources (according to rules applicable to resident individuals). Investment income and professional income are subject to a final withholding tax or to a substitute tax (otherwise a tax return shall be filed and the income is subject to taxation at the ordinary IRPEF rates). The law also states some exception to the above general rule.