Tax System in Italy

Italy’s tax system may seem complicated, but it offers many opportunities for foreigners and investors who want to live, work, or invest in the country. From progressive income taxes to special regimes designed for new residents, there are ways to lower your tax burden while staying compliant. In this guide, we’ll break down the essentials, helping you understand tax in Italy for foreigners and how to optimise your finances.

Italy’s tax system is complex and regulated, affecting residents and non-residents. Managed by the Agenzia delle Entrate (Italian Revenue Agency), the system includes direct taxes like income and corporate taxes and indirect taxes such as VAT and property tax. The system is primarily progressive, meaning income tax rates increase as earnings rise. For those asking “do you pay taxes in Italy?”, the answer depends on your residency status and income sources.

For individuals and businesses looking to live, work, or invest in Italy, understanding tax rates in Italy is crucial to avoid penalties, optimize benefits, and ensure compliance.

Who is Subject to Taxation in Italy?

Italy taxes individuals and companies based on their residency status and the source of their income.

Individuals

• Residents: If you’re a tax resident in Italy, you must pay taxes on worldwide income, regardless of where it’s earned.
• Non-residents: Non-residents are taxed only on income earned in Italy, such as rental income from Italian property or wages from an Italian employer.

In Italy, tax residency for individuals is determined based on three main criteria. An individual is considered a tax resident if they meet at least one of the following conditions for more than 183 days (about six months) in a calendar year:

• Registration: Officially registered in the Italian Civil Registry (Anagrafe).
• Domicile: If Italy is the primary location of your personal and family interests, you are considered a tax resident.
• Physical Presence: Spending over 183 days in Italy, even if not officially registered.
• Residency: This refers to a habitual residence, where an individual spends the majority of their time and manages their personal and professional activities.

In any case, you require legal residency to benefit from the tax resident status.

Companies

• Resident Companies: A company is tax-resident if its legal headquarters, effective management, or main activities are in Italy. They pay taxes on global income.
• Non-resident Companies: Non-resident companies are taxed only on income earned in Italy, such as profits from branches or real estate.

Tax residency is key in determining your tax obligations, as explained in the next section.

Individuals in Italy are subject to personal income tax in Italy (IRPEF) along with regional and municipal taxes. Those who own property, investments, or foreign assets may face additional taxes. Both residents and non-residents need to understand how these taxes apply, as tax liabilities depend on income sources and residency status.

Income Tax (IRPEF)

In Italy, personal income tax, known as IRPEF ― Imposta sul Reddito delle Persone Fisiche, applies to all individuals based on their earnings. The Italian tax brackets are progressive, meaning that higher income levels are taxed at higher rates. The tax rates in Italy for 2025 are as follows:

Unlike some European countries, Italy does not have a general wealth tax, but there are specific taxes on real estate and financial assets:

• Municipal Property Tax (IMU – Imposta municipale propria): Applies to secondary residences and luxury properties, with rates ranging from 0.4% to 0.8%, depending on the municipality. Primary residences are exempt, unless classified as luxury homes.
• Foreign Property Tax (IVIE – Imposta sul valore degli immobili situati all’estero): Residents owning property outside Italy must pay 1.06% on its value. If a similar tax is paid abroad, it can be deducted.
• Foreign Financial Assets Tax (IVAFE – Imposta sul valore delle attività finanziarie detenute all’estero): Residents with foreign financial assets must pay 0.2% on their total value. Foreign bank accounts incur a flat tax of €34.20 per year.

Inheritance and Gift Tax

Italy’s inheritance and gift tax rates depend on the relationship between the deceased and the heir. Spouses and children benefit from the most favorable rates, with a 4% tax and a €1,000,000 exemption per heir. Siblings pay 6% with a €100,000 exemption, while more distant relatives and unrelated heirs face rates of 6% or 8% with no exemptions.

Vehicle Tax

All vehicle owners in Italy must pay an annual vehicle tax (Bollo Auto). The amount depends on:

• Engine power (kilowatts – kW)
• Emission class (Euro 1–6 standards)
• Region of registration

For standard cars, the tax generally ranges from €2 to €4 per kW. Older and more polluting vehicles (Euro 0–3) may face additional surcharges. Electric vehicles often benefit from exemptions or reduced rates for the first few years of registration.

Businesses in Italy are subject to various taxes based on their legal structure, size, and residency status.

• Corporate Income Tax (IRES – Imposta sul Reddito delle Società): All companies must pay IRES at a standard rate of 24% on net profits (revenue minus expenses, depreciation, and allowable costs).
• Regional Business Tax (IRAP – Imposta Regionale sulle Attività Produttive): Companies also pay IRAP at a standard rate of 3.9%. This tax is based on a company’s gross operating margin, with few deductions allowed (such as labor expenses). Rates may vary by region and industry. Some sectors, such as banking and insurance, may face higher rates or additional taxes.

Value-Added Tax (IVA)

Italy applies a Value-Added Tax (IVA – Imposta sul Valore Aggiunto) on the sale of goods and services. The standard VAT rate is 22%, but reduced rates apply in some cases:

• 10% for restaurant services, hotels, and certain food products.
• 4% for necessities like bread, milk, and medical supplies.

