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WORKING IN ITALY

EXPLAINED: The pros and cons of Italy’s five percent flat tax for freelancers

Italy offers favourable tax rates to those who decide to work for themselves - but is it ever that simple? We weigh up the pros and cons of the flat-rate tax for new freelancers.

EXPLAINED: The pros and cons of Italy's five percent flat tax for freelancers
Italy's 'regime forfettario' flat tax rate is ideal for some - but not for everyone. Photo by Lucian Novosel on Unsplash

It’s an aspiration for many – move to Italy and work remotely, generating an income from wherever you like with just a laptop and a phone.

Or perhaps you have an entrepreneurial flair and want to try out a small business idea that will enable you to realise your living-in-Italy dreams.

Whichever way you decide to go freelance in Italy, you’ll need to carefully consider your paperwork and the best tax strategy for your circumstances. (Find out more about going self-employed in Italy here.)

One increasingly popular route is to work under the ‘regime forfettario’: an attractive flat-rate tax scheme for individuals and small businesses, introduced in 2015.

The idea was to create a financially desirable and more straightforward way to work for yourself, cutting down on Italian red tape as well as your tax bill.

READ ALSO: ‘Smart working’? Here’s what you need to know about going self-employed in Italy

This flat-rate tax scheme simplifies accounting and so, theoretically, frees you up to do more of your job and less of balancing the books. That means no counting receipts for how many pens you bought or calculating how many miles you drove to meetings to off-set your taxes.

The scheme hasn’t changed much in 2022 following this year’s Legge di Bilancio’ (Budget Law), rolling on most its requirements from last year.

Whether it’s right for you, however, will depend on various factors.

Let’s start with its advantages:

You pay less in taxes

This is the main attraction in lights – you keep more of what you earn and the taxman gets a smaller slice of your hard-earned pie.

In broad terms and depending on your situation, you could pay somewhere between just five and 15 percent tax on your earnings, regardless of what your working overheads are.

Tax rates are considerably lower under the regime forfettario. (Photo by Markus Spiske on Unsplash)

Compared to the standard personal income rates as an employee, known as ‘IRPEF’ (Imposta sui Redditi delle Persone Fisiche), as detailed by the Agenzia delle Entrate (Italy’s Inland Revenue Agency), this is an alluring tax rate.

The range of taxes you’d pay if you worked for a company fall between 23 percent to 43 percent of your gross earnings.

READ ALSO: Remote workers: What are your visa options when moving to Italy?

That difference in tax percentages is exactly what the government intended with this regime; to attract more individuals and small businesses to start their own commercial activity.

The lowest five percent tax rate is for new business activity and lasts for five years.

That means if you’re starting up as a freelancer in Italy, you’re granted this temptingly low flat-rate tax on your turnover as long as your self-employment isn’t an extension of a business you carried out previously.

After that, it goes up to 15 percent, which is still comparatively low to the standard Irpef income brackets.

Your job may be eligible for further beneficial tax rates

The tax you pay isn’t a simple blanket sum of five percent (or fifteen percent) of what you earn. Rather, it depends on the work you do. Taxable income will change depending on whether you’re working as a self-employed teacher or if you’re working in hospitality, for instance.

You determine your taxable income by applying what accountants call a ‘profitability coefficient’. 

Different professions have different tax considerations under this regime. Photo by Jason Goodman on Unsplash.

In simple terms, each professional group has a different ‘ATECO’ code (income code) and a corresponding percentage of what they earn that can be taxed.

READ ALSO: Q&A: What do we know so far about Italy’s digital nomad visa?

The table below is an abbreviated version of the existing ATECO codes. A teacher must pay tax on 78 percent of their gross earnings, but computer engineers have it better at 67 percent.

For a teacher, therefore, that means you’d pay 5 percent on 78 percent of your earnings. In other words, if you earned €30,000 per year, 78 percent of that is taxable.

If you run an e-commerce business, for example, only 40 percent of your earnings are subject to tax.

For a full list of ATECO codes, see here.

Example of some ATECO codes for working as self-employed in Italy. Photo: Accounting Bolla

However, in reality you’d be paying even less tax than that as your ‘INPS’ (‘Istituto nazionale della previdenza sociale’) contributions are deducted first.

