Israel – Italy Tax Treaty

Business Activity in Italy

Italy offers a dynamic and diverse business environment, making it an attractive destination for entrepreneurs and companies. The country has a strong industrial base, particularly in sectors such as fashion, automotive, manufacturing, and design. Additionally, with a consumer market boasting a population of over 60 million people, Italy provides businesses with a significant customer base, offering potential growth and profitability opportunities. Italy’s strategic location in the heart of Europe positions it as a gateway to other European markets, making it an ideal base for businesses looking to expand their operations within Europe. However, it is important to note that Italy has its own unique regulatory and bureaucratic procedures that businesses need to navigate. Understanding the local business culture, seeking appropriate legal and financial advice, and building relationships with local partners can greatly improve the chances of success for businesses operating in Italy.

Bilateral Agreements Between Italy and Israel

1. Convention for the Prevention of Double Taxation.
2. Convention on Social Insurance (National Insurance).

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Italy regarding the avoidance of double taxation was signed on September 8, 1995.

To read the agreement in English, click here.

Convention on Social Insurance

In 2015 Israel and Italy signed a Convention on Social Security. The convention went into effect on December 1^, 2015. The purpose of the convention is to regulate the social rights of individuals who relocate from Israel to Italy and vice versa.

To read the agreement in English click here.

Applicability of the MLI

Both Italy and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework. Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Italy as well, affixed its signature to the MLI on the 7^th of June 2017 but has not yet ratified the Convention.

Residency for Tax Purposes in Italy

Residence of an Individual

As of the new rules enacted in 2024, an individual is considered a tax resident in Italy if for the greater part of the calendar year, they:

1. They are physically present in Italy,
2. They have their usual place of residence in Italy (habitual abode), or
3. Their main social ties (like family) are based in Italy (domicile).

If any of these conditions are met, the person is treated as a tax resident under Italian law.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company or entity is considered a tax resident in Italy if, for most of the tax period, it has in the territory of Italy one of the following:

4. Its legal office.
5. Its main decision-making center, where strategic decisions are made.
6. The location where daily management takes place.

A foreign company is also treated as a tax resident in Italy if:

7. It is directly or indirectly controlled by Italian tax residents.
8. Most of its board members are Italian residents.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Italy

Italy Tax Authority is called the Agenzia delle Entrate (Italian Revenue Agency).

Income Taxation: 23% to 43%

Taxation of Companies and Branches:

In Italy, companies are subject to a two-layer tax structure:

• Imposta sul reddito sulle società (IRES) at 24%.
• Omposta regionale sulle attività produttive (IRAP) at 3.9%.

VAT: 22%

Capital Gains Tax: 26%

Withholding Tax

Inheritance Tax and Estate Tax in Italy

Pursuant to the rules in Italy, inheritance taxes are levied on the beneficiary, who is also liable for the decedent’s debts, up to his or her share of the inheritance. The tax is currently levied under the following rates:

• A 4% tax applies to the value of a share given to a spouse, parents, or children (up to four generations), but only if the value exceeds €1,000,000.
• A 6% tax applies to shares given to siblings (brothers and sisters) if the value exceeds €100,000. This rate also applies to other relatives (up to the fourth degree) and in-laws (up to the third degree) without any threshold.
• An 8% tax applies to shares given to everyone else, with no threshold.

If the beneficiary is severely disabled, as defined by Law No. 104 of 1992, the threshold increases to €1.5 million.

Relocation to Italy

Moving to a new country can be daunting, but for Israelis moving to Italy, moving can be made easier by the presence of vibrant Jewish communities across the country. Most Israelis who move to Italy settle in cities like Rome, Milan, and Florence, which have established Jewish communities with synagogues, community centers, and cultural organizations. These communities offer a variety of services and resources to help Israelis and other Jewish immigrants make a smooth transition to life in Italy. Thus, many Jewish communities offer language classes and cultural events that can help new immigrants integrate into Italian society and understand the local culture.

