Italy payroll and tax overview.

Italy is one of the largest countries in the Mediterranean, and the fourth-largest in the EU by population. While Italy was historically the heart of the Roman Empire, today it is one of Europe’s most important business destinations and boasts the continent’s third-highest GDP - which reached over $1.85 trillion in 2016. Surrounded by ocean on three sides, Italy’s northern land borders are shared with France, Switzerland, Austria and Slovenia, and the country has developed historic trade connections to the rest of Europe. Considered one of the world’s most industrialised nations, Italy has a mixed economy which draws on a diversity of industries including manufacturing, automobile, fashion, and agriculture. While home to fewer global multinational businesses than other comparably-sized countries, Italy does have a higher number of SMEs, which has lent its industrial landscape a reputation for specialised, and sometimes niche, products - including a variety of luxury items. Part of the G7, NATO and the OECD, Italy plays a prominent role in regional and international politics, offers a high standard of living, and is an extremely popular tourist destination. Italy was ranked 46 on the World Bank’s Ease of Doing Business Survey 2018.

Why invest in Italy?

Investors interested in Italy should consider the following factors:

• Economic prosperity: As one of the EU’s largest economies, Italy promises a variety of lucrative business opportunities, and a wealthy population of over 60 million. With a per capita GDP of $36,000, the average Italian household has a high amount of disposable income.
• Manufacturing and trade: Italy is one of the world’s most prolific and competent manufacturing nations - and is actually the 2nd-largest manufacturing economy in Europe. Italy has a trade surplus of over €90 billion - the 5th largest in the G20 - and exports goods with a reputation for quality and craftsmanship.
• Tax incentives: Italy’s government has introduced tax incentives to stimulate competition across industries. Investments may receive tax credits ranging from 15%-50% (depending on certain factors) while investments in technical and science ventures may be eligible for further financial incentives.
• Strategic hub: Italy’s geographical position offers advantageous trade links with continental Europe and its 500 million consumers, while its proximity to the Mediterranean Sea delivers useful shipping links to North Africa and the Middle East, and a further 270 million consumers.
• Labour force: Italian employees are skilled and hard-working. Italy has over 20 universities ranked amongst the top 500 institutions in the world, and produces around 300,000 graduates per year.

Foreign Direct Investment in Italy

There are a wide range of investment opportunities available in Italy, with incentives provided at European, National and Regional levels. In most cases foreign and local investors are treated equally and are both eligible for investment incentives.

The European Regional Development Fund (ERDF) provides monetary assistance to safeguard sustainable jobs and the European Social Fund (ESF) provides monetary assistance to encourage enterprise and job creation.

Central and Regional Government Incentives include:

• Contratto di Programma which provides investors with large scale industry incentives.
• Localisation agreements which provide Foreign Investors with Financial, Administrative and Procedural support.
• The Nation Programme for Research and Competitiveness which aims to support investors interested in research, innovation and business development.
• Grants and Subsidised loans for SMEs (Sistema Monetario Europeo).

Registering a Company and Establishing an Entity in Italy

To process payroll in Italy, a foreign company needs to be registered with the following Italian Authorities, before hiring employees and starting any activity

• INPS (Social Security),
• INAIL (Labour Insurance)
• Provincia (Labour Office)

These obligations are both due with a permanent establishment or a simple social security representative office.

In the event of a permanent establishment (PE), there will be additional potential tax implications for the company (corporate taxation) and the employees (the company will be obliged to perform the role of the tax-withholding agent). If the company has a stable presence in Italy the nature of the activity conducted as well as the level of autonomy and responsibility of the people involved in the activity may trigger some tax implications for the company.

A preliminary tax analysis is suggested to confirm if there is an Italian Permanent Establishment (PE) in Italy in order to set the right structure for carrying out the business in Italy. In fact, if from the analysis it arises that your Company is not putting in place any PE, a suitable solution could be the domiciliation of a Social Security Representative (SSR) in Italy in order to comply relevant domestic duties via domestic payroll. The Legal Representative of the mother Company, as well as the company needs to be fiscally domiciled in Italy in order to receive a Company Identification Number (so called “codice fiscale”).

The company will need to decide if they wish to set-up a PE or a legal entity and this may be based off the type of involvement and cost structure required Italy. This can be a branch (with an Italian VAT code) or a limited liability company (SRL or SPA).