These are social welfare contributions to cover you for events such as sick leave, pensions and maternity benefits and this tax regime doesn’t reduce the amount of contributions you pay.

For 2022, the calculation of INPS contributions in the flat-rate scheme varies according to the type of work activity you do. To get a vague idea of how much this will come to, the usual rate is 25.72 percent – it’s advised you speak to an accountant (commercialista) to find out how much you’d need to pay.

Then, your tax is calculated on your earnings minus this amount, meaning you pay even less in taxation.

It’s flexible and light on paperwork

Anything that cuts down on Italian bureaucracy is an undisputed advantage and this freelance regime offers exactly that.

To access the scheme, you need to obtain a ‘partita IVA’ (VAT number) and select ‘Regime Forfettario’ as your method of paying tax.

As noted, the flat-rate tax scheme makes the accounting side simpler and setting up as a freelancer under this regime is much more straightforward than other routes.

READ ALSO: Doing business in Italy: The essential etiquette you need to know

You don’t need to keep purchase receipts or track what you’ve bought for the company to off-set your taxes. That’s the whole point of this scheme: it’s a flat-rate tax with less red tape.

Not having to add up your petrol expenses or inputting the cost of paper clips into a spreadsheet might be incentive enough to encourage you to start up your own business in Italy.

You also don’t need to charge VAT on invoices, so that means you don’t need to complete an annual VAT return. What’s more, you have a competitive edge in the market as you won’t need to add VAT for your clients.

But of course you’ll need to be aware that the VAT exemption goes both ways. So, just as you don’t charge VAT, you can’t claim back the VAT you spend on IT equipment, stationery or any other business-related costs.

This is just one flip-side that might make you consider whether, in the end, this regime is for you.

Let’s take a look at the disadvantages of the scheme.

You can’t off-set your taxes

VAT aside, if you have a lot of business overheads, this regime might not turn out to be as financially viable as you hoped.

home working

Consider how much your overheads come to in determining whether this tax scheme is right for you. Photo: Firmbee / Pixabay

Another tax scheme might be better suited to you if you have a lot of outgoings related to doing your job, which would allow you to deduct your expenses from the tax you pay.

However, if you work from home and only need a laptop and a phone, the regime forfettario is a good option.

Its bureaucracy is getting more complex

How freelancers need to invoice clients changes from July, as the authorities move more services online and slowly do away with physical paperwork.

READ ALSO: Beat the queues: 19 bits of Italian bureaucracy you can do online

The so-called ‘fattura elettronica‘ (e-invoice) should be an advantage of the tax regime in theory, making admin quicker and easier.

However, on closer inspection, the updated rules on digital invoicing seem to place a greater burden on freelancers who now need to understand a new online system.

Not only do those self-employed on this scheme need to migrate to digital accounting, they also need to navigate what appears to be a tricky process of attaching electronic tax stamps (‘marca da bollo’) to any invoice exceeding €77.47, up until now done by physically sticking a stamp on the document.

For full details on the new rules and who it applies to, see our guide here.

There’s a limit on how much you can earn

You don’t qualify for the regime forfettario if you make more than €65,000 from self-employment in any given year. This can be generated from one activity or different income sources.

Therefore, if your business plans and projections look to exceed this level of earnings, you may be better looking at a different incentive on offer for earners above this threshold.

However, there is a workaround depending on where you get your income from. You can actually have a position of employment alongside freelancing, meaning that you can still earn €65,000 annually at the same time as getting a wage from an employer.

READ ALSO: Freelance or employee: Which is the best way to work in Italy?

You can earn up to €30,000 per year as an employee, meaning you’re allowed to make €95,000 annually and still be on this regime – €65,000 of that would remain on the low flat-tax rate for your freelance work.

There’s a cap on previous earnings

You’re not eligible for this regime if you earned more than €30,000 in the previous year from employment. So, depending on your previous position and income, you may not be allowed to take advantage of the scheme.

There is an exception to this, though – if your employment ended in the previous year, you can still apply.

For more information on the criteria and exceptions, see Italy’s Inland Revenue (Agenzia delle Entrate) page in English.

You can’t freelance for your previous employer solely

You might feel it’s more financially advantageous to go freelance instead of being on the payroll of your employer.

