# Income Taxes in Italy



## cinzia88

I've spent several hours searching the web trying to get clear on income taxes in Italy. I'm considering moving there from another EU country and I can't do that until I know what I will be paying in income taxes and for medical/pension taxes. Do you mind if I just bring this down to the bricks and mortar?

If I make 26,000 Euros per year as a self employed consultant and writer, have about 4000 Euros in tax deductions, am single, and take the standard deduction of around 4000 Euros (is this still valid or has this changed?), what amount or what percentage in taxes would I pay on my income? How much or percentage would I pay for medical/pension taxes? 

I think this is what I'm looking at in reality so I would greatly appreciate understanding the taxes so I will know whether I can afford to live/move there.

Thank you!


----------



## Bevdeforges

Not sure what you mean by having 4000 in tax deductions. Each country's tax system is a bit different and so are the deductions, particularly when you're talking about self-employment. (There's also the obligation to file US taxes while living overseas, but I assume you're aware of that.) It may also depend on how you set up your self employment business in the country. (For example, in France there is a big difference how things are taxed between running your business as an AE vs. one of the other business entities.)
Cheers,
Bev


----------



## cinzia88

Hi, Bev, I actually have my A-E status in France and I can't use deductions there because of it. Due to a divorce, I'm now looking at Italy. From what I found on the internet, a document from 2002 said that there is a standard deduction everyone gets (like in the US) ranging from 3000 - 7000 Euros (so I averaged it to come up with 4000). Their self-employment business statuses in Italy all seem to allow work cost deductions to subtract from taxes (at least that's what my research showed but it could be wrong). On average my work expenses annually are about $2500 - 4000. So that's where I got the numbers. Yes, I'm aware of the draconian tax laws, FATCA, etc of the US and follow the laws religiously in fear of the penalties. Thanks.


----------



## accbgb

If you haven't seen it yet, check out Income taxes abroad - Italy Be sure to click the "Self Employed" tab and also check the "Tax Allowances" link partway down the page.


----------



## BBCWatcher

Many major accounting firms publish summaries Italy's tax regime. Here's Ernst & Young's 2015 guide, for example.


----------



## cinzia88

WOW! According to these two documents, as a self-employed person, I would pay 27% income tax plus 4% other local taxes, plus 32% Social Security taxes (although that would be reduced to around 17% since I'm American and we have a treaty that I would pay SS in the US still). 

That's about 48% in taxes. Who can afford to live in Italy as a self employed person? Of course, with the exception of the new Auto Entrepreneur status, France is about the same for self employed people. Frankly, I guess it's why Europe has problems with high unemployment - who can afford to start businesses and pay these kinds of taxes. No new businesses, no new jobs. 

One more question, please. If I stay 180 days per year with my income/business in the US, I would have to have Permanent Residence in Italy but would not be a tax resident in Italy, correct? In this case, what would I do about medical care while I'm there? Would I be on the medical system because I'm a Permanent Resident or would I need to buy medical insurance there for 6 months out of the year. If so, is it expensive?

Thanks again.


----------



## NickZ

cinzia88 said:


> One more question, please. If I stay 180 days per year with my income/business in the US, I would have to have Permanent Residence in Italy but would not be a tax resident in Italy, correct? .


No. If you're a permanent resident you'll be a tax resident. Short of giving up residency after 180 years every single year.

The basic deduction declines with income going up. I can't remember the formula but there is a point you lose the deduction.

It's not 27% of your whole income. It'll be zero on the part covered by the deduction. 23% for the part up to 15K then 27%. Your effective tax rate would be the blend.

The local tax is almost totally limited to the large cities. 

To get residence you need health care.


----------



## BBCWatcher

cinzia88 said:


> (although that would be reduced to around 17% since I'm American and we have a treaty that I would pay SS in the US still).