The main types of entity in Italy are:

• Partnerships (società di persone): Assets and Liabilities are only partially segregated from the assets and liabilities of their members. There are 3 types of partnerships available; Simple Partnership (Società Semplice), General Partnership (Società in Nome Collettivo), or Limited Partnership (Società In Accomandita Semplice).
• Companies (società di capitali): assets and liabilities are completely segregated. There are 3 types of companies: Stock Companies (società per azioni or SpA); limited liability companies (società a responsabilità limitata or Srl) and partnerships limited

A company must be registered to:

• The Tax Agency (Agenzia delle Entrate): an Italian company tax code is needed; the legal representative of the Italian entity should also have a tax code. Registration could take up to 2 weeks.
• The Social Security Body (Istituto Nazionale Previdenza Sociale): the data required for registration is the same as the Tax Agency plus core business information. This should be completed within the first working month of the first employee.
• Insurance Against Accidents at Work (mandatory) (Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro): The same data as above is required, as well as the line of work (to define risks). This should be completed within the first working day of the first employee.
• The Employment Agency (Provincia): This is to allow communication regarding any new starts or leavers. This should be done the day before the first working day of the first employee.

Business Banking in Italy

It is mandatory to make F24 form payments, (which cover social contribution, insurance contribution and taxes) to the authorities from an in-country bank account. All other payments can be made from anywhere.

Banks are open Monday to Friday to the public from 8:30am to 13:00 pm, and for 1 hour in the afternoon, between 3:00pm to 4.00pm. On the working-days before the public holidays they are open only from 8:30am to 13:00 pm.

The RiBa (Ricevuta Bancaria) is a commonly used Italian electronic bank draft. It includes a bank receipt which is issued by the creditor on the basis of an invoice and submitted to the debtor for approval. All RiBas are processed electronically and the use of cheques is in decline but they remain an important means of business payment.

The use of IBAN is very common for bank transfers.

Working Week in Italy

The working week in Italy is usually Monday to Friday and weekly working hours are normally stated by the NCA.

Basic Facts about Italy

Italy is located at the heart of the Mediterranean, and is one of Europe’s most influential and historic nations. Early civilisation in the territory which became Italy saw the rise of Phoenician, Carthaginian, Etruscan, Celtic, and Greek settlements. The ‘Latin’ tribe eventually established the kingdom of Rome in central Italy which eventually grew into the dominant continental power known as the Roman Empire. The influence of the Roman Empire shaped the modern world through legal, political, economic and religious ideologies - which endure today. 21st century Italy is a modern parliamentary republic with a high standard of living and a significant political presence on the world stage. Italy’s interior environments are varied and include northern alpine regions, lush central grasslands and farmland, and stretches of picturesque coastline. Italy’s urban centres draw millions of tourists from across the world, who arrive to enjoy the country’s many historical and cultural attractions including classical artwork, sculptures and architecture - and, of course, Vatican City, the epicentre of the Catholic religion.

General Information

Population: 60.6 million (World Bank, 2016)

Capital: Rome

GDP (2011): USD 2,05 trillion

Main Industries: Agriculture, Manufacturing, Services

Official Language: Italian

Monetary Unit: 1 euro = 100 cents

Internet domain: .it

International Dialling Code: +39

Income tax in Italy is collected at a progressive rate. In 2016, that rate ranged from 23%-43% - plus additional amounts of regional and municipal tax. Residency status is relevant to the amount of income tax paid: tax residents (those living or spending more than 183 days in Italy) pay tax on income earned domestically and worldwide, while non-residents pay only on income earned within Italy. Italy operates a social security system which includes sick leave, maternity and paternity leave, disability benefit, unemployment benefits, and pension funding. Social security contribution rates vary by category of employee and seniority.

All companies must have:

1. A tax code
2. An employment agency access code
3. An INAIL code
4. An INPS code

The Tax Year usually runs from 1st January to 31st December. Companies may however choose a different fiscal year.

In Italy, taxable income is subject to Personal Income Tax (IRPEF). Furthermore, a Regional Tax and a Municipal Tax are applicable, which vary according to the Regional and Municipal authorities.

Further information is available on the Government Websites:

• Italy Treasury
• Ministry of Finance
• Italy Tax Department

Income Tax in Italy

The Company Identification Number (“codice fiscale”) is required for any operation involving local authorities.

For companies without an in-country presence: The in-country payroll office may obtain the company tax code number on behalf of the company by obtaining Italian Personal Fiscal Code and the company code. It normally takes 15 business days to process and the legal representative will be required to sign the necessary documents.

Any delays in the process will impact the implementation for a new employee as no employees can commence employment before this process is successfully completed.

A tax advisor is required to support the clients in setting up an Italian Branch, a Capital Company or a Subsidiary. They must obtain a VAT and Fiscal Code by requesting it from the local VAT Office. Income Tax Deductions must be paid to the Tax Office (Agenzia Entrate) before the 16th of the following month.

