Value Added Tax
The sale of goods, services and imports is subjects to IVA (Imposta sul Valore Aggiunto comparable to VAT, Value Added Tax), except in the case of derogations regarding certain activities and operations.
The ordinary rate is 20 per cent and is applied to all operations (except those which are exempt or non-taxable), unless otherwise indicated in the two tables of reduced rates (four and ten per cent). IVA is usually liquidated and payed monthly. By December 27 each year, a IVA deposit is payable of 88 per cent of the total due for the final period.
IVA is a tax applied by most business to turnover in countries in the European community. The rate of tax varies from country to country, but ranges between 16% to 25%.
This tax is not intended to apply to foreign businesses. However at point of sale it is difficult for the supplier to ascertain whether the customer is a foreign business. Thus the tax has to be initially paid and then recovered.
Reduction of fiscal pressure and tax rate on Corporate tax
Following rapid reduction of the public deficit in the 1990s to ensure Italian entry to European Monetary Union, the fundamental drive of Italy´s fiscal policy has focused on the decrease of fiscal pressure. The lowering of corporate tax in particular, in order to foster an increase in internal demand and provide fresh resources for investment. The current fiscal pressure (tax revenues in relation to GDP after capital taxes) has therefore receded from 42.9% in 1999 to 41.3% in 2003. During the same period, corporate tax has decreased from 2.7% to 2.2% .
In this context, a profound reform of corporate tax criteria has been launched. From 2004, the IRPEG tax has been replaced by a new corporate tax, IRES, in an attempt to increase transparency and simplify corporate tax obligations. The corporate tax rate has decreased from 37% of 1999 to 33% in 2004.
Ires – A European-style Corporate Tax
The Italian corporate tax has taken a European turn. With effect from 2004, Italy has abandoned its previous taxation system introduced in the 1970s and established IRES, the new corporate tax as outlined in the tax reform. This is a radical change. Italy has chosen to follow the same route as other advanced countries, by using its taxation regime to support resident businesses in increasing their competitiveness.
The corporate tax rate is now reduced to a uniform 33%. Unlike before, company profits are now taxed rather than shareholders´ profits, and capital gains from participation in companies are no longer included in the taxable base and, consequently, taxed. Profits and losses can be offset both within Italian and international company groups by consolidation of the taxable income. There is a special form of consolidation for corporations with a limited number of non-controlling shareholders. The new IRES corporate tax (which substitutes IRPEG) is part of the overall tax reform approved by the Italian Parliament in 2003, with the foremost objectives of simplifying the tax system and bringing it into line with current developments in other countries.
The reform also includes provisions for the gradual abolishment of the IRAP, the regional business tax introduced in 1998. In 2003, an initial portion of its taxable base has already been eroded in the case of small businesses.
One of the other fundamental changes contained in the tax reform is the drastic reduction in the number of taxes to just five (personal income tax, corporate income tax, VAT, tax on services, excise duties), all consolidated in a single Tax Code.
Single 33% rate
IRES is applicable with a single rate of 33%. This brings to an end the previous system of the Dual income tax, which made the average tax rate actually collected different for every firm. The substitute taxation regime for capital gains on company reorganizations (mergers, de-mergers, transfer of assets, etc.) will no longer exist.
Partial exemption for dividends, full exemption within groups
With the 2004 Reform, Italy has abolished the ‘imputation’ system of taxation on corporate income, which considered the tax on companies only as an advance payment of the personal tax owed by shareholders upon receipt of dividends and which consequently involved a tax credit system associated with the distribution of profits. In line with the current developments in all European countries, Italy has now also opted for a partial exemption system for dividends, which becomes a full exemption within company groups. Thus, the IRES corporate tax is a final tax on the income derived by companies, eliminating the complicated system of tax credits and the related ‘baskets’.
Dividends distributed amongst the companies in a group taxed on the consolidated taxable income are completely exempt from tax. However, if the dividends are accruing to a different corporation, there is a 95% exemption since the costs related to managing the participation shares are totally deductible.
Dividends distributed to individuals are taxed differently according to the percentage of their shareholding (‘qualified or non-qualified’) and according to the context in which they are received (in their business capacity or outside of it). The exemption is 60% if the dividend is paid to an entrepreneur who holds the participation in a business capacity, or to any individual with a ‘qualified’ shareholding (i.e., greater than 2% of the voting rights or 5% of the share capital in the case of listed securities; or greater than 20% of voting rights or 25% of the share capital of non-listed securities). In all other cases (non-qualified shareholdings or shareholdings belonging to entrepreneurs but not associated with their business activity), instead of the partial exemption system, a final withholding tax at source on all the dividend applies, with a fixed rate of 12.5%, after which the dividend is excluded from income tax