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FINANCE

How new freelancers in Italy can slash their tax bills to as little as five percent

Italy is not known for low taxes, but freelancers may be able to take advantage of a flat tax scheme that cuts the rate to as little as five percent. Here's how it works.

How new freelancers in Italy can slash their tax bills to as little as five percent
How much money could you save by signing up to Italy's flat-tax scheme? Photo by Markus Spiske/Unsplash

If freelancing seems an alluring way to work in Italy for you, you’ll need to get your paperwork in order and choose the best tax strategy for your circumstances. Here, we break down the so-called ‘regime forfettario’, an attractive flat-rate tax scheme for individuals and small businesses.

There are various routes to freelancing in Italy and, perhaps not surprisingly, the Italian bureaucracy involved can be overwhelming in choice and complexity.

But good news for people with an entrepreneurial spirit came in 2015, when the Italian government first introduced the flat tax or ‘regime forfettario’ to create a financially desirable and more straightforward way to work for yourself.

READ ALSO: ‘Smart working’? Here’s what you need to know about going self-employed in Italy

“This is the most popular tax regime for freelancers thanks to its flexibility. It’s handy with minimal outgoing costs, suiting people who only need a computer and a phone to do their work. It’s the number one choice for the freelance clients I work with,” tax expert Nicolò Bolla of Accounting Bolla told us.

The flat-rate tax scheme simplifies accounting and so, theoretically, frees you up to do more of your job and less of balancing the books. As for what you pay to the state coffers, in broad terms and depending on your situation, you could pay somewhere between just 5 and 15 percent tax on your earnings.

That seems enticing when the base rate of income tax is anything between 23% – 43% of your gross earnings if you’re an employee.

In fact, that’s exactly what the government intended by introducing the lower tax rates for freelancers – to boost commercial activity from more individuals and small businesses.

“It’s a great regime to start on and to test out freelancing in Italy. Perhaps you want to move to Italy for just a few years and instead of finding employment, you work for yourself. The forfettario regime lets you get set up quite hassle-free,” added Bolla.

READ ALSO: What is Italy’s investor visa and how can you apply?

Photo: Andreas SOLARO/AFP

Of course, if you want to move to Italy to go freelance, there are a few steps you’ll need to take first. Here’s what you need to know about going self-employed in Italy.

Here’s how the scheme stands up in 2021 following this year’s Legge di Bilancio (Budget Law).

There are no major changes compared to last year, so the latest information on the Agenzia delle Entrate (Revenue Agency) website from 2020 is still valid.

It’s advisable that you talk to a tax professional to assess your personal situation and determine which regime is the most suitable for you.

Is the Forfettario Regime right for me?

The flat-rate tax and simpler accounting seems like a no-brainer option, but it’s not a catch-all solution and you need to check whether you’re eligible.

Firstly, only individuals can access this regime and so companies and societies are exempt.

From that starting block, you then need to meet certain criteria involving income, previous earnings and other business interests.

To access the scheme, you need to obtain a ‘partita IVA’ (VAT number) and select ‘Regime Forfettario’ as your method of paying tax.

You do not qualify if any of the following applies to you:

  • You make more than €65,000 from self-employment in any given year. This can be from one activity or different income sources.
  • You pay out more than €20,000 in salaries, fees paid to collaborators or to someone for a specific project.
  • You opt in to certain special VAT schemes, such as those available for bookstores or tobacconists.
  • As a non-resident of Italy, you make less than 75% of your income in the European Economic Area.
  • Your only client is your past employer. It’s permitted to freelance for a previous employer, but only if you have other clients too.
  • You earned more than €30,000 through employment in the previous tax year.
  • You already have a business in the same professional area.

If you ticked no to these conditions, then the Regime Forfettario might just work for you.

How much tax would I pay under the Forfettario Regime?

Operating as a freelancer in Italy under this regime works out differently to an employee’s personal income tax payments, known as ‘IRPEF’ (Imposta sui Redditi delle Persone Fisiche), as detailed by the Agenzia delle Entrate.

Instead of progressive categories of tax deducted according to your income as an employee, starting from a base rate of 23%, the regime forfettario offers a 15% flat-rate tax on earnings.

This drops to just 5% for new business activity and lasts for five years.

That means if you’re starting up as a freelancer in Italy, you’re granted this temptingly low 5% flat-rate tax on your turnover. You’re eligible for it as long as you’re carrying out new business activity. Therefore, your self-employment can’t be an extension of a business you carried out previously.

READ ALSO: Freelance or employee: Which is the best way to work in Italy?

But the tax you pay isn’t a simple blanket sum of 5% of what you earn. Rather, it depends on the work you do. Taxable income will change depending on whether you’re working as a self-employed teacher or if you’re working in retail trade, for instance.

