Italy

Individual - Income determination

Last reviewed - 14 February 2020

The total taxable amount is generally subject to progressive tax rates (see the Taxes on personal income section for more information).

The Italian tax system provides the six following categories of income:

  • Employment income.
  • Business income.
  • Self-employment income.
  • Real estate income.
  • Investment income.
  • Capital gains.

The gross taxable income is determined by the sum of the taxable income of the above categories subject to ordinary taxation.

Please note that some types of income (interest, dividends, and capital gains) could be subject to a flat tax rate provided that conditions established by the Italian tax law are met.

Employment income

Employment gross taxable income includes all compensation (cash or benefits in kind) received by the employee in relation to their employment relationship, including: bonuses, stock options, interest free loans, overseas adjustments, cost of living allowance, tax reimbursements, car allowance, etc.

As a general rule, 100% of compensation paid in cash is subject to tax (some exceptions to this rule are reported below), and compensation paid as fringe benefits (such as housing, loans, company car granted for personal and business use) are taxed on the base of the ‘normal value’ or on a lump-sum basis. Normal value is defined in Article 9 of the Italian Tax Code, as the price generally applied to similar goods and services on the market. In particular, for shares, bonds, and other securities listed on stock exchange or traded over-the-counter, the normal value shall be determined on the basis of the average closing price during the preceding month (30-31 days); for other shares, it is determined in proportion to the net equity value of the company.

Specific rules apply to the items listed below.

Out-of-town travel allowance

Travel allowances provided for transfers/business trips are included in taxable income on amounts exceeding EUR 46.48 per day (transfers within Italy), or EUR 77.47 per day (transfers outside of Italy), if no meal and no accommodation costs are reimbursed. The above amounts are reduced by:

  • 1/3 if meals or accommodation are reimbursed by the employer, or
  • 2/3 if both meals and accommodation are reimbursed by the employer.

If the employee does not receive any travel allowances, any expenses supported by receipts that are related to food, travel, and accommodation are not taxable in Italy.

Relocation allowance

A relocation allowance is taxed at 50% of the amount, for a sum that cannot exceed EUR 1,549.37 for transfers within Italian territory, and EUR 4,648.11 for foreign transfers. It should be noted, however, that such beneficial treatment is recognised only for the first year of transfer.

Moving expenses

Moving expenses reimbursements (transportation of household goods, travelling expenses for employee and their family) are fully tax-free, if reimbursed by the employer upon submission of related receipts.

Employer contributions

Employer contributions to insured medical benefits are also considered taxable income in certain cases.

Housing benefit

In principle, accommodations provided to an employee by an employer are a taxable benefit in Italy.

If the rental contract is in the name of the employer, and the rental is paid by the employer, the taxable amount is the difference between a figurative value called cadastral value (approximately equal to about 1/10 to 1/15 of the annual rental amount), increased by the utilities eventually reimbursed to the employee, and reduced by any contributions paid by the employee (if any).

If the rental contract is not in the name of the company, the taxable amount will be equal to the difference between the annual rental amount and the contributions paid by the employee (if any).

Personal use of company car

The company car benefit (provided by the employer to the employee for private and professional use) constitutes taxable income to the employee for an amount equal to the 30% of the imputable value determined in accordance with tables provided by the Italian Automobile Club (based on car model, engine power, fuel, and considering an average annual mileage of 15,000 km/per annum). This rule applies until 30 June 2020. Starting from 1 July 2020, the Italian Budget Law 2020 has foreseen different percentages of the fringe benefit taxable depending on the level of carbon dioxide emissions emitted into the atmosphere, as follows:

  • 25% with the value CO2 emitted less than 60 g/Km; 
  • 30% with the value CO2 emitted more than 60 g/Km, and less than 160 g/Km;    
  • 40% (for FY 2020) and 50% (for FY 2021) with value CO2 emitted  more than 160 g/Km, and less than 190 g/Km;      
  • 50% (for FY 2020) and 60% (for FY 2021)  with value CO2 emitted more than 190 g/Km;        

 Interest on loans

The taxable income derived from loans granted by the employer, directly or through third parties, is equal to 50% of the difference between interest calculated at the official interest rate (in force at the end of each tax year concerned) and interest calculated at the rate applied by the employer or the third party.

