When are individuals liable to Italian tax?
An Italian resident individual, whether an Italian national or not, is subject to Italian taxation on worldwide income.
A non-Italian resident, whether an Italian national or not, is only subject to Italian taxation on income having an Italian source.
How is tax residence determined?
For tax purposes an individual is deemed to be resident in Italy if for the greater part of the fiscal year (solar year) he or she is registered in the Residents Register (anagrafe) as resident or is in fact resident or domiciled in Italy pursuant to the Civil Code.
Pursuant to Article 43 of the Italian Civil Code, domicile is the place where an individual has established the center of his or her affairs and interests; residence is the place where an individual usually lives.
Can taxes paid abroad be credited?
A tax treaty for the prevention of double taxation and for the exchange of information is in effect between Israel and Italy.
Taxes paid in one country by a resident of the other on income included in the taxable base are allowed as a credit against income tax due in the latter country. Detailed rules apply in each country.
How is wealth taxed in Italy?
There is no tax on wealth in Italy.
How is income taxed in Italy?
There are two taxes on income levied on tax-resident individuals in Italy: IRPEF personal income tax, levied by the Central Authorities; and IRAP tax on income from productive activities, levied by the Regional Authorities.
IRPEF (Imposta dei Redditi Persone Fisiche)
For the purpose of income tax, income is divided into different categories. Taxable income is obtained following the formula: overall income minus deductible expenses minus income taxed separately equals taxable income. The applicable rate is applied to the taxable income giving the gross income tax, from which rebates are deducted, giving the income tax due. In 2009, the tax rates range from 23 percent on the first 15,000 to 43% over 75,000.
Special rules apply to dividends derived by Italian residents.
Under the Italy-Israel double tax treaty, reduced tax and withholding tax rates apply to payments by Italian residents to Israeli residents as follows: dividends 10%-15%; interest 10%, generally; royalties 10%. These taxes are credited against Israeli tax on the same income derived by Israeli residents.
IRAP (Imposta Regionale sulle Attività Produttive)
This local tax applies to all income from business and professional activity carried out within a region and is calculated on the value of the business; this is deemed to be the difference between assets and liabilities specifically indicated by law. The basic tax rate is 3.9%, but this rate can be autonomously varied by each region by 0.92%.
Non-residents are subject to IRAP on activity carried out in Italy if they exercise an art or profession or trade for a period of more than three months in the fiscal year, via a permanent establishment or a permanent office.
Capital gains on securities portfolios
Italy taxes gains from transactions in shares, quotas of capital not represented by shares, and rights to acquire the above.
The rules distinguish between qualified and unqualified participations. Qualified quoted participations are holdings of over 2% (with voting rights) or over 5% (no voting rights). Qualified unquoted participations are holdings of over 20% (with voting rights) or over 25% (no voting rights).
Capital gains from qualified participation are taxed as part of general income.
Capital gain from unqualified participations, funds and derivatives are subject to tax at the rate of 12.5%.
Under the Italy-Israel tax treaty, Israeli residents are exempt from Italian tax upon a sale of Italian securities, provided they held under 10% of the voting power of the investee throughout the 24 months preceding the sale. Otherwise, Italy may impose tax of 20%. Israel will tax Israeli residents on such gains at rates of 20%-46% in 2009 (companies 25%-26%) and allow a credit for any Italian tax.
Capital gain on sale of Italian real estate
Capital gain on the sale of real estate situated in Italy is not subject to taxation in Italy except where less than five years have elapsed from the previous sale or if the real estate was received as a gift and less than five years have elapsed since then.
Where taxation applies, capital gain is taxed, at the choice of the taxpayer, either under IRPEF as part of general income or separately at the fixed rate of 20%.
The Italy-Israel tax treaty does not change the Italian tax on Israeli resident investors. Israel will tax Israeli residents on such gains at rates of 20%-46% (companies 25%-26%) and allow a credit for any Italian tax.
What about succession tax?
Italy taxes inheritances. If the deceased is tax resident in Italy, Italy will apply Italian succession tax to the whole estate, subject to any applicable tax treaty.
If the deceased is not tax resident, Italian succession tax will only apply to assets fallen in succession situated in Italy, subject to any applicable tax treaty.
Succession tax rates depend on who the beneficiary is, as follows:
Spouse and offspring: First 1,000,000 exempt, then 4% tax;
Relatives up to fourth degree: First 100,000 exempt, then 6% tax;
Others: 8% tax.
The exemption is increased to 1,500,000 for handicapped beneficiaries.
What if an Israeli resident holds an Italian company?
In principle, an Italian company will be subject to corporate income tax imposed by the Central Authorities at a rate of 27.5% as well as IRAP imposed by the Regional Authorities (basic rate 3.9%, but see above).
It is possible to tax the shareholders instead of the company in certain cases, but this may complicate any claim for a foreign tax credit in Israel.
Dividends paid by an Italian subsidiary to an Israeli company are subject in Italy to Italian withholding at the rate of 10% if the holding is 25% or more of the Italian company‘s capital, and 15% in other cases.
If an Israeli resident company or individual invests in the shares of an Italian company, they can generally defer Israeli tax until they receive a dividend from the Italian company. At that time, the Israeli tax would generally be 25% of the gross dividend less a credit for the Italian dividend withholding tax.
Alternatively, if an Israeli company (not individual) holds at least 25% of an Italian company, the Israeli company may choose to pay the regular rate of Israeli company tax (27% in 2009) on its share of the pretax profit of the Italian company and claim a credit for the corporate and dividend withholding taxes paid in Italy; this should eliminate the Israeli company tax altogether.
Can an Israeli company be subject to taxation in Italy?
Italy has detailed anti-avoidance rules aimed at foreign companies administered or controlled by Italian residents.
The Italy-Israel tax treaty generally restricts Italy‘s ability to tax Israeli companies to cases where: the company‘s effective management is in Italy; the company has a permanent establishment (fixed place of business or ‘‘dependent agent‘‘) in Italy; or the company derives Italian source income.
Although Italy is not a tax haven, careful planning can show that investing or living in Italy does not result in an excessive tax burden. The Italy-Israel double tax treaty helps harmonize the two tax systems.
The above is very brief and general. As always, consult experienced professional advisers in each country at an early stage in specific cases.
Antonia Marsaglia is an attorney based in Milan. Leon Harris is an international tax specialist based in Israel.