Get our post in your mailbox

Income Tax in Italy




Income Tax for Corporates

Italian corporate entities are subject to a corporate income tax, known as imposta sul reddito sulle società or IRES, and to a regional production tax, known as imposta regionale sulle attività produttive or IRAP.

The standard rates are as follows:
· 24% for IRES.
· 3.9% for IRAP.

Up to FY 2016, the IRES rate was 27.5%. Specific rules will apply for bank and financial entities.

The following different IRAP rates are applicable for certain entities:
· 3.80% for entities with a determined governmental exclusive right to provide services.
· 4.20% for banks and financial entities.
· 5.30% for insurance corporations.

Regions have the power to slightly increase or decrease IRAP rates.

General rules

IRES
The IRES taxable base is determined according to the worldwide taxation principle, which states that, regardless of the location/jurisdiction where the income is produced, to the extent that the income is legally attributable to an Italian resident entity, the income is taxed in Italy. IRES is charged on the total net income reported in the financial statements of the company as adjusted for specific tax rules. Non-resident companies are taxed only on Italian-source income.

IRAP
There are different methods of computation for the IRAP taxable base, depending on the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, cannot be taken into account when determining the IRAP taxable base.

For sales and manufacturing companies, the IRAP taxable base is broadly represented by the company’s gross margin in its financial statements. In addition to the non-deductible items mentioned above, interest income and expense and provisions for bad debts are excluded for the purposes of the IRAP taxable base.

For banks, the IRAP taxable base is broadly defined as follows:

· Intermediation margin reduced by 50% of dividends.
· 90% of amortisation costs relating to fixed tangible and intangible assets.
· 90% of other administrative expenses.
· Net value of adjustments and reassessments for bad debts.

Special rules apply to financial institutions, other than banks.

IRAP is levied on a regional basis, and regions are allowed to increase or decrease the standard IRAP rate up to 0.92%. Companies with facilities in different regions must allocate their overall taxable base to the different regions on the basis of the employment costs of personnel located at the various sites. Facilities become relevant to the calculation of IRAP if they have been established for more than three months. Italian companies with permanent establishments (PEs) abroad, as well as shipping companies qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on the income earned through these PEs.

The deduction of labour costs for IRAP purposes depends on the type of hiring contract. In particular:
· Full deduction for costs related to employees hired with an open-ended contract.
· Deduction limited to contributions for compulsory insurance against accidents (i.e. Istituto Nazionale Infortuni sul Lavoro or INAIL) for temporary employees.

Moreover, for the companies that have no employees, a tax credit equal to 10% of IRAP is recognised to be used to offset other tax liabilities.

Income Tax for an Individual

An individual is liable for tax on his income as an employee and on income as a self-employed person. Tax will be payable on income earned in Italy and overseas by an individual who meets the test of a "permanent resident" of Italy. A foreign resident who is employed in Italy pays tax only on income earned in Italy.

One of two tests must be passed to be considered an Italian resident: a life centered in Italy, or being registered in the Population Registry as living more than 183 days a year in Italy.

It is important to point out as regards taxable income from outside Italy, that a "tax credit" is granted for tax deducted outside Italy. In the case of income from a salary, the employer is obligated to deduct the amount of tax payable on a monthly basis.  A self-employed person must prepay income tax that will be offset on filing an annual return.
The advance payment is determined on the basis of the return made for the previous year.
In the event of a new business, the advance will be calculated on the basis of estimates made by the owner of the business. Certain payments are deductible from taxable income as detailed below.

Income Tax Rates 2017

Tax %
Tax Base (EUR)
23%
0-15,000
27%
15,001-28,000
38%
28,001-55,000
41%
55,001-75,000
43%
75,001 and above


In addition to the personal income tax, the regional tax is also due on the same taxable income and the percentage depends on the decision of the region in which the individual has his/her domicile at the date of 1 January. Generally the additional regional tax is charged at progressive rates between 0.7 percent and 3.33 percent.

In addition to the personal income tax, the municipal tax also is due on the same taxable income and the percentage depends on the decision of the Italian municipality in which the individual has his/her domicile at the date of 1 January. Generally, the additional municipal tax percentage ranges between 0 percent and 0.9 percent.

