Establishment of an entity in Italy and tax implications for employees

A foreign company that decides to start a business activity in the Italian market can establish a branch (permanent establishment) or to perform through a subsidiary company.

A subsidiary is a local entity that is independent and legal distinct from its head office, it has its own capital structure, and it is not subject to the economic results of its parent company.

A branch is an extension of the parent company operating under the laws of another jurisdiction. The Italian branch/secondary office is not an autonomous legal person or corporate body, but a part of the foreign parent company, which is fully liable for the liabilities of the branch.

The subsidiary and the branch must:

• Keep accounting and other related books for Italian tax purposes,
• Comply with periodic reporting duties for the purposes of income tax, VAT and regional tax on productive activities (IRAP).

Moreover, with reference to employees, when a foreign company opens a subsidiary in Italy, there are several tax implications that apply both to employees hired locally by the Italian subsidiary and those temporarily transferred from the parent company.

Employees hired directly by the Italian subsidiary are subject to the Italian tax system. The company must withhold and pay IRPEF (personal income tax) on behalf of the employees, as well as contribute to social security and provide coverage for work-related injuries.

For employees temporarily transferred from the parent company to the Italian subsidiary for more than 183 days within a fiscal year, they may be considered Italian tax residents, which would result in their worldwide income being taxed in Italy. If the transfer lasts less than 183 days, they will remain tax residents in their home country and will only be subject to Italian taxation on income generated in Italy.

In any case, there may be a Double Taxation Treaty in place between the two countries. Under such a treaty, the income earned in Italy will be taxed in Italy, but the home country may grant a tax credit to avoid double taxation.

Incentives

Companies can benefit from various incentive schemes designed to encourage the relocation or establishment of foreign enterprises in Italy. These incentives are primarily linked to investment, such as the 4.0 Capital Goods Tax Credit, which promotes new investments in both tangible and intangible assets that align with the principles of Industry 4.0. Additionally, there are incentives for research and development aimed at fostering value creation through investments and innovation within the Italian economy.

Special Tax Regime for Companies transferring their tax residence to Italy

Article 6 of Legislative Decree No. 209/2023 introduces a measure aimed at encouraging the so-called reshoring of economic activities to Italy, with the goal of stimulating economic development and combating the delocalization of activities to other countries characterized by lower labor costs and more attractive contribution and tax regimes.

Under this regime, income deriving from business activities carried out in a foreign country not belonging to the EU or the EEA and transferred to Italy would be exempt, for income tax and IRAP purposes, for 50% of the relevant amount:

• The relief applies in the current tax period at the time of the transfer to Italy and in the following five tax periods.
• Economic activities already exercised in the territory of the State in the 24 months preceding the transfer to Italy are not considered as eligible.

Forvis Mazars is a global network operating in more than 100 countries. We have a close collaboration with our colleagues worldwide, which gives us the opportunity to help our customers in the best possible way. If you have employees on site in Italy or consider expanding your business in the country, we can assist with any tax and social security related questions you might have.

Artikeln publicerad i Forvis Mazars nyhetsbrev December 2024