Offshore Tax Summaries-Italy

Offshore Tax Summaries-Italy In spite of plans to modernize its tax system, most expatriates say that the current Italian tax structure is "a mess." However, in January 2005 the Italian government implemented changes that have successfully reduced income taxes for certain categories of employees.

Income tax

At the present, the personal income tax rate can be as much as 45% for high earners. Italy has a multitude of taxes, so if for anyone who is thinking of carrying out any form of business here, it is highly recommend that they seek professional guidance from a tax accountant (known as a "commercialista").

Italian law provides for a system based on the following taxes: the imposta sul reddito (income tax); the imposta sulle società (corporate tax); the imposta sul valore aggiunto (VAT or sales tax); and the imposta sui servizi (tax on services).

Personal income tax, or IRPEF (Imposta sul Reddito delle Persone Fisiche), applies to any income derived from sources such as employment, self-employment, income from real estate, business income, etc. After allowances have been taken into account, rates are on a sliding scale from 23% to 43%.

More changes are expected. There has been talk about bringing in three levels of tax instead of the two that were originally supposed to be introduced. And, there will be new rules for deductions and allowances. In particular, it's expected that there will be a series of deductions from taxable income in relation to the taxpayer's family situation and home, healthcare, education, training, and research activities.

Residents are liable for IRPEF on their worldwide income, while nonresident individuals are subject to IRPEF only on income that arises from Italian sources. For income tax purposes, individuals are considered resident if their regular abode is in Italy, the center of their interests is in Italy, and they are registered as resident for the greater part of the tax period in public records.

The following income is considered to be produced within Italy:

Any income from employment and self-employment derived from services performed in Italy.
Any income from capital paid by the state or an establishment in Italy.
Any business income from a permanent establishment in Italy.
Pensions being paid by the State or by an Italian company.
Any income from received from patents, trademarks, and know-how if paid by the state or by Italian residents.
So, essentially, income of all kinds and derived from all sources that is received by people who reside in Italy, are taxable in Italy. So, is any income received by nonresidents from Italian sources. This general rule is subject to the provisions of international tax treaties, of which the Italian Republic has signed up to over 100. This prevents the double taxation of expatriates.

Whether a person pays U.S. or Italian taxes on his worldwide income comes down to which country he decide to make your fiscal domicile, n other words, where he is resident for tax purposes. If he lives permanently in Italy, and his residence is considered to be his fiscal domicile, he is required to pay taxes to the Italian government on his worldwide income. Basically, he can register as an Italian resident if he spends over than 183 days each year in Italy.

According to the American Citizens Services (ACS) department at the U.S. Embassy, any U.S. citizen who lives or earns income outside the U.S. is not relieved the responsibility for filing tax returns. However, Italy's double taxation agreement with the U.S. ensures that the expatriate will not be taxed twice on his income. This includes Social Security pensions, which are subject to U.S. withholding tax. U.S. citizens who live or work abroad may also be entitled to various deductions, exclusions, and credits. Along with federal tax forms, the ACS can provide a list of U.S. tax practitioners working in Italy.