There is an advance payment for additional municipal income tax to be paid as a one-off payment together with the income tax balance due for the previous year in the amount of 30 percent of the tax due for the previous year.


Solidarity contribution

Beginning in FY 2011 and up to 31 December 2016, a solidarity contribution of 3% has been introduced. In particular, the new contribution applies to individuals who declare yearly total gross income higher than EUR 300,000 and the additional taxation is applicable only to the amount exceeding the said ceiling of EUR 300,000.

This contribution is deductible from the total taxable income of the same year.

The withholding tax agents will have to take into consideration the so called solidarity contribution of 3% in the year-end settlement, if it is paid by employees or collaborators.

For FY 2017, the solidarity contribution is no longer in force.

Capital Gains

For individuals and companies capital gains are generally added to the regular income.
· The rate of tax payable on capital gains interest and dividend from shareholding is 26% for non-qualifying shareholding of up to 25% in a unlisted company.
· For the purpose of calculating a capital gain, the gain is decreased in line with the rate of increase in inflation, from the date of purchase to the date of sale. In regard to capital gains in a corporation, identical relief is allowed at the rate of increase in the Index.
· Companies pay 24% tax on capital gains. In sale of participation, 95% is tax exempt, subject to certain conditions.

Interest Income

Generally, interest income is taxable. There are, however, very different taxation rules for financial instruments, according to the source of the interest. In particular, interest income from government bonds is subject to a final withholding tax of 12.5 percent.

Interest income and income from other securities issued by banks or companies listed on the stock exchange, are subject to a final withholding tax of 26 percent.

Interest on bank and postal current accounts and interest on bank and postal deposits are subject to a final withholding tax of 26 percent. Interest on foreign bank accounts can be subject to a 26 percent substitute tax via the income tax return.

Deductions from Income

The deductions for family dependents are allowed as deductions from gross tax due.

The basic deduction for a spouse with income of less than EUR 2,840.51 is EUR 800; however, this amount is reduced progressively for incomes up to EUR 15,000. For income between EUR 15,000 and EUR 40,000, the basic deduction is fixed at EUR 690. For incomes in excess of EUR 40,000, the EUR 690 deduction is progressively reduced down to zero for income exceeding EUR 80,000.

An additional deduction for a spouse is due (varies from EUR10 to EUR30) for income between EUR 29,000 and EUR 35,200.

Basic deduction for a child is EUR 950. This is increased by:
· EUR 200 for each child, where there are three or more children in the family.
· EUR 400 for each disabled child.

These amounts are decreased as income rises as follows.
· For an individual with one child, the deduction no longer applies at income of over EUR 95,000.
· For taxpayers with two children, the deduction is not available for income over EUR 110,000.
·  For three children, the deduction is not available for income over EUR 125,000.
·  For four children, the deduction is not available for income over EUR 140,000.
·  For five children, the deduction is not available for income over EUR 155,000.

A further deduction applies for individuals with four or more dependent children.
The deduction is equal to EUR 1,200, regardless to the amount of income.

These deductions are also available to non-residents; however, they will need to be able to prove the family relationship by means of a local family relationship certificate. According to the EU Law 2013 bis (Schumacker case), to qualify a non resident has to perform at least 75% of their work activity in Italy (at least 75%).

According to special rules, the following additional deductions from aggregate income are allowable.
· Alimony paid to a former spouse, excluding child support payments, for the amount established by the court.
· Social security and welfare contributions paid in accordance with legal requirements, even if paid abroad.
· Voluntary social security contributions paid in Italy up to the limit of EUR 5,164.57 and provided that further conditions are met.
· Mandatory social security contributions paid for household staff, babysitter, and elderly-care assistants up to EUR 1,549.37 per year.

A tax relief of up to a maximum of 19 percent of the following deducible expenses is allowed only to resident taxpayers.
· Medical expenses exceeding EUR 129.11 in any year, incurred by the taxpayer, his\her spouse, and other dependents, including those charged by specialists.
· Voluntary life insurance premiums and accident premiums, not exceeding EUR 1,291.14 provided that further conditions are met.
· Interest paid to a bank resident in the EU in connection with mortgage loans secured by property in Italy; up to a maximum of EUR 4,000 per year (if each spouse owns the property in common the deduction will be calculated in proportion to the ownership percentage).
· Interest paid to a bank resident in the EU in connection with agricultural loans up to the declared land income.
·  Funeral expenses up to a maximum of EUR 1.550,00.
· High school tuition and university fees, not in excess of the tuition fees payable to state schools and universities.
·  Expenses related to primary and secondary school up to a maximum of EUR 400,00.
·  Expense paid to a real estate agent, up to a maximum of EUR 1,000.
·  Grants for particular public objectives.