However, this regime prohibits you from doing this if you have no other clients.

If you can drum up business from elsewhere though, you are allowed to work for your previous employer and charge them invoices instead of getting a paycheck.

Of course, they will no longer pay some of your INPS contributions if you choose this route and this will instead all fall to you.

It’s worth noting that you also can’t already have a business in the same professional field.

Whether this way of freelancing in Italy is right for you overall depends on your personal circumstances and speaking to a financial expert is advised.

Useful Italian vocabulary:

Agenzia delle Entrate – The Italian revenue agency/tax office.

Partita Iva – An Italian VAT number, required to set up as self-employed.

Codice ATECO – an income code, assigned to each type of professional with a Partita IVA, which determines how much of your income is taxable.

Marca da bollo – The Italian tax stamp you need to attach when submitting paperwork. These have varying prices depending on the type of document, and are available from tobacconists (tabacchi). 

IRPEF – ‘Imposta sui Redditi delle Persone Fisiche’, income tax paid by individuals.

INPS – ‘Istituto nazionale della previdenza sociale’, Italy’s social security and pensions agency.

Member comments

  1. Great article thanks. It doesn’t however mention the new electronic invoicing obligations. As far as I know freelancers will be required to submit “fatture elettroniche” (digital invoices registered in the tax authority’s central system) from the 1st of July 2022, but being Italy this could have changed since I last read about it a few weeks ago.
    An addendum would be really helpful to clarify who will be affected by this new regulation (if it still applies) and how one goes about submitting digital invoices without having to rely on an accountant and their potentially costly in-house system.

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READER QUESTIONS

Reader question: Do you need to cancel your residency when leaving Italy?

How do you cancel your residency permit when leaving Italy - and do you even need to do so at all? The Local looks into the rules.

Reader question: Do you need to cancel your residency when leaving Italy?

Question: My partner and I are leaving Italy after several years of living here. Do we need to cancel our residency? If so, can you advise us on how to go about doing this?

Most people know that you need to register as a resident in Italy if spending more then 90 days in the country. But what should you do if you decide to leave?

Do foreign nationals need to deregister as a resident, and under which circumstances? And how do you go about doing cancelling your residency?

We asked the experts to talk us through when you should deregister as an Italian resident and the the steps involved in cancelling your Italian residency.

Should you bother cancelling your residency?

As is so often the case when it comes to complex bureaucratic questions, the answer is: it depends. Both on your personal circumstances and on the type of residency permit you hold.

If you’re relocating away from Italy permanently then deregistering as a resident and informing the authorities of your new address is a legal requirement – and you’d want to do so anyway, says Nicolò Bolla of the tax consultancy firm Accounting Bolla.

READ ALSO: What’s the difference between Italian residency and citizenship?

On the other hand, if you’re moving away on a temporary basis, you’re not required to cancel your Italian residency.

“If, for instance, you undertake a two-year assignment somewhere, you can still remain a resident and benefit from all the coverage a resident has, such as healthcare,” Bolla explains.

You might want to hold on to your Italian residency in the short term if you're not sure whether the move will be permanent.
You might want to hold on to your Italian residency in the short term if you’re not sure whether the move will be permanent. Photo by MIGUEL MEDINA / AFP.

There’s no official time limit for this – you could leave Italy for a number of years while maintaining your residency and then return to live in the country as if there had been no break.

That means that if you’re leaving Italy and aren’t sure whether you want to return, you might want to keep your residency status, at least in the short term (it’s possible to be legally resident in both Italy and another country).

Financial planning and property consultant Daniel Shillito warns: “you want to be sure if you’re leaving the country that it was a permanent decision, and that you weren’t aiming to come back to live – because if you do want to, it could be tricky and quite administrative.”

For British citizens in particular, he points out, “having an Italian residency these days is a valuable thing, it’s not easy to get again.”

This all applies to those with permanent or long-term residency.

If you have a temporary residence permit, you will no longer be considered resident in Italy as soon as it expires – so you may decide it’s not worth bothering to cancel your residency if it’s due to expire anyway shortly after you leave.

Why does it matter?

There are multiple factors to consider here, the biggest of which is taxes.