New tax regime for inbound workers

Workers who transfer their tax residency (see the Residence section for more information) to Italy starting from 30 April 2019 are subject to a reduction of 70% of the employment income produced in Italy if the following conditions are met (before 30 April 2019, the reduction was 50%):

  • Employees have not been tax resident in Italy in the previous two years and are committed to staying tax resident in Italy for at least two years.
  • EU citizens and citizens of non-EU countries with a DTT (and exchange of information agreement) with Italy: (i) bachelor graduated, who has work experience on a continuous basis outside of Italy in the previous 24 months (before moving to Italy), or individual who, in the last 24 months or more (before moving to Italy), was studying on a continuous basis abroad and accomplished a bachelor’s degree or a master’s degree.
  • The employment activity is performed for the largest part of the time (for a period of 183 working days for each calendar year) in Italy.

The lack of registration to the AIRE (the register of Italian citizen living abroad) in the two previous tax periods is no longer an obstacle to tax residency purpose, just as long as the individual has been tax resident in the foreign country according to a DTT.

The special regime is applicable starting from the first year of tax residency and for the following four years, and it is further increased up to 90% if workers move their residence in the southern regions of Italy (Abruzzi, Molise, Campania, Apulia, Basilicata, Calabria, Sardinia, and Sicily).

In addition, the Italian legislator extended the special regime from five to ten years to those workers who meet specific requirements (e.g. dependent children or those who have purchased a resident property in Italy). In this case, the tax benefit is limited to 50% of the employment income for further five years, but it could to be increased up to 90% if the workers have at least three dependent children minor aged or economically dependent from them.  

Employment activity performed abroad

Regarding the taxation of employment income derived from a work activity performed outside of Italy by a tax resident individual, the Italian tax law provides a specific rule which allows the individual to be subject to taxation on the ‘notional remuneration’ (retribuzione convenzionale). This particular tax regime is applicable when the following conditions are met:

  • The employee is a resident for tax purposes.
  • The employment activity is rendered wholly and continuously abroad for more than 183 days in a 12-month period.
  • The employee’s assignment abroad is regulated by a written agreement signed by the parties (the employee and the employer).

The ‘notional remuneration’ depends on the employee’s position (i.e. employee, manager) and the national labour contract applicable to the company (i.e. industrial/commercial activity).

Employment income derived from work activity performed abroad (outside of Italy) by a non-tax resident individual is not subject to taxation in Italy.

Equity compensation

The possibility of obtaining the benefit of an exemption from employment income taxation has been abolished by Law Decree number 112/2008 which entered in force on 25 June 2008. The taxation of stock options has been subject to different changes in law in the last few years; this latest Law Decree has established that, starting on 25 June 2008, income derived from the exercise of stock options (the difference between the ‘normal value’ of the shares at exercise date and the exercise price paid by the employee) will be considered as taxable employment income and subject to ordinary progressive income tax rates. However, this income is exempt from social security contributions.

Business income

Business income arises from the performance of commercial activities and is subject to corporate income tax (Imposta sul Reddito delle Società or IRES). Generally, it is calculated on an accrual basis as the difference between proceeds and expenses relating to the commercial activity. Business income is also subject to IRAP (see Regional tax on productivity in the Other taxes section for more information).

Non-resident individuals are required to declare only Italian source business income. Income derived by a foreign entity from a business carried on through a PE in Italy is assumed to be Italian source.

Self-employment income

Self-employment income refers to incomes produced by self-employed professionals (self-employee VAT number holder).

Self-employment income is subject to IRPEF. The income derived from services rendered by professionals is calculated as the difference between fees collected and business expenses. Documented expenses refunded for travelling, boarding, and lodging expenses incurred in rendering services outside the tax domicile are not taxable income.

Income from self-employment could also be subject to IRAP (see Regional tax on productivity in the Other taxes section for more information).

Self-employment income is also subject to VAT (see Consumption taxes in the Other taxes section).

Professionals are required to keep accounting records, but directors and statutory auditors do not have to keep such records.

Non-residents who are self-employed are subject to a 30% final withholding tax (WHT) unless otherwise provided by DTTs. In this case, they are not required to file an income tax return.

Real estate income

Since FY 2013, a principal abode is no longer subject to IMU and is subject to IRPEF and has to be reported in the tax return.

Principal abode

The taxable income deriving from the ownership of a principal abode is calculated on the basis of its 'cadastral value', which corresponds to the 'ordinary'/'average' income deemed to be derived from such properties, determined by the Cadastral Office in consideration of their characteristics. The cadastral value is proportionated to the percentage owned and the period of ownership. The cadastral value has to be increased by 5%.