Some transactions, like exports and intra-EU sales, are exempt from VAT. However, businesses can still reclaim VAT on related expenses.

Businesses with an annual turnover over €85,000 must register for VAT and submit periodic returns. Smaller businesses may qualify for simplified VAT schemes.

Taxation of Non-Resident Companies

Foreign businesses operating in Italy must follow local tax rules, even if not registered as Italian companies. Non-resident companies are taxed in Italy if they have a permanent establishment, like an office or warehouse.
Key tax obligations for non-resident companies include:

• Withholding tax on business income: Payments like dividends, interest, and royalties may be subject to withholding tax, ranging from 5% to 26%, depending on tax treaties with the company’s home country.
• VAT registration: Foreign companies selling goods or services in Italy may need to register for VAT and charge the appropriate rate.
• Corporate tax: If a foreign company earns income from Italian sources, it may need to file an Italian tax return and pay taxes on that income.

Non-resident companies should carefully assess their tax obligations and seek professional advice for compliance.

In Italy, the tax year runs from January 1st to December 31st.

For Individuals:

• Tax returns for the previous year must be filed between April and November.
• Employees and pensioners use Form 730, while self-employed individuals use Modello Redditi PF.
• The first tax payment is due by June 30th, with the option to pay in installments.

For Companies:

• Companies follow the same calendar year (unless a different fiscal period is chosen).
• Corporate tax returns (Modello Redditi SC) must be filed within nine months after the fiscal year ends.
• Tax payments are made in two advance installments and a final balance payment.
• Businesses registered for VAT must file annual declarations, with VAT payments typically made monthly or quarterly.

Key Deadlines:

• April – November: Individual tax return filing period
• June 30th: First tax payment deadline
• November 30th: Second installment for businesses and final tax payments

Meeting these deadlines is crucial to avoid penalties and interest charges.

Italy offers a range of tax incentives and special regimes to attract individuals, foreign investors, and businesses. These benefits include various deductions and credits for residents, as well as favorable tax treatments for expatriates and high-net-worth individuals. Taking advantage of these incentives can help both locals and foreigners reduce their overall tax burden.

Tax Incentives for Individuals

Italian residents can benefit from several deductions and credits, such as:

• Family Deductions: Reductions for dependent children and spouses.
• Medical Expenses: Up to 19% deduction for expenses exceeding €129.11.
• Mortgage Interest: Up to €4,000 per year is deductible for primary residence mortgages.
• Education Costs: Tuition fees for universities and private schools can be deducted.
• Energy-Efficient Home Improvements: The EcoBonus and SuperBonus programmes allow tax credits of 36%–65% for renovations aimed at improving a home’s energy efficiency.
• Bonus Casa Green: 50% tax deduction when purchasing a home with an energy class of A or B.
• Bonus Mobil: 50% deduction of the cost of new furniture or large appliances.

Additionally, these categories of retirees may qualify for a flat 7% tax rate on foreign income for 10 years:

• Those moving to southern Italy (e.g., Sicily, Calabria, Puglia, and Sardinia) or to a municipality with fewer than 20,000 residents in select seismic areas in Marche, Umbria, and Lazio.
• Tax residents outside Italy for at least 5 years.
• Residents for 5 full tax years in a state with which Italy has agreements for administrative co-operation.

Special Tax Regimes for Foreigners

Italy has introduced special tax regimes to attract high-net-worth individuals, expatriates, and returning Italians, offering significant tax savings for those who qualify.

Flat Tax for High-Net-Worth Individuals. To attract wealthy foreigners, Italy offers a €200,000 flat tax on worldwide income for new residents who have not been tax residents for at least 9 of the last 10 years and choose this option over the standard progressive rates. This regime is available for up to 15 years and extends to family members at a reduced flat tax of €25,000 per person.

Regime Impatriati (Expat Tax Regime). This regime encourages expatriates and returning Italians by exempting 50% of their income from tax, whilst a 60% exemption applies for those with a minor child. There is an annual cap of €600,000. This means that the maximum relief possible would be on €300,000, if income exceeds a cap.

The tax break applies to employees, freelancers, and entrepreneurs who weren’t tax residents in Italy for 3 years before relocation and who undertake to keep the status for at least 4 consecutive years.

Italy’s Golden Visa programme offers a pathway to residency for non-EU investors who meet specific investment criteria.

You can obtain an Italian residence permit by investing in one of the following:

• €250,000 in an Italian startup
• €500,000 in an Italian company
• €2 million in Italian government bonds
• €1 million in a philanthropic initiative

While the Golden Visa grants residency, it doesn’t automatically make you a tax resident. To be considered a tax resident in Italy, you must meet at least one of the conditions mentioned in the “Who is Subject to Taxation in Italy” section.

This distinction is important for investors who want to live in Italy without being taxed on their worldwide income. For a more favourable tax status, new residents might consider Italy’s flat tax regime.