How do you figure that? According to the treaty, if you're self employed in Italy you wouldn't pay the 15.3% U.S. Self Employment Tax but would pay Italian INPS. Note that it doesn't matter where your clients are located, what currency you receive as your income, or where that income is received (into which bank account). What matters is your physical location when you're working.


----------



## cinzia88

BBCWatcher said:


> How do you figure that? According to the treaty, if you're self employed in Italy you wouldn't pay the 15.3% U.S. Self Employment Tax but would pay Italian INPS. Note that it doesn't matter where your clients are located, what currency you receive as your income, or where that income is received (into which bank account). What matters is your physical location when you're working.


It was in the document you sent me under Social Security:

Worldwide Personal Tax Guide - EY - Global


----------



## cinzia88

Hi, NickZ, 

The 48% taxes that I mentioned actually figured in the first 15,000 of income being taxed at a lower level. If I end up having to pay 31% for Social Security/Totalization on top of the income tax, that puts me at 65% income taxes. If I only make 26,000 Euros and I have to give 65% of it to taxes, there's no way I could afford to live. I need to rethink Italy. Perhaps it will have to wait until I'm retired but by then I won't have my French residency anymore and it will be harder to get a Visa. All very complicated. I don't know how any self-employed person can survive financially there. Unless I'm missing something or not reading the documents that were sent to me by Forum members correctly. Thanks for your help.


----------



## BBCWatcher

cinzia88 said:


> It was in the document you sent me under Social Security.


No, that's not in that document. That document says that Italy has a social security totalization treaty with the United States. True. That treaty means self-employed U.S. persons working in Italy don't have to pay the 15.3% U.S. Self Employment Tax and do pay Italian INPS.

How do you figure a net effective tax rate of 65% on 26,000 euro of self employment income? Would you mind walking us through that math?


----------



## cinzia88

Sure. Here's what I've pulled from the documents you guys sent me:

Rates and income brackets
Five income bands have been envisaged, each of which has a corresponding tax rate.
Table for calculating Irpef
Taxable Income	Rate	IRPEF (Gross)
(My Income: 27,000 Euros)
up to 15,000 euros	23%	
more than 15,000 and up to 28,000 euros 27% ME: 3,450 + 27% on the part exceeding 15,000 euros = 3230 = 3450 + 3240 = 6690 tax 
add local taxes 4% = 1080 
plus SS taxes:
Self-employed individuals. Self-employed individuals, directors and consultants must enroll with the so-called Gestione Separata (INPS). The contributions to the INPS are calculated at a flat rate of 30.72%. 27,000 x 30.72% = 8294 euros

8294 SS + 1080 local taxes + 3450 + 3240 Income taxes = 16,064 Euros in taxes/SS = 60% taxes on 27,000 (I was off 5% from my original 'in my head' calculations) Granted, I didn't include any deductions but I don't have many business expenses so it wouldn't reduce my taxes much.

Did I do something wrong in my calculations? Thanks!


----------



## BBCWatcher

Yes. As NickZ noted upthread, you forgot the 0% tax bracket. Also, you subtract INPS contributions _then_ calculate income tax. And you've used something very near the maximum local combined tax rate, which is arguable anyway. Those taxes range from 0.7% to 4.23% of taxable income (after the 0% bracket) depending on where you live. Since you're deciding where to live I'd pick something like 2% rather than 4%.


----------



## BBCWatcher

Figure as a very worst case, after subtracting INPS from your 27,000 gross income, that 4,800 euro would be within your 0% tax bracket (i.e. excluded from taxable income).


----------



## cinzia88

Hi, BBCWatcher, that's very helpful (and hopeful). Forgive my ignorance, but the 0% is confusing to me. Is this like what we call a standard deduction in the US (I think it's about $6500 right now) that is immediately subtracted from your taxable income and then you pay taxes over and above that? I did read about something like that in my research but it was in old documents. Is it deducted from Social Security as well or do you pay the full amount of 31% on ALL of your income or only on the income after all your deductions? I'm getting to the end of this and starting to understand it much better. It is so different from France and the US. Thanks.