In any case, the taxable income for principal abode can be deducted by the gross taxable income.

Real estate at disposal

IMU has substituted IRPEF for real estate at disposal, but it is to be reported on a tax return in any case, and no taxable income arises. However, an exception is provided for real estate at disposal located in the same municipality in which is located the principal abode, which constitutes taxable income in the measure of 50% of the cadastral value increased by 5%.

Real estate rented

Taxed at a progressive tax rate

In case of rented real estate located in Italy, the taxable income generally corresponds to the highest amount between: (i) the cadastral income increased by 5% and (ii) 95% of the rentals referring to the relevant tax period (even if not actually collected, with some exceptions).

In fact, for leased buildings, the law admits a 5% flat rate reduction of rentals (higher flat rate reduction is provided in some specific cases) in consideration of eventual managing and maintenance expenses incurred by the owner.

As a result, related expenses actually incurred are not relevant for tax purposes.

The taxable income, as determined above, is subject to a progressive tax rate.

Taxed at a flat tax rate

As of FY 2011, a new tax regime, called cedolare secca, has been introduced. It is a voluntary and optional tax regime in respect to the ordinary one. In this case, the rental income can be taxed at a fixed tax rate equal to 21% or 10%, provided some conditions are met.

This taxation replaces:

  • the incomes tax (national, regional, and municipal)
  • the registration tax
  • the stamp duty, and
  • other taxes.

The taxable income is 100% of the rental income.

Foreign real estate

As of FY 2012, IVIE (see the Other taxes section for more information) replaced the national income tax (IRPEF) on incomes deriving from foreign real estate not rented, whereas rented real estates must be reported in any case in the tax return.

In particular, if the income deriving from the rented real estate owned outside of Italy is subject to foreign rental income taxes in the foreign country, the same taxable base utilised in the foreign tax return is subject to taxation also in Italy. This income is then included in the Italian ordinary taxable base and taxed at progressive tax rates.

In this case, the taxpayer is entitled to claim for the foreign tax credit in the Italian tax return in order to avoid double taxation (if any). The said deduction is limited to the proportion of the Italian tax corresponding to the ratio between the taxable income produced abroad (and subject to double taxation) and total income. The foreign tax credit cannot, in any case, exceed the net Italian tax due on the foreign source income.

Otherwise, if the income deriving from rented real estate owned outside of Italy is not subject to taxation in the foreign country, the rental income reduced by 15% constitutes the taxable income in Italy.

See the tax regime for neo-domiciled individuals in the Taxes on personal income section, which substitutes the income tax on foreign rental income deriving from a real estate owned out of Italy, provided the individual opted for it.

Investment income

Investment income is generally defined as income arising from the use of capital, typically interest and dividends.

See the tax regime for neo-domiciled individuals in the Taxes on personal income section, which substitutes the income tax on foreign interests and dividends, provided the individual opted for it.

Dividend income

The taxation of dividend distributions mainly depends on following categories of participation:

  • ‘Qualified shareholding’ if:
    • it exceeds 2% of the voting rights or 5% of the capital or of the equity in case of securities traded in an Italian or foreign public regulated market
    • it exceeds 20% of the voting rights or 25% of the capital or of the equity in case of securities not traded in an Italian or foreign public regulated market.
  • ‘Non-qualified shareholding’ if:
    • it does not exceed 2% of the voting rights or 5% of the capital or of the equity in case of security traded in an Italian or foreign public regulated market
    • it does not exceed 20% of the voting rights or 25% of the capital or of the equity in case of securities not traded in an Italian or foreign regulated public market.

Generally, dividend distributions deriving from a ‘qualified shareholding’ are subject to progressive tax rates on 49.72% of dividends distributed (i.e. 50.28% of dividends income is not subject to further taxation). Dividends distributions deriving from a ‘non-qualified shareholding’, such as dividends granted by Italian companies, are subject to final WHT at 26% to be applied at source, on the contrary through the annual Italian tax return.

Moreover, according to the 2018 Financial Law, as of FY 2018, the tax treatment of dividends deriving from qualified shareholdings will be aligned to the one provided for non-qualified shareholdings through the application of a 26% substitutive tax; a transition period has been provided where dividends distributed from 1 January 2018 to 31 December 2022 and referred to profits produced before 31 December 2017 will be taxed according to the old disposition.

The 2018 Italian Financial Bill has also introduced for Italian individuals without self-business a final WHT at a 26% rate for dividend distributions deriving from qualified and non-qualified shareholdings (starting from 1 January 2018).

