Considering a move to Italy? one of the first items on your agenda should be to familiarize yourself with the Italian taxes system you’ll face as an expat. Whether you plan to work, retire or operate a business in Italy, taxes in Italy compared to US taxes have some important differences. We’ll try to cover the basics of the Italian tax system and the most important taxes that you’ll need to be aware of as an expat living in the country.
Taxes in Italy for Expats
Your tax situation in Italy will depend on your residency status in the country. For those who only work in Italy and do not spend the entire year there, the state assesses taxes only on that income that is earned inside Italy. On the other hand, if you live in the country for more than 183 days in the year and own a business centered on Italy, you will need to pay Italian taxes on your entire worldwide income.
The IRS requires all Americans who earn more than $10,000 to file a tax return, regardless of where in the world they live and work. Fortunately, the United States and Italy have a double taxation agreement. Thanks to this US Italy tax treaty, expats can make sure their income is not taxed in both countries. If you’ll also be living and working in another EU country, you can take advantage of similar agreements to avoid double-paying on any income earned there, as well.
As for a departure tax Italy charges those leaving the country around $8, normally included in the taxes and fees added to airline tickets at the time of purchase. With respect to a tourist tax Italy permits its regions and municipalities to tax visitors in hotels and other establishments, but this tax can vary widely from place to place.
Types of Taxes
General Income tax
In Italy income tax is known by its Italian acronym IRPEF. This individual tax will be the main tax most foreign residents of Italy will have to pay. For large incomes, the IRPEF can reach to almost 50 percent. The Italy tax rate structure is as follows:
- Incomes up to $36,000: 23 percent
- Incomes from $36,001 to $39,300: 33 percent
- Incomes from $39,301 and $119,200: 39 percent
- Incomes of $119,201 and over: 45 percent
Different regional and local authorities will also asses income taxes, which can range from 0.1 to 1.4 percent.
Real Estate Taxes
If you own property in Italy, you will have to pay taxes on it. Rates range from 0.4 to 0.7 percent of the property’s assess value. This is determined according to a number of factors, including the category, location and condition of the property.
Expats who have traveled to Italy in the past will likely already be familiar with this tax, the VAT or IVA. The national government sets this tax in Italy, so it is the same in all regions. The current rate is 20 percent, and the VAT is already factored in to bills and prices for goods.
If you are in a position to inherit, a fairly complex series of factors will determine the taxes that you must pay under the Italy tax system. Whether the tax will be on the deceased’s entire estate or not depends on whether he or she was an Italian resident. Furthermore, the tax paid by any particular heir depends on the specific nature of the relationship to the deceased person, with different tax rates for different relationships.
Corporate and Capital Gains Taxes
The basic corporate income tax rate in Italy is 24 percent. There are a number of available deductions for operating costs, expenses and more.
Capital gains are typically taxed as normal corporate income at the normal 24 percent rate. Taxpayers can spread the bill out over periods of up to 5 years. 95 percent of gains are entirely exempt from the Italy capital gains tax under certain conditions.
Filing Your Taxes
If you’re obliged to pay taxes on your Italian income, you’ll need to file an annual return. For many employees, your employer will often file for you. However, the self-employed or those with other taxable income will have to file for themselves.
- You must file your taxes between May 1 and June 30 either by paper or online.
- You must pay 40 percent of any taxes owed by May 31 and the remainder by Nov. 30
Extensions are usually not possible and penalties for late payment can be very severe, especially after the first 30 days. If you’re owed a tax refund Italy may take as long as a year to send it.
A number of exemptions are available to Italian taxpayers. These include contributions to charity, alimony, medical expenses, interest on real estate loans, tuition expenses and more.
For American expats in Italy, there are also a number of other options, including the Foreign Earned Income Exclusion and the Foreign Tax Credit. To take advantage of these options you must also file in the United States, even if you weren’t otherwise required to do so.
Ups and Downs of Taxes in Italy
There can be large regional variations of tax rates in italy. A number of regions that have recently increased in popularity with expats, like Abruzzo, have begun to consider adding additional tourist taxes. Real estate taxes across Italy can also vary widely.
Various plans for reform of the tax system have been part of Italian politics for years. Recent proposals have included a reduction of the tax brackets to two or three categories. So far, the government has not accepted any of these proposals, but there is the possibility that the system will change in coming years.