Last updated on 7 de April de 2023
Italy is one of the most appealing countries in the world. We analyze the most important taxes in Italy in an easy-to-understand manner. This will help those interested in living there.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Real Estate Taxes
- Italy Public Finances
Almost everyone likes Italy. With its excellent cuisine, art, culture, history, a very attractive language and good weather, it is difficult not to like Italy. As a result, it is one of the main tourist destinations in the world.
However, its economy has been stagnant for a long time. Italy has barely grown since the early 1990s.
In this post we will analyze the most important taxes in Italy. This will be useful if you are considering living in the country that gave birth to the Roman Empire, or if you are just interested in the subject.
According to the comparison website WorldData.info, the cost of living in Italy is about 14% lower than in the United States, and 22% lower than in the United Kingdom. The average salary, however, is also much lower as well.
Taxes on Earned Income
Like in most Western countries, income from work in Italy is subject to both social security contributions and income taxes:
The Italian social security is one of the most onerous in the world, both for employers and employees. This makes employing people in Italy expensive. In addition to that, its system also has one of the largest structural deficits.
Employers must bear most of the cost of social contributions when they employ people. Employers must pay the equivalent of 23.81% of the gross salary of the worker to the country’s social security.
If the company is active in an artistic sector, the percentage charged to the employer increases to 25.81%.
With regards to Italian workers, the percentage of their gross salary that must be paid to the social security is 9.19% for most of them. For a minority of professions, including those in artistic sectors, the percentage increases to 9.89%.
The amount on which social security contributions are paid varies depending on the year in which the worker joined the labor force. For those who started working in or after 1996, the maximum base for social security contributions is capped at €103,055 per year.
This means that we do not have to pay social security above that amount.
However, for those who started working before 1996, the social security base in uncapped. This means social security is paid on the entire gross salary, even if it is in the millions of euros.
Income Tax (IRPEF)
After paying social security contributions, workers have to pay income taxes. In Italy, the income tax is known as IRPEF (imposta sul reddito delle persone fisiche).
Income taxes in Italy are composed of three brackets, which represent the three administrative levels of government: national, regional, and municipal.
National Income Tax Brackets
Most income tax in Italy is paid to the national government. National income tax follows a progressive structure with three rates. These apply in all regions in Italy:
- €0 to €15,000 €: 23%
- €15,000 to €50,000 €: 27%
- Over €50,000: 43%
It should be noted that the Italian tax code has a multitude of exemptions and is highly complex. However, something that applies to almost all full-time workers in Italy is the exemption from paying tax on the first €8,000 of annual income.
If an individual has dependents, the amount exempt from taxes can be slightly higher.
Regional Income Tax Brackets
Italy is divided into 20 administrative regions. Two of the most famous are Lazio and Lombardy, whose capitals are Rome and Milan respectively, the main cities in the country.
Regional governments have the power to charge a few percentage points of the income tax to their residents. These percentages vary depending on the region and are usually progressive. They range from 0.7% on the lower end to 3.33%, on the higher end.
The Italian income tax also includes a municipal bracket. There are around 8,000 municipalities in the country, and they add between 0.1% and 0.9% to their residents’ income tax
Total Tax Burden on Earned Income
In order to understand the total level of taxation that workers must bear in Italy, it is useful to compare their net salary with the employer’s total cost, which includes both the gross salary and social security contributions.
For this exercise, we will use the circumstances of a worker who is unmarried and has no children, in an economic sector not considered artistic, who lives in Milan and has entered the labor market after 1996:
As we can see, the total tax burden on workers in Italy is immense. Workers with lower incomes (those with salaries of less than €1,300 net per month) face a total taxation level of about 40%, while middle- and high-income earners face a tax burden of 50% or more.
Capital Income Taxes
Let us now see how income from savings and investments is taxed:
Dividends and Interest
If we are tax residents in Italy income received in the form of dividends or interest will be taxed at a fixed rate of 26%, regardless of their amount.
The rate applicable to dividend income may be higher if we have a controlling stake in the company.
Realized capital gains will receive a different treatment depending on their source.
Capital gains from financial investments, such as stocks, funds, ETFs or bonds, will be subject to a fixed tax rate of 26%.
Gains obtained through the purchase and sale of real estate may be taxed at the same progressive rates applicable to earned income, or at a fixed rate of 26%, depending on our personal circumstances.
Additionally, if we have owned that property for at least 5 years before selling it, or for less than 5 years but we have lived in it, those real estate capital gains would be tax-free.
