A Comparative Guide to USA and Italian Taxation for Business Professionals

Taxation Systems

In the United States, the tax system is based on citizenship, meaning that US citizens are taxed on their worldwide income regardless of where they reside. The US tax system is complex, with various deductions, credits, and brackets based on income levels, ranging from 10% to 37%.

On the other hand, Italy operates on a residency-based taxation system. Residents are taxed on their worldwide income, while non-residents are taxed only on income earned in Italy.

Italy’s tax system is progressive, with tax rates ranging from 23% to 43% for different income brackets. Deductions and credits are available for certain expenses, such as healthcare and education.

Social Contributions in Italy

In the US, american workers contribute to Social Security and Medicare through payroll taxes, which are withheld from their salaries. Employers also contribute a matching amount for each employee.

In Italy, social contributions are mandatory for both employees and employers and cover various benefits such as healthcare, unemployment, and pensions. The contribution rates vary depending on the type of employment and income level.

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Business Taxes in Italy

 In the US, american businesses are subject to federal income tax at the corporate level, with rates ranging from 15% to 35% based on income. Additionally, businesses may be subject to state and local taxes.

Italy imposes a corporate income tax on businesses operating within its jurisdiction, with a standard rate of 24%. However, there are reductions and exemptions available for certain types of income and business activities.

Value Added Tax (VAT):

The US does not have a national VAT system but instead relies on sales taxes imposed at the state level.

In Italy, VAT, known as “IVA” (Imposta sul Valore Aggiunto), is a consumption tax levied on the value added to goods and services at each stage of production or distribution.

Tax Incentives in Italy for foreigners

Italy offers attractive tax incentives to foreigners relocating to the country for work-related reasons.

The benefits dedicated to foreigners moving to Italy encompass tax relief measures for both employees and freelancers relocating from abroad.

There are two sets of legislation to consider: one for those who moved before December 31, 2023, and another for those who relocated from January 1, 2024.

Under the new taxation law effective from 2024, the tax relief percentage has been reduced from 70% to 50% of the taxable income. This means that a higher portion of the salary becomes subject to taxation, albeit still offering significant tax savings. The reduction in taxable income may also result in a transition to lower income tax brackets, potentially unlocking additional tax benefits. However, the benefit is limited to the first €600,000 of annual income and remains applicable for 5 years without extension.

For individuals who relocated before the end of 2023, a 70% reduction in taxable income is still applicable. Additionally, there’s an opportunity for further tax relief if the worker chooses to transfer their tax residence to certain regions, where a 90% exemption can be obtained instead of the standard 70%.

Another notable incentive is the “Regime Forfettario” or flat-rate tax regime, which allows eligible individuals to pay a flat tax of 15% on their gross income for certain professional activities. This regime is particularly beneficial for self-employed professionals and freelancers.

These tax incentives provide a compelling reason for foreigners to consider relocating to Italy, offering substantial savings and opportunities for financial optimization.

If you want to understand exactly how much you could save thanks to this tax incentive we created this italy tax calculator for foreigners just for this purpose!

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Relocation Considerations:

Professionals considering relocating to Italy should evaluate the tax implications of their move, including potential tax treaties between the US and Italy to avoid double taxation.

Italy offers special tax regimes, such as the “Regime Forfettario,” designed to simplify taxation for certain professionals, including freelancers and small businesses. However, eligibility criteria and benefits should be carefully assessed.

In conclusion, while both the US and Italian tax systems share similarities, such as progressive taxation, they also have distinct features and complexities. Business professionals contemplating a move to Italy should seek professional tax advice to navigate the intricacies and optimize their tax planning strategies effectively.