The topic is certainly not the most exciting, and entrepreneurs often do not want to think about it, but anyone who decides to start a startup (or, more generally, a company) necessarily needs to know what taxes they will have to pay.
That of business taxation in Italy is an obscure subject for many, but one that we will shed more light on in the next few lines. If you, too, do not know what tax regimes are provided in Italy, do not know the difference between taxes and fees, and do not know what the words IRES, IRPEF, IRAP and VAT mean, you would do well to continue reading.
Tax regimes
Knowing what a tax regime (or accounting regime) is it is a necessity for every business owner: a tax regime is the set of rules and procedures that companies and professionals must observe and follow in order to be in compliance from a tax and legal standpoint.
You have to consider that just according to the tax regime, the way you have to keep accounts changes, because there are precise requirements to be fulfilled.
Let us analyze the three main tax regimes in Italy, leaving out for now those reserved for particular economic categories (tobacco, fuel, etc.):
- the ordinary regime;
- the simplified regime;
- the flat-rate regime.
The ordinary regime provides for the fulfillment of all obligations under the Civil Code, including the preparation of annual financial statements and their publication. Compulsorily included in this tax regime are corporations, cooperative and insurance companies, associations and entities whose exclusive or main purpose is commercial activity, and businesses not resident in Italy (unless they meet the requirements for access to the flat-rate regime). The limits, which, if exceeded, result in the transition to the ordinary regime, are set at 500,000 euros in annual revenues for activities that sell services and 800,000 euros for other activities.
Those who have access to the simplified regime have minor accounting obligations (e.g., they do not have to file annual financial statements) compared to the ordinary regime. Partnerships (sas or snc) and individuals, who carry out business activities as sole proprietorships, and who decide or cannot join the flat-rate regime, can access it, obviously with the obligation to adopt ordinary accounting upon exceeding the revenue limits, as already stated, of 500,000 euros for service providers and 800,000 euros for other types of activities
The flat tax regime is the only tax-advantaged regime provided in Italy. The Budget Law approved by the Meloni government in late 2022 expanded the number of beneficiaries of the Flat Tax to 15 percent, increasing the maximum limit of revenues or compensation from 65 thousand euros to 85 thousand euros. Not only that, the Budget Maneuver also stipulates that those who should reach 100 thousand euros in revenues or compensation in 2023 will exit the concessional taxation, while those who remain between 85 thousand euros and 100 thousand euros will remain in the flat-rate regime for the current year, exiting only from the following year.
Remember that the choice of tax regime is related to different factors, starting with the characteristics of your business. Among the aspects you must consider, however, is the income you expect to achieve with your business and the costs you will incur (those with higher expenses may find the ordinary or simplified regime more convenient than the flat-rate).
The importance of knowing the regulations
Knowing the tax regulations provided in Italy not only allows you to avoid making mistakes that could create great problems for you economically and legally: being aware of every aspect of this complicated matter and proceeding, accordingly, to proper strategic tax planning, allows you to have complete control over your costs and, where possible, to reduce (and, in some cases, significantly lower) your tax burden, obviously in a completely honest and legal manner.
Before examining in detail the taxation that exists in Italy, it is useful for you to know that The Italian tax system is based on criteria of progressivity and, therefore, the average taxation applied to the taxpayer as a natural person increases in proportion to income. It is also important for you to know that taxes are divided into:
- levies, i.e., compulsory cash benefits payable by the taxpayer, in relation to his or her ability to pay; with these revenues the state finances expenditures for the realization of public works and services for the benefit of the entire community, such as public health. They are taxes, for example, Irpef, Ires and Irap.
- taxes, which are sums of money paid in exchange for a benefit or service intended for individual citizens. An example of a tax is the garbage tax, the Tari or the registration tax on leases;
- contributions, that is, levies by the state on certain taxpayers who mandatorily benefit from a public service or good. The example we are all familiar with are the Inps contributions that an employer pays for its employees.
Levies, in turn, are divided into:
- direct levies, which affect the taxpayer’s income directly and proportionally (IRES) or at progressive rates (IRPEF);
- indirect levies, which affect the taxpayer’s income indirectly, in relation to consumption and wealth transfers (an example is VAT).
What taxes do companies pay in Italy? And when should they be paid?
It’s time to get to the heart of the matter and understand what taxes companies in Italy have to pay.
You should know that despite Mario Draghi‘s warning,
“high taxes result in less self-financing, less assets, less ability to make credit”,
in Italy, small and medium-sized businesses have a particularly high overall tax burden: according to CGIA data from 2020, it is 59.1 percent of profits, lower only than that of France in Europe.
With reference to the main levies to which businesses in Italy are subject, a distinction must be made between direct and indirect.
Direct levies
Among the direct levies that companies and professionals have to pay in Italy are IRES (corporate income tax) and IRPEF (personal income tax).
The former is a proportional levy that affects the income produced by companies and is calculated, applying a single tax rate (currently set at 24 percent) and corresponds to what is known in the rest of the world as Corporate Tax. It is paid through a mechanism of down payment and balance and the due dates are June 30 (or end of July or end of August but with surcharge) for the first installment and November 30 for the second installment.
They have to pay IRES:
- Spa;
- Sapa;
- LLCs;
- cooperative and mutual insurance companies;
- European companies and European cooperative societies residing in Italy;
- public and private entities residing in Italy;
- companies and entities of all types, including trusts, for income generated in Italy.
IRPEF is a levy payable by individuals, is progressive with increasing rates in brackets, which is levied on total taxable income. Starting in 2022, there are 4 brackets (23% rate for income up to 15,000 euros, 25% rate up to 28,000 euros, 35% rate up to 50,000 euros, 43% rate for income above 50,000 euros).