In addition, these communities can provide a sense of community and support for Israelis who may be far from their families and friends in Israel. Of course, as with any move to a new country, there are also practical considerations that need to be taken into account. Such as obtaining visas and paperwork necessary to establish residency in the country. Due to the complexity of relocation, it is recommended to consult with experts in the field in order to ensure the softest landing.

Real Estate Taxation in Italy

Pursuant to the 2020 legal reformation of property taxation, real estate in Italy will be subject to the Municipal Tax (Imposta Municipale Unica or IMU). IMU is a property tax applicable yearly on the cadastral value of the relevant property, as determined by the local land office, evaluated at 5% and multiplied by specific revaluation coefficients. Special rules are provided for the calculation of the value of land. The IMU tax rates are fixed by the government and generally apply to second homes, certain real properties other than principal residences (at 0.86%), and lands (at a rate of 0.7%)

Transfer of real estate. Transactions involving real property are subject to mandatory registration. A registration tax of 2% is payable on the purchase of a principal home. Where a property is not the principal home, a registration tax of 9% is payable, and in the case of a transaction involving land, the tax is 12%.

Transfer of Funds from Israel to Italy

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Italy

Limited Liability Company

The limited liability company is ideal for small to medium-sized businesses. One of its key features is that shareholders’ liability is limited to the amount they have contributed to the company. This structure provides a level of protection for personal assets against business debts.

Joint-Stock Company

The Joint Stock Company is typically used by larger companies, particularly those that are publicly traded on the stock exchange. This type of company requires a higher amount of initial capital and adheres to more formal governance structures, making it suitable for significant business operations.

General Partnership

In a General Partnership., all partners share unlimited liability and are directly involved in managing the business. Profits and losses are distributed among the partners, which can encourage a collaborative approach to business operations.

Limited Partnership

The limited partnership consists of general partners, who have unlimited liability, and limited partners, whose liability is confined to their investment. This structure allows for a blend of active management and investment while protecting the limited partners’ personal assets.

Sole Proprietorship

This type of business is owned and managed by a single individual, making it simple to set up and operate. However, it carries the downside of unlimited personal liability, meaning that the owner’s personal assets are at risk if the business incurs debts.

Incentive Laws in Italy

In February 2023, Italy’s Council of Ministers approved the establishment of a new “incentives code” aimed at reducing the fragmentation of current incentive policies and enhancing the efficiency of measures for businesses.

Key components of the reform include:

• Foreign Tax Credit: Italian companies can claim a tax credit for foreign-source income taxed abroad, capped at the lower of the foreign tax incurred or the portion of the IRES liability related to that income. Excess credits can be carried forward for eight years.
• Reshoring Exemption: A 50% tax exemption on IRES and IRAP is available for repatriated business activities from non-EU countries, valid for the year of reshoring and the following five years. Certain conditions and monitoring periods apply.
• Tax Credit for New Capital Assets: All enterprises can benefit from a tax credit for new capital investments, with varying rates based on investment amounts and timelines.
• Incentives for ‘4.0’ Investments: Specific tax credits are available for investments in advanced tangible and intangible assets, with benefits depending on investment size and timing.
• Research and Developments and Technological Innovation Credits: Tax credits for R&D and innovation projects are available, with increased rates for specific activities aimed at ecological transitions.
• Special Economic Zone Tax Credits: A new tax credit structure supports investments in Southern Italy, with varying rates based on company size and location.
• Advertising Campaign Tax Credit: Businesses can claim a tax credit for increased advertising expenditures, specifically if they exceed previous year levels.
• Patent Box Regimes: Two regimes exist an old profit-based system and a new cost-based system that recognizes a 110% tax deduction for qualifying research and development expenses.
• Super Deduction for New Hires: A 20% increase in personnel cost deductions will apply.

Italy Double Tax Treaties