Tax System in Italy

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.

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.