The payment mechanism involves a down payment related to the current year and a balance related to the previous year. Depending on the amount, the down payment is payable in one installment (by November 30 of the tax year) or in two installments (by June 30, together with the balance for the previous year, and by November 30).
The following are subject to the payment of IRPEF:
- employees;
- the self-employed;
- sole proprietorships;
- individuals with income from a capital or land.
IRAP (regional tax on productive activities) deserves a separate mention: the Budget Law 2022 definitively abolished IRAP as of 2022 for self-employed workers, sole proprietorships and professionals, which in this way joined those who adhered to the flat-rate regime, which was already excluded. Associated professional firms, partnerships, corporations, business entities and third sector entities, however, still have to pay IRAP.
Indirect levies
The main indirect levy is VAT, which is value-added tax. This is a tax levied, precisely, on the added value of a good or service sold, which VAT holders must settle and pay on a monthly (by the 16th of each month) or quarterly basis. By Dec. 27 each year, VAT holders must also pay an advance payment.
Generally, this levy affects the pockets of the final consumer, because companies eventually pay VAT only on the difference between sales and purchases, making a Liquidation which can, indeed, be credit or debit. In Italy, the ordinary VAT rate is 22%, but keep in mind that for certain goods and services there are reduced rates (at 10%, 4% and 5%).
Regional surcharges
You may not be aware that to the aforementioned personal income tax, one must also add the IRPEF surcharge on a regional and municipal basis.
The regional IRPEF surtax is applied to total income determined for national IRPEF purposes and is payable if, for the same year, IRPEF is due. Each region or autonomous province can set the rate within the limits set by the Italian state.
Municipal surtaxes
Like the regional surtax, the municipal IRPEF surtax is also a tax levied on total income determined for IRPEF purposes and is due if, for the same year, IRPEF is due. Each municipality in Italy may establish it and set the rate and any exemption threshold within the limits set by Italian law.
INPS contributions
Wages paid are, of course, another important item of expenditure for Italian companies. Remember that, to the net salaries, companies must also add the aforementioned IRPEF and regional and municipal surtaxes, INPS contributions, INAIL and any other deductions provided for by their sector of reference.
Let us now shed light on INPS contributions: social security contributions are that amount that is mandatorily and periodically paid by the employer to guarantee a certain amount to the employee for any periods of sickness or maternity leave and especially for the pension he or she may enjoy when he or she reaches a certain age.
The contribution rate affects both the employees and the employer, but it is the employer who pays both the employee’s and the employee’s contributions. The rate depends on several factors, such as the type of work of the insured and his or her job title, but also the activity carried out by the company, the size of the company, and its legal configuration. Another aspect to consider is, then, the pension fund to which the worker is enrolled.
The compulsory insurance (INAIL)
As already anticipated, companies are also obligated to take out INAIL insurance for the benefit of all their workers. In more concrete terms, employers must pay an insurance premium each year, which is calculated by multiplying the taxable wages of employees by the rate applied by INAIL (which varies according to the work activity performed and the sector to which the company belongs).
Subtractions and deductions
To have complete mastery of the subject matter involving taxation in Italy you must also know what subtraction and deduction are, two different concepts even though they both refer to tax breaks that allow you to take advantage of discounts from the IRS.
We often read them used synonymously, but they operate at different times in the calculation of our taxes.
By “deduction” we refer to particular deductible charges that allow us to reduce the tax base, that is, the income on which we are going to calculate taxes. These charges can be very different in nature depending on whether we are talking about a sole proprietor or a professional, a corporation or an employee.
By the term “subtractions” we are talking about amounts that allow the tax to be lowered, so they come into the picture after deductions. Once we have applied the deductions and found the taxable income, we calculate the gross tax, and it is at this stage that the subtractions come in, thus arriving at the net tax.
Some practical examples
Now that we have clarified several key aspects of business taxation in Italy, it is time to turn to some practical examples of companies, making explicit reference to the startup arena.
You should know, in this regard, that in Italy, innovative startups (i.e., according to the definition of the Ministry of Economic Development, “young, high-tech companies with strong growth potential”) have access to concessions involving tax breaks for those who invest in them.
As of January 1, 2017, an important tax relief is available for investors who make investments in venture capital of innovative start-ups (Budget Law 2017). The investment incentive is configured as follows:
- for individuals, a subtraction from gross Ires tax liability equal to 30 percent of the amount invested, up to a maximum of 1 million euros;
- for legal persons, deduction from Ires taxable income equal to 30 percent of the amount invested, up to a maximum of 1.8 million euros.
As of 2017, the use of the incentive is conditional on maintaining a stake in the innovative startup (holding period) for a minimum of three years.
There is also an incentive that provides a 50 percent IRPEF subtraction intended for individuals who invest in the venture capital of innovative startups. The incentives are granted under the “de minimis” regulation (Commission Regulation EU No. 1407/2013 of December 18, 2013).
Keep well in mind, too, that a startup (or rather all natural persons, holders of a vat number, engaged in business, art or profession as individuals) can have access to the tax relief under the flat-rate regime at a rate of 5 percent instead of 15 percent (for the first 5 years of activity), but only if it has certain characteristics:
- must not have exercised in the 3 years prior to the startup any artistic, professional or business activity, even in an associated or family form (opening a VAT number in the previous 3 years does not determine exclusion);
- the new activity must not be a mere continuation of another activity conducted in the form of employment or self-employment;
- in the event that the startup is a continuation of the activity of another person, the amount of revenues and compensation earned prior to the recognition of the benefit must not exceed 85 thousand euros.
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