You determine your taxable income by applying what accountants call a ‘profitability coefficient’. 

In simple terms, each professional group has a different ‘ATECO’ code (income code) and a corresponding percentage of what they earn that can be taxed. As you can see in the table, a teacher must pay tax on 78% of their gross earnings.

Computer engineers have it better at 67% and if you run an e-commerce business, only 40% of your earnings are subject to tax, for instance.

Let’s take the example of a new freelance teacher paying the 5% tax rate. That means you’d pay 5% on 78% of your earnings. In other words, if you earned €30,000 per year, 78% of that is taxable.

So, you’d pay 5% tax on €23,400, therefore, meaning you’d pay €1,170 to the state. This could be further reduced with ‘INPS’, or social security, payments.

You still have to pay your contributions to the INPS (‘Istituto nazionale della previdenza sociale’) to cover you for events such as sick leave, pensions and maternity benefits. This regime doesn’t reduce the amount of contributions you pay and the normal rate of 25.72% is applied to your taxable income.

“The good news is that INPS contributions are taken first and your tax is calculated on your earnings minus this amount,” stated Bolla.

The sequence is key because it means you take home more cash.

In the case of a freelance teacher, the amount owed to INPS would be 25.72% of 78% of earnings. From what’s left of your income, you calculate the tax owed.

READ ALSO: These are the thousands of job vacancies that Italy can’t fill

It’s interesting to note that you could actually – legally – get away with earning more than €65,000 for one year under the Forfettario Regime, benefitting from the lower tax rate.

The deal is that once you pass this threshold, you shift to paying tax under the regular IRPEF tax brackets from the following tax year.

An extra bonus is that you can actually have a position of employment alongside freelancing.

“As long as you don’t earn more than €30,000 from a position as an employee, you can combine working with a company and freelancing for yourself. That means you can earn €95,000 gross per year and still benefit from the low flat-rate tax on your freelance work,” Bolla revealed.

Filing taxes in Spain
Image: Tanja-Denise Schantz/Pixabay

So is this the overall best regime for freelancers in Italy?

As far as tax goes, the 5% rate does seem too good a deal to miss – and added to that is the simpler bureaucracy and tax compliance.

Under the regime forfettario, you don’t need to charge VAT on invoices, so that means you don’t need to complete an annual VAT return. What’s more, you have a competitive edge in the market as you won’t need to add VAT for your clients.

Bookkeeping is also much more straightforward. There’s no need to keep purchase receipts or track what you’ve bought for the company to off-set your taxes. That’s the whole point of this scheme: it’s a flat-rate tax with less red tape.

No counting mileage for your petrol expenses or inputting the cost of a biro into a spreadsheet might just be relief enough to encourage you to start up your own business in Italy.

READ ALSO: Doing business in Italy: The essential etiquette you need to know

On the other hand, maybe this is a sticking point. If you have hefty overheads that you want to deduct, perhaps another freelancing scheme would suit you better.

“This scheme is straightforward, which is attractive. But make your calculations before hopping into any regime,” Bolla warned.

“You have to consider your growth perspective, because if the €65,000 threshold doesn’t fit with your business plans, it might be better to consider another tax regime. There are others with incentives that may better suit you,” he added.

It’s not surprising that the VAT exemption goes both ways too. So, just as you don’t charge VAT, you can’t claim back the VAT you spend on IT equipment, stationery or any other business-related costs.

Another drawback of this tax plan is the little quirk of Italian revenue stamps. Even though Italy is making progress in moving to a digital environment, it’s not yet fully let go of its paper legacy. You have to attach a €2 stamp, called a ‘marca da bollo’, to every invoice that exceeds €77,47. It actually is possible to do this online, but it is “administratively burdensome”, according to Bolla.

A real snag crops up if you want to take advantage of the tax deductible schemes on offer, such as the building superbonus. Under this regime, you can’t offset your taxes, which means you can’t take part in tax deductible schemes. That includes accessing house renovation credits, for instance.

Luckily, for those wanting to renovate their property with the state funds on offer, there are other ways to access the cash this year. But if you wanted to reduce your tax burden over several years, you can’t do that under the Forfettario Regime.

Whether this method is right for you depends on your personal circumstances, but with its low tax rate and relatively simple accounting, it might be a way to dip your toes into freelancing and test the waters of self-employment in Italy.

Useful Italian vocabulary:

Agenzia delle Entrate – The Italian revenue agency/tax office.

Partita Iva – An Italian VAT number, required to set up as self-employed.

Codice ATECO – an income code, assigned to each type of professional with a Partita IVA, which determines how much of your income is taxable.