A National Income Tax Bonus is introduced in May 2015 for employment incomes that are not exceeding an annual gross salary EUR 24.000 (de minimus annual gross salary limit is EUR 8.000). The bonus is equal to EUR 80 per month andit is proportionally decreased for annual gross salaries between EUR 24.000 and EUR 26.000 €.




-------------------------------------------------------------------------------------------------

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.
Income Tax in China




When are tax returns due? That is, what is the tax return due date?
Monthly individual income tax returns are due by the 15th of the following month (but see discussion on compliance requirements).
Annual individual income tax returns are due by 31 March of the following year.
What is the tax year-end?
31 December.
What are the compliance requirements for tax returns in China?  

Monthly returns:

For employment income, employers must file individual income tax withholding returns on a monthly basis and settle the tax payments by the 15th day of the month following the date of receipt of income. In practice, the due dates may be extended in certain locations. The same monthly filing requirement and due date applies for individuals who receive employment income but have no withholding agent in China. Such individuals must file an individual income tax return on a self-declaration basis.

Annual returns:

Beginning calendar year 2006, individuals of China domicile and non-domiciles who were full-year resident in China during the calendar year with annual income exceeding RMB120,000 are required to file annual individual income tax returns on self-declaration basis. Individuals have the legal obligation to file even if taxes have been duly withheld and paid on a monthly basis such that there is no additional tax liability accrued on the annual return.
Individual Taxation:
Individuals who have a 'domicile or place of abode' in China are subject to individual income tax (IIT) on their worldwide income. Foreign individuals and residents of Hong Kong, Macau, and Taiwan, who are normally considered as non-China domiciled individuals, are taxed in accordance with their physical presence in China
An individual is taxed in China on one's income by category. China's IIT law groups personal income into 11 categories. Each income category has its own tax rate(s), allowable deduction, etc.

The 11 categories of income are:
·        Employment income (i.e. wages and salaries).
·        Income from the operation of sole proprietorship.
·        Income from the operation of a business on a contract or lease basis.
·        Payment for labour services.
·        Author's remuneration.
·        Royalties.
·        Interest, dividends, and profit distribution.
·        Rental income.
·        Income from transfer of property.
·        Incidental income.
Other taxable income as determined by the Ministry of Finance of the State Council.

Personal income tax rates:
Employment income tax rates

Calculation of IIT on monthly employment income for wages and salaries is based on progressive tax rates (see the table below) using the following formula:
(Monthly gross taxable income x Tax rate) - Quick deduction

Monthly taxable income (CNY) (1)
 Tax rate (%)
Quick deduction (CNY)
Grossed income
Net income 
0 - 1,500
0 - 1,455
3
0
Over 1,500 - 4,500

Over 1,455 - 4,155

10
105
Over 4,500 - 9,000
Over 4,155 - 7,755
20
555
Over 9,000 - 35,000

Over 7,755 - 27,255

25
1005
Over 35,000 - 55,000
Over 27,255 - 41,255
30
2755
Over 55,000 - 80,000
Over 41,255 - 57,505
35
5505
Over 80,000
Over 57,505
45
13505

Notes:
1. Monthly taxable income after deducting the monthly standard deduction (see the Deductions section for more information).
2.  Where an individual's income tax liability is borne by the employer, the tax liability is calculated on a grossed-up basis (i.e. tax on tax).