Qualified shareholdings

The taxation of dividends deriving from qualified shareholding has changed as of fiscal year 2018.

Indeed, dividends deriving from qualified shareholdings starting from 1 January 2018 will be taxed through the application of a 26% substitutive tax.

However, the tax law provides a transition period in which the dividends from qualified shareholding distributed from 1 January 2018 to 31 December 2022 and referred to profits produced before 31 December 2017 will be included in the individual gross income according to the following percentages:

  • 40% of the dividend realised until 31 December 2007.
  • 49.72% of the dividend realised between 1 January 2008 and 31 December 2016.
  • 58.14% of the dividend realised until 1 January 2017 to 31 December 2017.

For the sake of completeness, the dividends distributed by a foreign entity that are not paid through an Italian broker should be included in the individual Italian tax return and taxed according the above-mentioned rules.

Non-qualified shareholdings

The dividends distributed by a foreign entity that are not paid through an Italian resident broker shall be included (net of foreign taxes withheld) in the individual’s tax return and taxed at a 26% flat rate.

In this case, no foreign tax credit can be claimed.

Dividends distributed by a foreign entity and paid through an Italian resident broker are subject to tax at a 26% flat rate (net of foreign taxes withheld). In this case, no further action will be required.

Interest income

Interests are subject to a flat tax rate of 26% to be applied at source.

For specific interests stated by the tax law (e.g. government bonds and other bonds issued by public entities mentioned in Article 31 of D.P.R. 29 September 1973, no. 601 and similar financial instruments), the tax rate will remain at 12.5%.

Capital gains

For individuals, capital gains are generally taxable, even if they do not arise from speculative intent or from a business.

See the tax regime for neo-domiciled individuals in the Taxes on personal income section, which substitutes the income tax on capital gain, provided the individual opted for it.

Capital gains tax on securities

The taxable base referred to in the sale of assets (securities, i.e. stocks, bonds, etc.) is the sale price less the purchase price, with all the additional purchase costs (notary fees, taxes, broker fees, etc.).

As per the taxation of dividends, the taxation of capital gains on securities also mainly depends on the following categories of participation:

  • ‘Qualified shareholding’ if:
    • it exceeds 2% of the voting rights or 5% of the capital or of the equity in case of securities traded in an Italian or foreign public regulated market, or
    • it exceeds 20% of the voting rights or 25% of the capital or of the equity in case of securities not traded in an Italian or foreign public regulated market
  • ‘Non-qualified shareholding’ if:
    • it does not exceed 2% of the voting rights or 5% of the capital or of the equity in case of security traded in an Italian or foreign public regulated market
    • it does not exceed 20% of the voting rights or 25% of the capital or of the equity in case of securities not traded in an Italian or foreign regulated public market.

Qualified shareholdings

The capital gains earned by the sale of qualified shareholdings is taxed as follows:

  • Capital gains made before 31 December 2017: 49.72% of capital gains is included in the individual annual gross income (income taxed applying progressive tax rates).
  • Capital gains made between 1 January 2018 and 31 December 2018: 58.14% of capital gains is included in the individual annual gross (income taxed applying progressive tax rates).
  • Capital gains made as of January 2019 will be taxed applying a flat tax rate of 26% on the whole capital gains amount. The 2018 Italian Financial Bill introduced a final WHT at 26% both to tax resident and non-tax resident individuals for capital gains deriving from a qualified and a non-qualified shareholding (starting from 1 January 2019).

Non-qualified shareholdings

The capital gains earned by the sale of non-qualified shareholdings is taxed applying a flat tax rate of 26%.

Capital gains tax on the sale of a real estate

The taxable base of the real estate capital gains is the difference between the sale price and the original cost of real estate together with the sum of all the additional purchase costs (notary fees, taxes, etc.).

The capital gain on the sale of real estate is taxed at progressive tax rates.

There are some exemptions, however, and such are applicable on capital gains deriving from the following sales:

  • The sale of a real estate if owned for more than five years.
  • The sale of a real estate, even if owned for less than five years, if it has been used as primary residence for most of the period of ownership (even if owned for less than five years).

Exempt income

The following are some examples of income exempt from IRPEF:

  • War pensions.
  • Pensions and allowances paid to legally blind, deaf-mute, and invalid individuals.
  • Social pension.
  • Revenues paid by the National Institute for the Insurance against on-the-job injuries (called INAIL) for permanent disability or for death.