If you are planning to establish or acquire a company in Italy, it is essential to analyze the tax regime applicable to corporations and partnerships in Italy.

Taxation of corporations

In Italy, the main types of corporations include the Limited Liability Company (Società a responsabilità limitata - S.r.l.) and the Joint-Stock Company (Società per Azioni - S.p.A.). Corporations in Italy are subject to Corporate Income Tax (Imposta sul Reddito delle Società - IRES). The corporate income tax rate is currently 24%. Additionally, Italian corporations are subject to the Regional Tax on Productive Activities (Imposta Regionale sulle Attività Produttive - IRAP). The IRAP rate is currently 3.90%, though it may vary depending on the region.

The IRES taxable base is determined starting from the company’s statutory profit or loss, adjusted with tax adjustments — increases and decreases — in compliance with Italian tax law.

For IRES purposes, business expenses such as personnel costs, rent, purchase of goods, service costs, depreciation of fixed assets, and interest expenses are generally deductible. However, some expenses, such as those for company cars, telecommunications, meals, and lodging, are subject to deductibility limits.

It is important to note that interest expenses are deductible only under specific conditions. Specifically, excess interest expenses (those exceeding interest income) are deductible only up to 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Tax losses incurred in the first three fiscal years can be carried forward indefinitely and fully offset against taxable income in future years. Tax losses generated starting from the fourth fiscal year can also be carried forward indefinitely; however, they can only offset up to 80% of taxable income in subsequent fiscal years.

Corporations also benefit from a partial tax exemption (participation exemption - PEX) for capital gains arising from the disposal of shares, provided certain conditions are met:

• the shares have been held for at least 12 months prior to disposal;
• the shares are classified as financial fixed assets in the company’s financial statements starting from the first year of acquisition;
• the company whose shares are being sold is not based in a tax haven;
• the company whose shares are being sold carries out a business activity.

The IRAP taxable base is generally determined as the difference between revenues and operating costs, excluding financial income and expenses. It is also worth noting that personnel costs for permanent employment contracts are usually deductible for IRAP purposes, while personnel costs for fixed-term contracts or other types of contracts (e.g., those for directors) are not deductible.

If an Italian corporation distributes dividends to an individual resident in Italy, these dividends are generally subject to a substitute tax of 26%.

On the other hand, if an Italian corporation distributes dividends to another Italian corporation, only 5% of the dividend amount is included in the taxable base of the recipient company, while the remaining 95% is exempt from taxation.

It is also worth mentioning that, if the requirements of the Parent-Subsidiary Directive (Directive 2011/96/EU) are met, a foreign resident company can receive dividends from an Italian company with full exemption from withholding tax or can request a refund of the Italian withholding taxes on dividends.

Similarly, a foreign company can benefit from full exemption from withholding tax or request a refund of taxes paid in Italy on interest and royalties, provided that the requirements of the so-called Interest and Royalties Directive (Directive 2003/49/EC) are met.

Taxation of Partnership companies

The main types of partnerships in Italy are the General Partnership (Società in Nome Collettivo - S.n.c.) and the Limited Partnership (Società in Accomandita Semplice - S.a.s.). In a general partnership, all partners are jointly and severally liable with their personal assets for the obligations of the partnership. In a limited partnership, there are general partners, who are jointly and severally liable, and limited partners, whose liability is limited to their contribution to the partnership’s capital.

Partnerships are subject to IRAP, which is calculated using criteria similar to those applied to corporations, as described above.

However, partnerships are not subject to IRES, as the taxable base is allocated transparently to the individual partners and taxed on their personal income tax returns. The determination of the taxable base follows criteria similar to those applied to corporations (described above). Unlike corporations, partnerships are not subject to the limitations on the deductibility of interest expenses.

Income allocated transparently to individual partners who are natural persons is subject to Personal Income Tax (Imposta sul Reddito delle Persone Fisiche - IRPEF). IRPEF is progressive, ranging from 23% to 43%, depending on the income bracket. Tax losses allocated transparently to individual partners can be offset against income of the same category; any excess losses can offset up to 80% of taxable income in subsequent years. Tax losses allocated transparently from the first three years can be carried forward indefinitely and used in full to offset taxable income in subsequent years.

If a partner of a partnership is a corporation, the income allocated transparently is subject to IRES at the 24% rate. It is important to note that if a corporation holds interests in multiple partnerships, tax losses allocated transparently from one partnership can only be offset against taxable income in subsequent years if they originate from the same partnership.

If you would like more information on the taxation of companies, businesses, and permanent establishments in Italy, please do not hesitate to contact us: we would be happy to assist you.