The Italian Tax System
It is a good idea to have a handle on the tax system of the country where you have chosen to live, at least for a period. This section will give you an overview, with an emphasis on the areas where you personally have to take action.
All modern western countries have complex tax systems that baffle the average citizen and the average citizen is rarely very keen on paying their taxes. Italy is no exception. Sure, there is probably a higher rate of tax evasion in Italy than in your country, but its only a matter of degree, not of black and white. Here it may appear to be a national sport, but only because it is talked about more often. Historically, Italians disliked paying taxes because for centuries they had to be paid to a foreign overlord. Since 1870, when Italy became a united country, this is no longer an excuse, but some habits die hard. Nowadays, the combination of a lack of political will to fight tax evasion to the hilt, especially in the south, and tax rates that are too high in comparison with many other European countries, far less the United States, ensures that many people still choose to hide a slice of their income so as to reduce their effective tax rate to a level that they consider fair.
Types of tax
The Italian legislator seems to have been inspired in the past by three guiding principles, none of which is fairness: the shotgun approach: spray them with lots of silly little taxes - something is bound to hit;
the tangible versus intangible approach: collecting income tax is difficult because income tends to be invisible. So identify tangible, visible assets - particularly ones that Italians are unlikely to want to do without (house, car, petrol, even cigarettes) - and tax them to the hilt;
the fixed versus flexible approach: even better if you can hit them with a fixed amount (e.g. bollo auto, canone RAI) rather than an amount that it is up to the taxpayer to decide.
These principles led to a proliferation of taxes which frankly became absurd. Every month there was something to pay. Then in the late 90s, "simplification" became the buzz-word. This entailed incorporating a number of taxes into a new one (particularly the elimination of ILOR and ICIAP, both local business taxes, TSS or tassa sulla salute, i.e. health contributions, and various other minor taxes, and the creation of IRAP, a regional business tax). Admittedly, this process of "simplification" often meant issuing acres of instructions to explain the new monster, but at least there are now fewer taxes to pay.
Taxes in Italy are generally referred to by their acronym. These change over time, but you will often find Italians - or even expats - referring to them by their old name, so we will explain them too:
IRPEG (Imposta sui Redditi delle Persone Giuridiche): this is corporation tax on the income of limited liability and joint-stock companies. So you will only encounter this if you set up an S.r.l. (Società con responsabilità limitata) or an S.p.A. (Società per azioni). In 2004, IRPEG became... IRES (Imposta sui REdditi delle Società)
IRAP (Imposta Regionale sulle Attività Produttive): this is the relatively new tax that incorporated various other ones, as explained above. It is a bit of an oddity because it is not based on pre-tax profit, but on a figure that for simplicitys sake well call "profit plus personnel costs" which is then taxed, generally at 4% (the rate is decided by each region). You will have to pay this if you have your own business, of whatever kind. It includes health contributions, which means that your business pays for the health cover of yourself, any partners, and your employees (full-time, part-time, those on fixed-term contracts). The European Commission dislikes the concept of IRAP, so it is likely to be changed sooner or later.
IVA (Imposta sul Valore Aggiunta): this is value-added tax and functions much the same as any European VAT system. Note that VAT is different from US-type sales tax, which is only charged to the end-customer at the retail end of the chain. VAT is charged at every step of the chain, so businesses involved in the chain charge VAT to the next business in line and then deduct all of the VAT that they have been charged by other businesses during the tax period, paying over the difference to the government on a monthly or quarterly basis, depending on the size of the business. The total cost is borne by the end-customer, while the individual business only ends up paying on the value that it has added to the goods or services in question, which is why it is called "value-added" tax. One of the major decisions to be made if you decide to work freelance in Italy is whether or not to register for IVA. If you essentially work for one client, you are probably best to push for a contratto di progetto. If you then do the odd job (lavoro occasionale) for other clients, they can be billed using a ricevuta fiscale from which income tax is withheld at 20%. If, on the other hand, you have or plan to have several clients, and especially if you expect to have a variety of tax-deductible costs (computer, rent, electricity, telephone, car, travel, office stationery, etc) it is almost certainly worth your while signing up for IVA. There is a bit of extra hassle involved (basic bookkeeping, monthly or quarterly returns, and almost certainly the cost of a commercialista (accountant, tax adviser) to keep you on the strait and narrow), but financially you should be better off, especially the more you earn.
Note that we have lots of detailed articles in our archives, while The Informer, our monthly online publication, will give you regular updates on any changes in Italian tax law. Access to both The Informer and to our archives are by subscription only. Subscribers also have free access to Lifeline, our exclusive on-line advisory service.
IRPEF (Imposta sui Redditi delle Persone Fisiche), for a short period from 2004 known as IRE (Imposta sul REddito): this is personal income tax and is the one that you will come across most frequently as it the one that will take away the biggest slice of your income. Again, you dont have to be a tax expert, but you would be wise to gain a smattering of how personal income tax is calculated (above all what expenses you can deduct) and when/how it has to be paid.
The most logical way of splitting this section is into "Employees" and the "Self-employed", as the procedures vary quite considerably.
As employees, the bulk of the work is with your employer. Italy has a sort of pay-as-you-earn system (generally referred to as 730 after the form used) which incorporates various personal deductions. You will be asked by your employer to provide information on your family status (if you have a dependent spouse and/or children), if you are making deductible mortgage payments, life insurance premiums or supplementary pension contributions, if you have other deductibles such as medical expenses, or if you have other income needing to be declared. Make sure that you keep your company up to date with any changes in these situations. If you would prefer not to let your employer know about certain situations - say other sources of income that you would prefer to keep secret - then you can use an outside CAF (centro di assistenza fiscale) or a commercialista when it comes to filing your tax return.