----------



## BBCWatcher

That's correct on both counts as I understand it.


----------



## Bevdeforges

It's actually very much like the French tax system. Many of the European tax systems allow you to take most, if not all of your "social insurance" payments as deductions before you get to "taxable income," which is the starting point for income taxes. (That's how it works in France and Germany, at the very least.)

It's also true that "self-employment" is a whole different ball game in most of the EU. You can't just hang up an ad and go into your own business venture. Generally speaking there is some form of registration with the authorities - for social insurances and taxes at the very least. And different countries have different thresholds for VAT, which you would have to charge on your "consulting fees" if they exceed the threshold and/or your business form requires it.

Back in business school, they used to advise that you should never take a decision based solely on the tax implications. Maybe this is one of the reasons why.
Cheers,
Bev


----------



## cinzia88

Bevdeforges said:


> It's actually very much like the French tax system. Many of the European tax systems allow you to take most, if not all of your "social insurance" payments as deductions before you get to "taxable income," which is the starting point for income taxes. (That's how it works in France and Germany, at the very least.)
> 
> It's also true that "self-employment" is a whole different ball game in most of the EU. You can't just hang up an ad and go into your own business venture. Generally speaking there is some form of registration with the authorities - for social insurances and taxes at the very least. And different countries have different thresholds for VAT, which you would have to charge on your "consulting fees" if they exceed the threshold and/or your business form requires it.
> 
> Back in business school, they used to advise that you should never take a decision based solely on the tax implications. Maybe this is one of the reasons why.
> Cheers,
> Bev


Hi, Bev, I'm an auto-entrepreneur in France so I've been operating under that scheme and haven't really had to worry about the income tax since it's pretty straight forward. The VAT may be the killer for me in Italy. My American companies/clients are not going to pay me 20% more so I can live in Europe, so effectively that would add another 20% tax onto my income taxes, bringing me up to 55% again. The bottom line is I have to have enough money to live on as a single with few assets and 45% of 26,000 euros is not enough to have quality of life. My only real option is to return to France in two years under the A-E, or just give it up and come for summers to see my stepchildren. I tend to be an optimist and an idealist, but when when it comes to money, I tend to be a realistic. Very discouraging.


----------



## NickZ

If you're "exporting" you shouldn't be charging VAT to the USA. With in the EU you're supposed to charge the local rate but they keep changing the rules .


----------



## Bevdeforges

The issue here is that cinzia88 is being paid for "consulting services" - which usually means that you pay your VAT based on where the services are actually performed, not where your customer is located. However, you should check first to find out what the threshold for paying VAT is in Italy. (In France the threshold is the same as the limit on AE turnover - which is why AE's don't have to pay VAT.)

OTOH, if you're charging VAT in a regular sort of business, you get to deduct any and all VAT you pay on your expenses for your business. So it's not a full 20% of your revenues, but 20% reduced by anything you pay (fuel for your car, pencils, computer supplies, etc.).

Doesn't Italy have some sort of "small business" set up that you might be able to take advantage of? 
Cheers,
Bev


----------



## cinzia88

Bevdeforges said:


> The issue here is that cinzia88 is being paid for "consulting services" - which usually means that you pay your VAT based on where the services are actually performed, not where your customer is located. However, you should check first to find out what the threshold for paying VAT is in Italy. (In France the threshold is the same as the limit on AE turnover - which is why AE's don't have to pay VAT.)
> 
> OTOH, if you're charging VAT in a regular sort of business, you get to deduct any and all VAT you pay on your expenses for your business. So it's not a full 20% of your revenues, but 20% reduced by anything you pay (fuel for your car, pencils, computer supplies, etc.).
> 
> Doesn't Italy have some sort of "small business" set up that you might be able to take advantage of?
> Cheers,
> Bev



Hi, Bev, I have very few business expenses (at least ones that Italy would allow from the list I've seen) so it wouldn't reduce my VAT much. I don't know if Italy has a type of A-E. So far, all my hours of research (many!) have not come up with anything. That's why I came to the forum to try to get all of the many documents I've found (some dating back 10 years to 2015) to make some sense. There's a lot of contradictory info out there. Thanks for your help.