Business income tax rates

Income earned by individuals from privately-owned businesses, sole proprietorship enterprises, or partnerships is generally subject to IIT at progressive rates from 5% to 35%, as follows:

Annual taxable income (CNY)
Tax rate (%)
0 - 15,000
5
Over 15,000 - 30,000
10
Over 30,000 - 60,000
20
Over 60,000 - 100,000
30
Over 100,000
35

Tax rates for income derived from labour services

Labour service income is income derived from independent service activities such as design, medical practice, legal practice, consulting, etc. For income derived from labour services, IIT is calculated based on progressive tax rates ranging from 20% to 40%.
Monthly taxable labour service income (CNY)
Tax Rate(%)
0 - 20,000
20
Over 20,000 - 50,000
30
Over 50,000
40

Tax rates for other personal income

A flat rate of 20% is applied on the remaining categories of income, including royalties, incidental income, author's remuneration, rental income, interest income, dividends, and capital gains, unless specifically reduced by circulars issued by the SAT.


Taxes on Corporate Income:
Tax resident enterprises (TREs) are subject to corporate income tax (CIT) on their worldwide income. A non-TRE that has no establishment or place in China is taxed only on its China-source income. A non-TRE with an establishment or place in China shall pay CIT on income derived by such establishment or place from sources in China as well as income derived from outside China that effectively is connected with such establishment or place.
Under the CIT law, the standard tax rate is 25%.
A lower CIT rate is available for the following sectors/industries:

·        Qualified new/high tech enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a new/high tech enterprise.

·        Integrated circuit (IC) production enterprises with a total investment exceeding 8 billion renminbi (CNY), or that produce integrated circuits with a line-width of less than 0.25 micrometre, are eligible for a reduced CIT rate of 15%.

·        Key software production enterprises and IC design enterprises are eligible for a reduced CIT rate of 10%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a key software production enterprise or key IC design enterprise.

·        Qualified technology-advanced service enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a technology-advanced service enterprise.

·        From 1 January 2016 to 31 December 2017, qualified technology-advanced service enterprises in the 15 innovative service development pilot areas (e.g. Shanghai, Tianjin, Guangzhou, Shenzhen) are eligible for a reduced CIT rate of 15%. This incentive is only available to enterprises that are mainly engaging in the prescribed technical services, and an enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a technology-advanced service enterprise.

·        Enterprises established in the Qianhai Shenzhen-Hong Kong Modern Services Industry Cooperation Zone are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the zone.

·        Enterprises established in Zhuhai’s Hengqin New Area are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the area.

·        Enterprises established in the Pingtan Comprehensive Experimental Zone are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the zone.

·        For qualified small and thin-profit enterprises with annual taxable income of less than CNY 500,000, the CIT rate is reduced to 10% from 1 January 2017 to 31 December 2019.

·        From 1 January 2011 to 31 December 2020, encouraged enterprises in the Western Regions are eligible for a reduced preferential CIT rate of 15%.

Corporate Deductions:

Generally, an enterprise is allowed to deduct reasonable expenditures that actually have been incurred and are related to the generation of income.


Depreciation of fixed assets

Fixed assets with useful lives of more than 12 months must be capitalised and depreciated in accordance with the CIT regulations. Generally, depreciation is calculated by the straight-line method. Shorter tax depreciation life or accelerated depreciation may be allowed due to advancement of technology or suffering from constant vibration or severe corrosion. Production-nature biological assets, such as livestock held for breeding and commercial timber, also have to be capitalised and depreciated using the straight-line method.
Under the straight-line method, the cost of an item, less its residual value, is depreciated over the useful life of the asset. Residual value should be reasonably determined based on the nature and usage of the asset. The CIT law provides minimum useful lives for the following assets:
Assets
Years
Buildings and structures
20
Aircraft, trains, vessels, machinery, mechanisms, and other production equipment
10
Appliances, tools, and furniture etc. related to production and business operations
5
Means of transport other than aircraft, trains, and vessels
4
Electronic equipment
3
Production-nature biological assets in the nature of forestry
10
Production-nature biological assets in the nature of livestock
3

Accelerated depreciation

Shorter tax depreciation life or accelerated depreciation is allowed for particular types of fixed assets (e.g. fixed assets that need to be replaced more frequently due to advancement of technology, fixed assets that suffer from constant vibration or severe corrosion). Certain fixed assets acquired on or after 1 January 2014 by companies in certain specific industries may be expensed-off in one lump sum in the year of acquisition or be depreciated over a shorter appreciation life or under an accelerated depreciation method.
Where a shorter depreciation period method is applied, the minimum depreciation period cannot be less than 60% of the minimum depreciation period as prescribed in the CIT Law; where an accelerated depreciation method is applied, the double-declining-balance method or sum-of-years-digits method can be used.