In straight-forward situations, all of your income tax payment and filing requirements will be fulfilled through the 730 system. The company will deduct each month an amount of tax that is one-twelfth (assuming 12 monthly payments) of the total tax expected to be due for the year. There will then be an equalisation (conguaglio) at the end of the year, which usually affects your January salary.
In more complicated situations, you may have to file a separate tax return (dichiarazione dei redditi), which is now called a Modello Unico, though it used to be called - and many people still refer to it as - the 740 (pronounced Sette Quaranta). In theory, Italy (like the USA, but unlike the UK) taxes you - if you are tax-resident in Italy - on your worldwide income. This does not mean, however, that you should start telling the Italian taxman all about your investments, real estate, bank accounts etc. abroad. One thing is what you earn during your period in Italy; what you accumulated before coming here is quite another matter.
Note that we have lots of detailed articles in our archives, while The Informer, our monthly publication, will give you regular updates on any changes in Italian tax law, including deadlines. Access to both The Informer and to our archives are by subscription only. Subscribers also have free access to Lifeline, our exclusive on-line advisory service. Which means that if there are tax matters that you do not understand, you can ask us and we will do our best to point you in the right direction. Questions and answers feed Dear John, our Letters to the Editor, unless you ask for matters to be kept confidential. They can also be published without your name being revealed.
Being self-employed puts a far greater burden on you in terms of compliance compared with an employee. You would be best to choose a commercialista early on to ensure that you start off your business on the right footing. Even if you speak reasonable Italian, it is probably best to have a commercialista who already has other expat clients so that they are aware of the particular situations that expats tend to find themselves in (e.g. awareness of international tax and social security treaties).
The situation is simplest if you work as a collaboratore, or co-worker, on one of a variety of fixed-term contracts, because from 2001 you are considered more or less as an employee for tax purposes. This means that you are included in the 730 system, with tax deductions taking into account your actual level of income and tax-deductibles, instead of a flat 20% withholding as in the past (often leading to vast overpayments that were hard to reclaim).
If you only do odd jobs, or to start with before you have found a definitive way of operating, you can take the lavoro occasionale route. Once you have finished a particular project, you (or the client company) can issue a ricevuta fiscale (a tax receipt which is simpler than an invoice) which only shows the amount due less 20% income tax - no IVA and no social contributions. The drawback is that you cannot carry on using this system indefinitely. As the word says, it is only for "occasional" (casual) work. There is also a maximum that you can earn in this way: €5,000.
The next step up is to work as a libero professionista. This can mean that you have an "official" profession (architect, doctor, lawyer, accountant, etc) in which case you have the additional obstacle of obtaining reciprocal recognition of your qualification. Even within Europe, this is not a simple matter and the problem should not be underrated. Because without formal recognition, you cannot practice legally in Italy.
On the other hand, libero professionista is often used in a wider sense of someone who is self-employed, working freelance or on a so-called "consultancy" basis. As mentioned earlier, in this case you are obliged to register for IVA (VAT) purposes, issue invoices and keep accounting records of your costs and revenues. Your invoices will show (among other things) a 20% withholding for income tax, which amount will be paid over to the tax authorities on your behalf. Your clients will then issue you with a certificate at the end of the year stating how much tax they have deducted and paid over for you. So when it comes to filing your tax return, all of these amounts paid in advance are deducted from the total tax due for the year and all you have to pay is the net amount. Depending on your income, you may even be in credit, in which case you can apply for a rebate. And as we shall see below, the freelancers invoices also include a 4% extra for pension contributions.
Lastly, you may be classed as an entrepreneur. This would be the case if instead of working on your own, you set up a partnership (Società in nome collettivo or Snc). So it is not so much a question of the type of work you do, but the way that the business is organised. In this case, it is the business or partnership rather than the individual that is registered for IVA purposes. The business issues invoices that include IVA, but there is no withholding tax (which helps your cash flow) and no 4% extra for pension contributions (unfortunately). In this situation, you have to bear in mind two deadlines for income tax purposes: 16 June and 30 November. 16 June is the deadline by which you have to pay the balance of any income tax due for the previous year, as well as the first advance payment for the current year. 30 November is the deadline for the second advance payment for the current year, with the balance being paid by 16 June of the following year.
Bear in mind that you will have to provide your accountant not only with all of the purchase and sale invoices and any other documentation pertaining to the business, but also any other expenses that may be deductible for tax purposes (car purchase and running costs, medical expenses, mortgage payments, life insurance, pension contributions, etc).
In any case, The Informer follows these matters systematically, with requirements and deadlines, and above all any changes in the law, spelt out in English so that you can discuss things with your commercialista from a relatively informed point of view. But note that these monthly updates and the ability to access our Lifeline advisory service are only available by subscription.
As we said earlier, Italy is the land of the thousand taxes, so be aware that you will probably have to pay one or more of the following taxes, usually once a year. They may be payable to central, regional, provincial or local government. How and where they have to be paid is explained elsewhere on the site or in our monthly updates (available by subscription).
Car tax (bollo auto), which now includes the tax on your car radio and the stamp duty on your Italian driving licence
Motorbike tax (bollo moto)
Scooter tax (bollo motorino)
TV tax (canone RAI)
Refuse tax (tassa rifiuti solidi urbani - TARSU)
Municipal property tax (Imposta Comunale sugli Immobili - ICI), though first homes were recently exempted from ICI.
With thanks to the Informer for this information