Income tax

An introduction to Italy’s income tax

Italy has a pay-as-you-earn (PAYE) system of income tax ( imposta sul reddito delle persone fisiche/IRPEF), whereby employees’ tax is withheld at source by employers.

The tax year is the same as the calendar year and income is taxed in the year in which the payment or advantage is received. Each person is taxed individually and, although a married couple may file a joint tax return, they’re taxed separately.

Italian income tax has traditionally been among the highest in the EU and, although the rates have been reduced in recent years, it’s still above the EU average. On the other hand, tax allowances are more generous than in some other countries.

If you’re able to choose the country where you’re taxed, you should obtain advice from an international tax expert. Moving to Italy (or another country) often offers opportunities for legal ‘favourable tax planning’. To make the most of your situation, it’s recommended to obtain professional income tax advice before moving to Italy, as there are usually a number of things you can do in advance to reduce your tax liability, both in Italy and abroad. For example, you may be able to avoid paying tax on a business abroad if you establish both residence and domicile in Italy before you sell. On the other hand, if you sell a foreign home after establishing your principal residence in Italy, it becomes a second home and you may then be liable for capital gains tax abroad. Be sure to consult a tax adviser who’s familiar with both the Italian tax system and that of your present country of residence. You should inform the tax authorities in your former country of residence that you’re going to live permanently in Italy.

Tax evasion ( l’evasione fiscale) is rife in Italy, where avoiding taxes is more popular than soccer (Italians may not be world champions at soccer, but they certainly are when it comes to tax evasion). The worst offenders are businesses and the self-employed, and it’s common knowledge that tax inspectors accept bribes to ‘turn a blind eye’ to tax evasion. The tax authorities may estimate your taxable income based on your perceived wealth. All taxpayers must list (on a one-page riccometro form) their possessions and liabilities, such as homes, cars, boats and motorbikes, whether they employ household help, whether their spouse works, and whether they have dependent family members. This information is used to determine your financial situation and whether you’re entitled to certain social services. Therefore, if you’re a millionaire and declare the income of a shop assistant, it would be wise not to live in a palazzo and drive a Ferrari! Severe sanctions, including larger fines, were introduced for tax evasion in 2000.

Further information about Italian income tax is available from local tax offices in Italy.

This article is an extract from Living and Working in Italy. Click here to get a copy now.

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