Taxation of real estate income in Italy is quite attractive. As a general rule, net rental income after deducting all associated expenses is taxed at the progressive rates applicable to earned income, which can be as high as 43%.
However, if we the income comes from residential real estate, it is possible to receive a more attractive tax treatment thanks to a law known as Cedolare Secca.
In this case, real estate income is only taxed at 21%, even if it comes from short-term rentals.
And if the property is located in a municipality where the authorities consider that there is a shortage of housing, net rental income will only be taxed at 10%. Most major cities in the country receive such treatment, including Rome, Milan, Turin, Naples, Venice, and Florence.
VAT (Value Added Tax) is applied to the consumption of goods and services in Italy. Like in most European countries, VAT in Italy has different rates, so not all products are taxed the same way.
The general VAT rate in Italy is 22%. It applies to all products that are not subject to any of the reduced rates.
The VAT rate of 22% has been in place since 2013. Between 2011 and 2013, the country raised the general VAT rate from 20 to 22% to increase tax revenues and reduce the deficit.
In addition to it, there are 4 reduced rates:
The first reduced rate is 10%. It is used for some food products, hotels, restaurants, transportation within the country, real estate renovations, pharmaceutical products, cultural and sports events, energy and water supply. It also applies if we buy a new home, but it is not our main residence.
The second reduced rate of 5% applies to some food products.
The third reduced rate is 4%. It is used for some food products, new construction homes if they are our main residence, books, e-books, and press.
Finally, international transportation is effectively exempt from VAT.
The corporate tax in Italy is composed of two rates, which correspond to the national and regional levels of government.
The national rate of corporate tax is known as IRES (imposta sul reddito delle società). The applicable rate for most companies is 24%. But financial companies are subject to a rate of 27.5%.
The regional corporate tax rate is known as IRAP (imposta regionale sulle attività produttive). The general rate is 3.5%. However, banks are subject to a rate of 4.65%, and insurance companies to a rate of 5.9%.
On aggregate, we can say that the general rate of corporate tax in Italy is 27.5% for most companies. It is also 32.15% for banks and 33.4% for insurance companies: 33.4%.
Real Estate Taxes
Purchasing and owning real estate in Italy is also subject to taxes:
Taxes on buying a home
If we buy an apartment or house in Italy, we will also have to pay taxes. These will depend on whether we buy a new or second-hand home, the type of home, and whether it is our main residence or not.
If we buy a new construction home in Italy, we will have to pay VAT. The VAT rate will be 4% if it is our main residence or 10% if it is an additional residence. Additionally, if it is considered a luxury home by the authorities, the applicable VAT rate will be 22%.
As for second-hand homes, their purchase is usually taxed more lightly. If we are purchasing our main residence, we will have to pay 2% of the cadastral value as a transfer tax. If it is a second residence, the rate will be 9%.
Keep in mind, however, that the cadastral value can be very different from the market value that we end up paying. This will depend on the municipality in which the property is located.
If we own real estate in Italy, we will have to pay taxes regularly. The main real estate tax in Italy is the IMU (imposta municipale unica), similar to property taxes in the United States.
The IMU varies depending on many variables, including the municipality where the property is located, the type of home, and its size. It ranges from 0.2% to 0.76% of the assessed value. Given the assessed value can vary greatly from one municipality to another, it is yet another factor to consider.
In addition to that, some municipalities also charge additional fees for services such as garbage collection.
Finally, if the property is at our disposal and not rented out to others, we will also have to pay a small amount of income tax on imputed rent. In other words, the government assumes that we charge ourselves rent. In any case, such cost is usually very low.
Italy Public Finances
Now that we have analyzed the tax system in Italy, it is time to focus on the country’s financial situation, which is not good. After all, this gives us clues about whether current tax rates are sustainable in the long term or will have to be increased to balance the budget.
Italy is one of the most indebted countries in the world. At the beginning of 2021, the ratio between public debt and GDP was 157.1%. Only Japan and Greece have a higher level of public debt in the developed world.
An interesting fact about Italy is that its public finances have been in bad shape for a long time. Public debt relative to the country’s GDP surpassed 100% in the 1990s.
The next graph shows the level of public debt in Italy since 1988:
As you can see, the issue of Italian public debt is not new but has never been taken seriously.
Italy may not be the most attractive country in the world from a tax perspective. And it is something you should consider if you want to move there. But there is no doubt it can be a wonderful place to live in.
As always, the important thing is to carry out an in-depth analysis to know what we are getting into.
If you liked this post about taxes in Italy and are interested in another Mediterranean country, check out this link:
Taxes in France – A Complete Guide
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