09 Jan Pay What You Owe
Working in Italy? Pay your taxes!
By Avv. Michele Capecchi, LL.M.
Now that the sun is finally shining and spring has arrived, how sad and boring (you may think) it is to discuss taxes. But believe me, an incomplete tax declaration could make your summer and fall much drearier! Because if you live and work in Italy, with few exceptions, you must pay taxes in Italy. Who takes care of your income tax report, la dichiarazione dei redditi? What it is a ‘CUD’? If part of your income comes from investments or work abroad, in which country do you pay taxes?
Individual situations vary, and the Italian tax system is very complicated, but there is some basic, general information that every foreign employee who works in Italy should know about how employee taxes are paid and who is responsible for their payment. Let’s explore these basics through some frequently asked questions.
How do I pay taxes on my salary?
Every month your employer must deduct a part of your salary to pay your taxes directly on your behalf. Thus, the check that you receive at the end of each month is ‘lighter’ than your gross salary. The employer is your sostituto d’imposta, your withholding agent, who is personally liable for withholding a part of your gross income to pay your taxes and social security duties.
How do I know how much I paid in taxes?
All the employment wages that you received during the previous year, as well as the amount of salary used by your employer to pay your taxes and the amount of money used for security contributions are reported in a final document called the Certificazione unica dei redditi di lavoro dipendente (CUD). By the end of February of each year, employers must provide all employees with two originals of the CUD documenting salary and taxes paid during the previous year. So, for example, by the end of February 2011, you should have received the CUD for 2010. If you have more than one employer, you should receive a CUD from each.
What information does the CUD contain?
Every year the Ministry of Finance releases a new model of the CUD (due to the introduction of new tax provisions), so the number and the location of the information to include in the form can change. But generally speaking each CUD is divided into four parts:
- Employer (withholding agent) information
- Section A: employee general information (birth date, residency, tax code)
- Section B: employer’s tax information
- Section C: social security data.
The most important portions are probably contained in Part B, where you will find: *N.1 the gross salary, which is used to calculate the taxes; and N.2, other income, which is considered the equivalent of your employment salary, reported only for tax deduction purposes, and income subject to separated taxation (for example, back payments, pensions, and money paid in addition to regular wages to an employee upon dismissal or resignation). Section B also contains N.3 and N.4, the number of days worked during the year. The items from N.5 to N.33 document taxes paid on behalf of the employee by the withholder, including salary, regional and local surtaxes. Finally, N.34 notes the reported gross amount of taxes that the employer will pay. This amount will be subject to different types of detractions, such as tax credits, including taxes paid abroad, family support, and other burdens that will determine a reduction of the taxes to be paid.
*These numbers are according to the 2011 CUD
I have my CUD. Now what?
Generally speaking, if you do not have any other form of income in Italy or abroad, or if all your income is reported in the yearly CUD, then-provided that the employer correctly filed your tax report and took care of all the tax payments-it is likely that the employee will not have to file any other tax form.
On the other hand, if during the year you (1) earned income from other sources in Italy or abroad, (2) own real estate properties in Italy or abroad, (3) had expenses or burdens that are allowable deductions such as mortgage, medical expenses, child expenses, alimony or child support; or (4) claim reimbursement of the tax credits paid in excess, then the employee must file another tax report, either the Modello 730 (see below) or Modello UNICO. In this case, the employee will submit one of the two original CUDs to one of the organizations that offers support to employees in filing their tax reports (such as the Centro Assistenza Fiscale (CAF), generally free of charge for employees) or another tax professional to compile the Modello 730 or Modello Unico. Which one you will use will depend on the type of income, and all these expenses will be used to decrease the amount of taxes you must pay. To avoid the countless pitfalls possible in the Italian tax system, I recommend that you work with a professional accountant or the CAF.
I am an expat employed in Italy, but I also have income from activities, investments or properties abroad. Where do I pay taxes?
Enter double taxation relief. According to the Testo Unico Imposta sui Redditi (‘Unified Text on Income Taxation’), whoever resides in Italy pays taxes in Italy, no matter where the income was earned. This is known as the worldwide taxation principle. Thus, in Italy the general rule (although subject to several exceptions) is that a person is liable to pay taxes in Italy if he or she resides here for at least 183 days or if the person’s closest personal and economic relations (‘center of vital interests’) are in Italy. But, even if a person paid taxes abroad, that part of their income must be reported in the Italian tax return. Finally, note that since 2009, if a person owns a real estate property in a foreign country, even if he or she already paid taxes in that country, these assets must also be reported on the Italian tax form Modello Unico, redditi prodotti all’estero, even if the person is not earning money from them.
What about . . .?
Perhaps you are employed in Italy but conduct your work abroad, or you have investments such as stock investments, pensions or retirement funds in your home country. The tax process becomes even more complicated. Even if you owe taxes in your home country, you may still be liable to declare that income in Italy. Thus, even if some of your assets are abroad, you are obliged to report them all in your Italian tax return. Again, I advise you to turn to a tax professional.
Disclaimer: The information provided in this article does not constitute legal advice and should not substitute for counsel. The information is based on the opinion of an independent expert and does not claim to be complete or definitive.
Originally published by Michele Capecchi on The Florentine (http://www.theflorentine.net/lifestyle/2011/04/pay-what-you-owe/).