2019 Stability Law – Flat-Rate Tax Scheme
The flat-rate tax scheme, first introduced in to the Italian tax system by Stability Law 2018, has been modified and made more practical in the 2019 Stability Law.
The government’s objectives for introducing the flat-rate tax scheme are to boost employment, steer Italy’s economic recovery in a positive direction, reduce undeclared taxable income and employment irregularities.
The flat-rate tax scheme pertains to individuals operating in what are classified as, ‘the arts and independent professional activities’ sector. This includes individuals generating income from the rental of investment properties and second homes:
- Replaces Irpef, Irap and additional taxes.
- Establishes a tax rate of 5% for the first 5 years and of 15% from the sixth year onwards: neither VAT nor other taxes are due.
- Represents an opportunity to regularize compliance on any activity that has not previously been declared to the Italian Tax Authority. Foreign property owners may not realize that they need to declare this type of income, even if it is seasonal and infrequent. Owners may be subject to heavy penalties in case of an audit by the Italian tax authority.
Taxable income in the flat-rate scheme is determined by applying profitability coefficients. These coefficients vary according to business activity. Accommodation, lodging, lettings and B&B activities are calculated by applying a profitability coefficient of 40% on revenues.
Let’s take an example:
Mr. Hunt owns a property in Tuscany, which he decides to start using as a seasonal holiday letting business. Mr. Hunt opts to apply for the flat-rate tax scheme.
Let’s imagine that revenues from Mr. Hunt’s first year of lettings are € 40.000.
Based on a 40% profitability coefficient, taxable revenues would be €16.000. At a 5% tax rate, Mr. Hunt would be liable for a tax payment of €800.
Had Mr. Hunt opted to use the personal income tax scheme, his tax payment would have been approximately € 4.300.
As you can see from the example above, for the purposes of calculating income tax, expenses are not included – income tax calculation is based exclusively on revenues. Only social security contributions (INPS) can be deducted from revenues; it is worth a reminder here that anyone wishing to take advantage of the flat-rate scheme, must have social security cover. Social security contributions are calculated as a percentage of revenues, a reduction of up to 35% of contributions is available and in certain cases an exemption from INPS contributions is possible.
Any individual planning to start-up a business activity in Italy qualifies for the flat-tax scheme, provided that the individual has not carried out the same activity in the past three years and that revenues will not exceed €40.000 per annum.
Foreign residents and non-residents, who generate an income from letting their property in Italy, wishing to benefit from the flat-tax scheme, must notify the Italian tax authorities through a Notice of Business Start-Up.
If you need help to understand your personal situation, please contact me or seek advice from a qualified accountant registered with the ODCEC, the Italian professional accounting association of certified public accountants, auditors and advisors.