Income Tax withheld to the employee must be paid to the Tax Office (Agenzia Entrate) before the 16th of the following month.

Social Security in Italy

Social security contributions in Italy are made by both employer and employee, and amount to around 40% of salary. Like income tax, categories of employment and seniority affect social security payments but general contribution rates are apportioned as follows:

• Employers - around 30%
• Employee - around 10%

The Social Security body is named INPS (Istituto Nazionale Previdenza Sociale). A company must register with the Labor Office, the Social Security Institute and the Insurance Institute, all of which are public authorities. The core business of the company will define the “class of activity” to determine the contribution rate.

The Legal Representative of the company is required to sign the relevant documents which are then delivered to the relevant Institutions by the In-Country Payroll at the agreed schedule.

The pre-agreed schedule dates for the process:

• Insurance Institute (INAIL): Registration must be completed no later than the first day of employment.
• Social Security Institute Registration: By the 16th of the month after commencing the employment.
• Labor Office Registration: Must be completed at least 1 day prior to the start date of employment.

Penalties: In the cases of delay, fines and interest are due to the respective authorities.

Once a contract of employment has been signed, new employees in Italy should be inducted onto company payroll and social security. The employee set-up process involves several steps and requires a variety of documents, materials, and procedures, including:

• A completed New Employee form – written working contract signed by the employer and the employee.
• On the day before the start date it is mandatory to send a communication (called COB) to the Labour Office. To do this, the employer must be enrolled with Centro per l’Impiego.
• The employee is required to produce a complete list of personal data, including Address, Place of Birth, Fiscal Code, Family Status (WifeHusband Occupational Status, Age of Children), Date of Employment, and Former Employment Income from the same Year.
• Appropriate forms (TFR - Tax Deduction Form) are given to the employee to collect information

Failure to meet the compliance with the labour office will result in a penalty per employee. Each labour office per province has their own website where this form must be submitted and this information is forwarded to INAIL and INPS by the Labour Office.

Collective agreements provide probationary periods, ranging from a few days to 6 calendar months, during which both parties may terminate the employment without notice.

The documentation required from new Expat employees includes the same data as above (date and place of birth, address in Italy, Italian tax code). An employment contract and an Italian Tax code are also required as well as, depending on where the Expat is from, a residency permit.

For an Expat new employee, the following information must also be provided: -

• Salary and Contractual Information
• Secondment Letter
• Residency permit for all Non-EU nationals
• A1 form (if applicable)

The deadline for new Expat employees for registration with the authorities is 1 day before the start date.

Please note that for expats who work in Italy, a new requirement in addition to the communication to the labour office has been introduced via the online Cliclavoro website:

https://www.cliclavoro.gov.it/

Leavers in Italy

Since March 2016, voluntary redundancy and consensual resolutions in Italy have been processed by an electronic submission. Appropriate forms are available on the website of the Ministry of Labour and automatically sent to the competent territorial directorate of the Labour Authority, and the employer.

In addition, the online process, an employee termination must also be communicated to the Italian Labour Office. Under the previous system, employers had to receive an employee’s resignation and provide the online communication to the Labour Office within 5 days of the termination.

If an employee fills in their termination form personally, they are required to use both the PIN CODE received from National Social Insurance Agency (INPS) and the additional security user information from the “CLICLAVORO” web portal. Otherwise, employees can ask for the support of their trade unions offices to carry out their resignation. In any case, the online form is identified with a code and the date of transmission.

Employees have 7 days from the day of request to withdraw the notice given.

Payroll in Italy

In Italy, payroll involves registration with the Labour Office, Social Security Institute, and the Insurance Institute - each process involving its own deadline. Although there are no laws controlling how frequently employees should be paid in Italy, regulations set by unions and collective agreements generally require a monthly payment.

Payroll processing in Italy imposes withholding obligations on employers during each pay cycle. Broadly, employees must pay income tax (23% - 43%), and social security (around 10%) to the tax authority, and employers must withhold these contributions at source. Employers are also responsible for withholding local taxes, which could range from between 0.9% - 2%.

Payroll regulations in Italy state that employees must be provided with a payslip - although it is acceptable to do so electronically. Payroll reports must be kept for at least 5 years.

Understanding the payroll process in Italy can be daunting for foreign businesses, but it is possible for employers to engage the services of a global payroll provider to help with payroll implementation - and to ensure their system meets the relevant legal and compliance requirements. Global payroll solutions will take into account both the state-level taxation, and the local, municipal taxation applicable to employee wages.