Amortisation of intangibles and goodwill

A deduction is allowed for amortisation of intangible assets, such as, but not limited to, patents, trademarks, copyrights, and land use rights. Generally, intangible assets have to be amortised over a period of not less than ten years. For an intangible asset obtained through capital contribution or assignment, it can be amortised according to the useful life prescribed in the laws or agreed in the contracts, if any. However, acquired goodwill is not deductible until the invested enterprise is entirely transferred or liquidated.

Organisational and start-up expenses

Organisational and start-up expenses are tax deductible fully in the first year of operation.

Research and development (R&D) expense

For R&D expenses incurred for new technology, new products, or new craftsmanship, an extra 50% of the actual expenses incurred are also tax-deductible as an incentive.
From 1 January 2017 to 31 December 2019, the extra 50% deduction is increased to 75% for qualified small and medium-sized technology enterprises.


Asset loss

Asset loss (including bad debt loss) may be deductible in the tax year during which such loss is incurred, provided that supporting documents are submitted to and accepted by the in-charge tax bureau before annual income tax reconciliation filing.

Interest expenses

Interest on loans generally is tax-deductible. For interest expenses on borrowings from non-financial institutions by a non-financial institution, the portion that does not exceed the commercial rate is deductible. The tax deduction of interest paid to related parties is subject to the thin capitalisation rule under the CIT law.

Reserves and provisions

Provisions for asset impairment reserves (e.g. bad debt provisions) and risk reserves generally are not tax-deductible unless otherwise prescribed in the tax rules. Financial institutions and insurance companies may deduct certain provisions and reserves subject to the caps specified in the relevant tax circulars.

Contingent liabilities

The CIT law does not specifically address the deductibility of contingent liabilities. According to the general principle of the CIT law, contingent liabilities are liabilities that an enterprise has not actually incurred and thus shall not be tax-deductible.

Charitable donations

Charitable donations are tax-deductible at up to 12% of the annual accounting profit. Non-charitable donations, as well as sponsorship expenditures that are non-advertising and non-charitable in nature, are not deductible.

Wages and staff welfare expenses

Reasonable wages and salaries of employees incurred by an enterprise are tax-deductible. Directors’ fees are also tax-deductible. As an incentive to encourage the hiring of handicapped people, 200% of the actual salary expenses paid to handicapped staff are deductible.

Basic social security contributions, including basic pension insurance, basic medical insurance, unemployment insurance, injury insurance, maternity insurance, and housing funds, that are made by an enterprise in accordance with the scope and criteria as prescribed by the state or provincial governments are deductible.

Commercial insurance premiums paid for investors or employees shall not be tax-deductible unless it is paid for safety insurance for workers conducting special types of work.
Staff welfare expenses, labour union fees, and staff education expenses are tax-deductible at up to 14%, 2%, and 2.5% of the total salary expenses, respectively. For qualified enterprises, the cap for tax-deductible staff education expenses is increased to 8% of the total salary expenses.



Entertainment expenses

Entertainment expenses are tax-deductible up to the lesser of 60% of the costs actually incurred and 0.5% of the sales or business income of that year. The excess amount must not be carried forward to and deducted in the following tax years.

Advertising expenses and business promotion expenses

Advertising expenses and business promotion expenses are deductible at up to 15% (30% for certain enterprises in the cosmetics, medicine, and beverage industries) of the sales (business) income of that year unless otherwise prescribed in the tax regulations. Any excess amount is allowed to be carried forward and deductible in the following tax years. Advertising expenses and business promotion expenses incurred by the tobacco industry are entirely not tax-deductible.

Fines and penalties

Fines, penalties, and losses arising from confiscation of property are not deductible for CIT purposes.

Taxes

CIT payments and surcharges that are imposed on overdue taxes are not deductible for CIT purposes.

Net operating losses

Tax losses can be carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted.

Payments to affiliates

Management fees for stewardship are not deductible, but services fees paid for genuine services provided by affiliates in China or overseas and charged at arm’s length should be deductible. Other payments to affiliates, such as royalties, are also tax-deductible, provided that the charges are at arm’s length.



-------------------------------------------------------------------------------------------------

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

This blog is Created by CA Anil Kumar Jain.