Italy is changing the tax system: key points of the reform

Italy has initiated a large-scale transformation of its tax system. On March 16, 2023, the Council of Ministers approved a set of general principles and criteria for the forthcoming reform. This marks the most significant overhaul of Italy’s tax system in over 50 years.

Key points of the fiscal system transformation in Italy include:

• Comprehensive revision of traditional taxes such as IRES, VAT, and IRPEF.
• Reduction in the number of deductions.
• Elimination of criminal penalties for tax evasion due to objective reasons beyond the taxpayer’s control.

The expected outcome of the tax burden reduction is to stimulate economic growth and increase birth rates in the country.

The Italian government asserts that these changes will make the system more manageable and facilitate the fight against tax evasion, which, according to the latest data from the Treasury, amounted to €90 billion in 2020.

Income tax for individuals in Italy (Imposta sul Reddito delle Persone Fisiche):

The reforms envision a structural review of the taxation system for individuals. The Italian government aims to establish a unified range of fiscal benefits and equal tax burden, regardless of the category of income received.

Additionally, there are plans to reduce the number of tax brackets from 4 to 3. It is worth noting that Italy currently operates a progressive income tax scale for individuals.

Corporate tax in Italy (Imposta sul Reddito delle Società):

As part of the tax reform in Italy, the government plans to reduce the tax on corporate and organizational incomes from 24% to 15%. However, businesses can only avail of this benefit if they meet two conditions over two tax periods:

1. The income received (fully or partially) is directed towards business investments or hiring new personnel.
2. The profits are not distributed or allocated to activities unrelated to commercial operations.

VAT in Italy:

The Italian authorities seek to carry out significant transformations regarding VAT. Their plans include:

• Optimizing the number and sizes of tax rates.
• Revising the criteria for tax liability and exemptions.
• Modifying the deduction mechanism.
• Simplifying calculation and application rules for VAT payers.

Regional production tax in Italy (imposta regionale sulle attività produttive):

IRAP is a regional tax levied in Italy on enterprises engaged in production, trade, services, and other types of activities. The standard rate is 3.9%, but it may vary based on the region and the nature of the activity. IRAP is paid in addition to the corporate income tax (IRES).

During the reform, there are plans to completely replace this tax with IRES. By increasing the latter, Italian authorities aim to ensure sustained revenue for the state treasury and guarantee:

Additional Fixed Tax

One of the most significant innovations of the 2023 Italian reform is the introduction of a fixed tax rate of 15%, which is set to apply to all wage earners. Currently, this tax is only applicable to the following categories:

• Self-employed individuals
• Professionals such as lawyers, accountants, notaries, etc.
• Individuals engaged in artistic activities

This tax will only be levied on income exceeding the average citizen’s income level for the past 3 years but not exceeding a maximum limit of €40,000. The additional fixed tax will replace the higher standard IRPEF tax.

Combatting Tax Evasion in Italy

Italian authorities acknowledge substantial budget losses due to tax evasion. Therefore, the reform will significantly address this issue. The plans include:

• Simplifying the declaration mechanism;
• Reviewing taxpayer rights;
• Introducing tools such as global agreements with creditors and activating economic conflict resolution through negotiations;
• Implementing motivational instruments for taxpayers who admit their guilt and show remorse in their actions;
• Actively digitizing processes at all levels and stages of taxation, including customs and the judicial system.

Regarding the revision of criminal tax penalties, special attention will be given to cases where the taxpayer is unable to fulfill tax obligations due to reasons beyond their control.

Reduction in the Number of Tax Deductions

To ensure the successful implementation of the reform, Italian authorities need to find necessary resources. To achieve this, there are plans to significantly reduce the number of tax deductions, of which there are approximately 600 in Italy. This measure aims to provide annual budget revenues of €5 billion to €10 billion.

The availability of deductions will be reduced based on an increase in the taxpayer’s income. Authorities also intend to introduce a one-time payment for citizens with low-income levels.

Empowering Municipalities

The proposed law envisions expanding the powers of local authorities in making decisions regarding taxation. Furthermore, municipalities will receive more financial autonomy and the freedom to manage their revenues.

New Fuel Excise Taxes

The proposed law supports producers of renewable energy actively. The authorities seek to increase the share of electricity, methane gas, or natural gas produced from biomass or other renewable resources. Certificates will be issued to provide benefits or exemptions from excise taxes.

Additionally, excise duties on natural gas, electricity, and renewable energy sources will be revised based on the actual cost of sold products and invoices.

New Taxes on Capital Gains

The 2023 tax reform includes a reorganization of capital and financial income taxes. These are planned to be combined into a single category of taxable income based on cash and compensatory principles.

Currently, Italy has a capital gains tax rate of 26% on any annual capital gain. After the implementation of the changes, taxpayers will only have such obligations during asset realization. Furthermore, taxation of the accumulated part of pensions will be canceled, and the mechanism for tax collection from pension funds will be revised.

It is essential to note that the tax reform in Italy will affect all aspects of life and business, including non-residents. After approval by the Council of Ministers, the enabling law project will be examined in a joint conference. The head of state will then submit the draft law to the chambers. From this point, the parliamentary process will start, expected to conclude in May, followed by the second phase of implementing the tax reform in Italy.

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