Italy offers significant economic advantages for those who want to start their own business. The first step is to decide on an appropriate legal structure for the business. This is important because each structure has different tax implications. Smaller businesses will need to consider whether to make use of regime forfettario (flat-rate scheme) – a key tax incentive for those starting out in business. 

Choice of legal form

Similar to the position in the UK, those wishing to start their business in Italy can choose between the following structures: 

• Sole trader (ditta individuale): the profits are taxed as the owner’s personal income. 
• Partnership: income is attributed to the partners according to their interest in the partnership and is taxed as personal income. There are two types of partnership:
• a general partnership (società in nome collettivo (SNC)). The partners are all liable without limitation; and
• a limited partnership (società in accomandita semplice (SAS)). There are two types of partner: a general partner to whom the administration of the company is devolved, and a limited partner who acts solely as a capital partner and who is not allowed to manage the company. The two categories of partners have different liabilities: while the general partner is liable without limit for the debts of the company, the limited partner is only liable for the capital contributed to the company.
• Company: income is taxed at the corporate level, and distributed profits are further taxed at the personal level of the shareholders according to their capital participation. There are two types of company: 
• a limited liability company (societa a responsabilita limitata (SRL)) – for the SRL, the share capital can be as low as €1 and there is no obligation, under certain amounts, to appoint a board of auditors; and 
• a public limited company (società per azioni (SPA)) – for the SPA, the minimum capital is €50,000 and there is an obligation to appoint a board of auditors and an auditor. 

As with a limited company in the UK, liability is limited to the amount of share capital subscribed.

Each structure is taxed differently and has different tax obligations. 

The main taxes

The main taxes to be aware of are: 

• The personal income tax (imposta sui redditi delle persone fisiche (IRPEF)). This applies to the sole trader, to the profits allocated to the partners of a partnership and to funds paid to directors and shareholders by companies. The company must withhold tax at the rate of 26% from dividends paid to shareholders.
• The corporate income tax (imposta sul reddito sulle società (IRES)), applying to the income of companies. The current rate is 24%.
• The regional tax on productive activities (imposta regionale sulle attività produttive (IRAP)), which applies to all types of businesses as long as they have an autonomous structure. It is generally payable by partnerships, companies and sole traders that employ employees. It is applied to the net production value of the business. The rate varies depending on the region. The ordinary rate, which can be increased by each Italian region, is 3.9%.

VAT (imposta sul valore aggiunto) has the same functionality as in the UK. In Italy, however, all businesses must have a VAT number regardless of turnover. The standard rate is 22%, with reduced rates for certain goods (eg, 10% for food and construction; 5% for aromatic plants; 4% for basic necessities). The tax does not apply to intra-EU and/or extra-EU commercial transactions.

Businesses are obliged to pay social security contributions in respect of their employees to the National Social Security Institute (Instituto Nazionale Previdenza Sociale (INPS)). Sole traders and partners may also have to pay contributions on their own behalf. 

Flat-rate scheme

Individuals with business revenues of €85,000 or less per year may opt to use the flat-rate scheme. The flat-rate scheme replaces the liability to some other taxes, including VAT, personal income tax and the regional tax on productive activities. This can reduce the person’s overall tax bill and make it easier for them to comply with their tax obligations. 

Under the flat-rate scheme, tax is calculated at the rate of 15% on a figure for income arrived at by applying a profitability percentage to turnover. That percentage varies according to the type of activity carried on. Importantly, the rate of tax is reduced to 5% for the first five years in which the business is carried on. A number of conditions must be met in order to use the flat-rate scheme, and there are some exclusions from the scheme. It is particularly suitable for professionals, freelancers and small businesses.

Accounting and tax declaration obligations

Businesses must keep accurate accounts consisting of VAT registers of invoices issued, purchase invoices and receipts. Accounting records must be numbered consecutively and must be kept until the end of the assessment period (fifth year following the submission of the tax return).

In addition to the obligation to keep accounting records, companies are subject to the obligation to file financial statements with the commercial register of the province in which the company has its registered office.

Every business entity in Italy must file an annual VAT return and four quarterly VAT settlements, as well as the intrastat form if it carries out transactions with EU countries.

Finally, a tax return must be submitted so that tax may be calculated on the business’s taxable income. 

Diligence pays

Setting up a business in Italy requires a thorough understanding of the tax system and related obligations in order to avoid penalties, to ensure that you comply with all regulations and that you take advantage of any available concessions.

Non-tax benefits of starting a business in Italy include that Italy is the third biggest economy in Europe, has excellent connections and infrastructure and is close to markets in Africa. 

Andrea Matera, ACA, Owner of Studio Andrea Matera in Genova and Rapallo, Italy. Previous articles in the ‘lowdown’ series considered the tax rules that apply where an individual becomes resident in Italy and buys property in Italy.