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.

A number of agreements were signed between Israel and Italy

1. Convention on Social Insurance (National Insurance)
2. Conventions for cooperation agreements in the fields of economy, employment, water and more.
3. Convention for the Prevention of Double Taxation.

Convention on Social Insurance

In 2015, a treaty on social insurance came into effect between Israel and Italy, aiming to prevent double social security coverage for individuals in both countries.

Double Tax Treaty between Israel and Italy

The initial tax treaty between Israel and Italy was signed in 1968. In 1995, a new treaty was signed, which became effective on January 1, 1999. The primary objective of the treaty is to eliminate double taxation on income and to prevent tax evasion and avoidance. Israel and Italy are committed to developing optimal economic solutions for the benefit of both nations and their citizens.

Applicability of the MLI and its Impact on the Bilateral Treaty

Both Israel and Italy signed the multilateral treaty in 2017. However, while Israel ratified the treaty, making it effective from January 1, 2019, Italy has not yet ratified it. Once the Italian government ratifies the treaty, the Multilateral Convention (MLI) will automatically modify the existing treaty between Israel and Italy.

Single residency for tax purposes

An individual is considered a resident of Italy for tax purposes if at least one of the following conditions is met for a period of time greater than half of the tax period:

1. The individual is registered in the local population registers.
2. The individual has their main center of life in Italy, such as a place of business or primary interests.
3. The individual has a residence in Italy.

Company residency for tax purposes

A company is deemed a resident of Italy for tax purposes if its place of incorporation, registered seat, or place of management is directly located in Italy.

Tax regime in Italy

Italy’s tax authority is called the Agenzia delle Entrate.

Individual income tax: Progressive 23-43%

Corporate income tax: 24%

VAT: 22%

Capital gains tax: 19%

 Inheritance and estate tax

Inheritance tax in Italy ranges from 0% to 8% and varies according to proximity to the deceased.

There is an exemption for the children and the spouse of the deceased for inheritance up to one million euros, and above this amount the tax rate is 4%. The brother of the deceased and his relatives up to the fourth degree will pay 6% for properties with a value above one hundred thousand euros. Those with a connection farther away from this will pay 8%.

Transfer prices

The legislation in Israel regarding transfer prices appears in section 85A of the Tax Ordinance (New Version), 5721-1961, and the Income Tax Regulations (Determination of Market Conditions) – 5766-2006 (the Regulations).

In the field of transfer prices, Italy bases its guidelines on OECD guidelines. Similar to Israel, in Italy, the taxpayer must indicate, when submitting the report to the tax authorities, that there is transfer pricing work in accordance with the Italian income tax regulations. If such work does not exist, the taxpayer will not have protection from fines.

In Italy, Local File, Master File, and CBCR (Country-by-Country Report) must be submitted in compliance with the conditions specified in the Italian income tax regulations. In November 2020, Italy updated the requirements and clauses that the Local File and Master File must accommodate.

Transfer prices in Italy are regulated by internal legislation. For information on transfer prices in Italy, click here. Our office has carried out many transfer pricing works involving companies in Italy, and we will be happy to assist you as well.

Click here for more information on transfer prices in general, and for information on transfer prices in Israel in particular,here.

Relocation

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. Contact us, and we will be happy to arrange an introductory meeting with you.

Real Estate

Italy is a popular destination for real estate investments. Many investors from around the world, as well as from Israel, are showing increasing interest in the Italian real estate market, with many Israeli companies and individuals already investing in properties throughout the country. The Italian real estate market offers attractive opportunities for investors, with a wide range of properties available at competitive prices. Moreover, Italy’s tourism industry is very strong, so investing in properties located in popular tourist destinations can provide strong rental returns.

Purchase tax in Italy depends on several variables, and ranges from 2% to 10% of the value of the property or the transaction price. When purchasing (new) real estate from a registered company, the tax on the purchase of a first home is 4%, and the tax on the purchase of a secondary home is 10%. The tax on the purchase of a luxury home is high – 22%. It should be noted that there is no tax liability in Israel for the purchase of real estate outside of Israel.

Money transfers from Israel to Italy

According to section 170(a) of the Income Tax Ordinance, most money transfers from Israel will require prior approval from the Tax Authority.

When advising on the transfer of money abroad, our firm not only addresses the issue of withholding tax but also handles the requirements imposed by foreign banks. This includes obtaining an accountant’s approval regarding the payment of taxes and examining additional actions necessary in light of the Common Reporting Standard (CRS) – a uniform standard for the automatic exchange of financial information between countries. This exchange of information is facilitated first through the banks and then between the tax authorities of the respective countries.

It is worth noting that banks often impose challenges and high conversion fees when converting shekels to euros. Therefore, it is essential to seek consultation before initiating any fund transfers. For further assistance, please feel free to contact us.

Types of business entities in Italy

1. Limited liability company

Limited liability means that each owner’s liability is limited to cash or assets that he/she has contributed to the company.

In Italy there are two types of limited liability companies:

• Società a responsabilità limitata or S.r.L. )-The most common format for small and medium-sized businesses.
• A public limited liability company by shares (società per azioni or S.p.A. – Usually used by dealers or large corporations. Its establishment requires a minimum investment of 120,000 euros and at least one director.

2. Partnerships

• General Commercial Partnership (General Partnership or S.n.c. )

To establish this company, a minimum of two partners is required. All partners in this company are general members of the partnership and hold full responsibility and managerial responsibility.

• Limited liability partnership (Limited partnership or S.a.s.)

The main conditions for the formation of this company are the same as for a general partnership. In this type of company at least one partner must be limited in his liability to the obligations of the partnership.

Tax incentives in Italy

In Italy, there are tax benefits available to individuals to attract talented people to work in the country:

• Professors and researchers who transfer their tax residency to Italy will enjoy a reduced tax on income from employment in the field of research and study. They may be eligible for a 90% exemption for a period of 4 years.
• “Foreign workers” can be entitled to a 50% exemption for 5 years if they transfer their residency to Italy, provided they hold a degree, have been studying, working, or self-employed for 24 months, and work in Italy.

Countries with which Italy has a double taxation treaty (DTA):