----------



## Bevdeforges

There's lots of contradictory information out there and you're looking into an area that seems to be changing pretty quickly, which makes it really difficult to keep up.
Cheers,
Bev


----------



## NickZ

Bevdeforges said:


> Doesn't Italy have some sort of "small business" set up that you might be able to take advantage of?
> Cheers,
> Bev


Agenzia delle Entrate - Regime di vantaggio - Requisiti

Max of €30K of annual revenues.

Don't charge VAT but you can't deduct VAT either.


----------



## cinzia88

Hi, Did I understand your response correctly? I DO pay 31% on ALL of my income? I don't get to use any deductions for that? Thanks again. I think I've got the info straight now and you have been very helpful.


----------



## NickZ

No you lose the ability to deduct VAT on purchases but I'm guessing you aren't buying a great deal of goods.

https://www.fiscoetasse.com/approfo...-2015-presenta-il-nuovo-regime-agevolato.html

That provides more info on the changes for this year. You don't have itemized business expenses. But a flat percentage based on the type of business. My guess is you'd fall into the 78% class. So you'd get 22% of revenue in deductions.

Then you'd have your personal non business deductions.

But you really should consult with somebody who is following this stuff.


----------



## cinzia88

NickZ said:


> No you lose the ability to deduct VAT on purchases but I'm guessing you aren't buying a great deal of goods.
> 
> https://www.fiscoetasse.com/approfo...-2015-presenta-il-nuovo-regime-agevolato.html
> 
> That provides more info on the changes for this year. You don't have itemized business expenses. But a flat percentage based on the type of business. My guess is you'd fall into the 78% class. So you'd get 22% of revenue in deductions.
> 
> Then you'd have your personal non business deductions.
> 
> But you really should consult with somebody who is following this stuff.


Thank you. That was very helpful. I'll look at the link more closely. The small business status, Vantaggio, looks very interesting. There are some confusing statements in it but it's because my Italian isn't up to the level it should be anymore after being away from it or 10 years. And I hadnt found the new flat rate deductions in my research so that was very helpful too. Much much gratitude.


----------



## cinzia88

Just found this which contradicts many of the other documents and research I've done. It sounds like there's no VAT with this new plan: 

Italy – Self-employment tax system revamped
27 March 2015


Following Parliamentary approval, a modified tax regime for the self-employed has been introduced in Italy, affective as of 1 January 2015, according to Capital Consulting; a global provider of employment and payment solutions.

Previously, when registered as self-employed, or a sole trader, Italian income tax was fixed at 5% and based on an individual’s business turnover up to a maximum €30,000.

Following the approval of the Stability (Budget) Law; for self-employed workers with an annual turnover of between €15,000 and €40,000 the new 15% fixed tax regime is applicable. From the beginning of 2015, this tax substitutes individual income tax; as well as VAT and regional taxes on production.

The taxable amount is predetermined by the local authorities and coefficients of expected profitability are applicable depending on the sector of activity.

With a view to encouraging new business to set up, a fixed tax rate of 5% of the annual turnover is applicable to start-ups in their first three years of existence and to self-employed individuals of not more than 35 years of age.

For non-local workers, the new tax regime of 15% will only be applicable if at least 75% of the worker’s total annual income is generated in Italy and if the worker resides in another EU country, which has agreed to exchange tax information.

As far as the social security contributions are concerned, these are currently set at around 27% and will increase to 33% by 2018.

Following the protest around the spike of social security charges and lower benefits offered compared to the previous tax regime, the Italian Prime Minister Matteo Renzi announced in early February that his government will work to improve the new self-employed tax system and confirmed his willingness to change the current terms.

- See more at: Italy – Self-employment tax system revamped


----------