If you’re resident in Italy, you’re expected to pay taxes here. However, if you’re moving to a country with which Italy has a double taxation agreement or dual tax treaty, you’re protected from being taxed twice on the same income. Many states, including the UK, America, Australia and Canada, have dual taxation treaties with Italy. 

READ ALSO: Can second-home owners get an Italian residence permit?

If you’re moving to a country which doesn’t have a double tax agreement with Italy, on the other hand, you’ll be legally required pay the full amount of Italian tax on your income even if you spend very little time in Italy, so will almost certainly want to cancel your residency.

Even if you’re moving to a country that does have a dual tax treaty with Italy, you may still want to deregister as an Italian resident in order to avoid having to deal with the paperwork involved in proving you’re a dual resident whose tax obligations are limited.

There’s also a third category of emigrant: for those moving to a country on the EU’s tax haven blacklist, such as Panama, simply deregistering as an Italian resident won’t keep the tax authorities at bay. The burden of proof is on the individual to demonstrate they actually reside in the blacklist country and aren’t just trying to evade Italian taxes.

In these situations, Bolla advises clients to register as resident in an intermediate third country after leaving Italy and before moving to the blacklisted country in order to avoid the extra bureaucracy.

READ ALSO: What taxes do you need to pay if you own a second home in Italy?

Do you need to cancel your residency when leaving Italy?

There are multiple factors to consider when deciding whether to cancel your Italian residency. Photo by FABIO MUZZI / AFP.

Other considerations

Besides where you pay your income tax, you’ll want to consider other factors such as official correspondence, tax breaks, and timeframes for residency-based citizenship applications, Bolla says.

If you maintain Italian residency, the authorities will expect to be able to reach you at your registered address, including for things like traffic fines or notifications of tax audits. If you no longer have any link to that address and no one to forward your correspondence on to you, you could end up in a sticky legal situation.

It’s also worth taking into account the fact that new Italian residents can access certain tax breaks that aren’t available to people who’ve lived here for a while. If you cancel your residency and then return to Italy at a later date, you’ll be eligible for those incentives in a way that you wouldn’t be if you’d kept your residency.

On the other hand, Bolla notes, maintaining Italian residency could work in favour of those interested in pursuing citizenship through residency.

An individual must be continuously resident in Italy for 10 years before they can apply for Italian citizenship based on their long-term residence status.

In theory, maintaining your Italian residency while you’re temporarily abroad could mean that period still counts towards towards those ten years and you won’t have to restart the clock on your return – though it’s important to consult a professional if you’re considering this option.

How can you go about cancelling your residency?

There’s no standardised national protocol for cancelling your residency. Instead, you’ll need to contact the comune, or town hall, you’re registered with to inform them of the change and ask them what you need to do.

The process could be as simple as sending a few emails, without even having to set foot in the building. There may also be a form to fill out. Because things vary from one municipality to another, you’ll need to contact your local comune to find out exactly what’s required.

Generally the process can only be completed after, not before, leaving the country, because you’ll need to provide your new address and possibly supporting documentation proving that you’re now resident elsewhere.

“You say me and my family – and then you list all the members – are no longer residing in your town, please deregister us, and our new address is (e.g.) 123, Fifth Avenue, New York,” says Bolla.

If you have a Spid (Sistema Pubblico di Identità Digitale or ‘Public Digital Identity System’) electronic ID, Bolla notes, in many towns and cities (such as Milan), the process can be completed online through the comune‘s website.

You should expect to receive confirmation that you and your dependents have been deregistered as Italian residents, so it’s worth following up until you receive this.

READ ALSO: How to use your Italian ID card to access official services online

Shillito advises using a PEC (Posta Elettronica Certificata, or Electronic Certified Mail) email account if you have one when communicating with your comune about deregistering. 

Messages sent between PEC accounts are certified with a date and time stamp to show when you sent them and when they were received, with a record of receipt automatically emailed to you as an attachment. Within in Italy they have the same legal value as a physical lettera raccomandata (registered letter).

“That secure email communication is official, you’ve got a receipt showing it’s been received,” says Shillito.

“That way you’ve got evidence and a record that you’ve communicated it to them, in case anything went wrong in the future and the Italian government decided to claim you were still living in Italy.”

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