Marca da bollo – The Italian tax stamp you need to attach when submitting paperwork. These have varying prices depending on the type of document, and are available from tobacconists (tabacchi). 

IRPEF – ‘Imposta sui Redditi delle Persone Fisiche’, income tax paid by individuals.

INPSIstituto nazionale della previdenza sociale’, Italy’s social security and pensions agency.

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For members

PROPERTY

Nine things we’ve learned about claiming Italy’s building ‘superbonus’

Two years after it was introduced, Italy's popular renovation discount scheme continues to cause headaches for homeowners trying to access it. Here's what we've learned so far about claiming the so-called 'superbonus 110'.

Nine things we've learned about claiming Italy's building 'superbonus'

In May 2020, as the pandemic gripped Italy in its first wave, the government introduced a new building bonus programme to kickstart the country’s sluggish, Covid-hit economy.

This emergency response, known as the ‘superbonus 110′, came as part of the government’s Decreto Rilancio (Relaunch Decree), which offered a tax deduction of up to 110% on the expenses related to making energy upgrades and reducing seismic risk.

Other types of building bonuses existed before – and continue to be available.

However, none had offered quite so high a value to those looking to make home improvements on their property.

In fact, not only did the new measure incentivise people to upgrade their existing properties, it encouraged people to buy old, abandoned properties, making previously unfeasible renovation projects, in financial terms, a genuine possibility.

READ ALSO: How Italy’s building ‘superbonus’ has changed in 2022

We counted among those taking the plunge to buy a crumbling and uninhabitable building, with the intention to carry out extensive works thanks to funds from the superbonus.

Our property search completely changed due to the scheme and we planned on taking advantage of the generous sums of state aid.

After looking around and viewing properties for months, attracted by adverts that claimed a property was eligible for restoration with the superbonus, we found an old farmhouse – which had become a derelict wreck – in the lowlands countryside outside Bologna, near where we are already located.

(Photo by Philippe HUGUEN / AFP)

In our case, we had to demolish the old property and rebuild a home from scratch – it couldn’t be restored due to earthquake damage in the area, rendering it far too unstable and destroyed to ever be habitable again.

READ ALSO: Why we decided to build our new house in Italy out of wood

That wasn’t a disappointment as we had the opportunity to design our own home instead, choosing every angle, material, layout and floorplan we wanted. It would have been beyond our means to take on a project like this without the superbonus, but with it, we thought it was possible.

Incredibly, the small print of the incentive permits this too, as the government intended to reinvigorate the nation’s many old, damaged and inefficient buildings and recover lost land – including using existing plots to build new homes if the property was too damaged, as is the case for us.

So, we ploughed all our savings and the money from the sale from my husband’s apartment into a collapsing set of bricks, filled with junk and debris from years gone by.

Although daunting, the figures stacked up and meant that we could create our own country home with a manageable mortgage for around 15 years.

Since I’m now 37, that seemed to work well and it all looked reasonable.

READ ALSO:

But it was just the beginning, before the superbonus spiralled into delays, bureaucratic quagmires and fraudulent claims, which all contributed to making accessing the funds a stalemate for many homeowners.

18 months into our project, we have got as far as a concrete shape in the ground, the old farmhouse demolished, but no sign of our future home still – and a budget that has blown out of proportion, changing our financial future considerably.

18 months ‘ progress looks like this on our Italian property renovation project. Photo: Karli Drinkwater

The clock is ticking with deadlines too, albeit briefly extended, to access the bonus in time.

Since its inception, here’s what we have learned about (trying to) claim Italy’s superbonus 110.

1. Demand slowed down starting renovation projects

Within its first year, interest in the scheme was so high that building companies were overwhelmed and projects piled up in a queue.

Many firms stopped taking on new clients, as they battled to push through projects that were already delayed by months and some homeowners abandoned their plans altogether as a result.

As the backlog built up, firms increased their construction quotes and material prices rose – driven by a worldwide boom in cost increases and also most certainly not helped by Italy’s superbonus-fuelled building boom.

Photo by Bill Mead on Unsplash

The situation has continued to worsen due to the war in Ukraine, which has impeded the import and subsequently driven the cost of raw materials.

It was this demand that also saw us sit and wait, watching on while absolutely nothing happened and we continued to be stuck, all the while watching the project cost continually rack up.

READ ALSO: How to stay out of trouble when renovating your Italian property

It had taken four months just for the sale of the wreck to go through, so we were on the back foot already as far as the bonus is concerned.

We were ready to get going in May 2021 after putting in our offer on the property in the January, but in the past year, very little has happened.

We’ve since had to move out of our apartment, as the new owners understandably wanted to move in and we’re now effectively camping out in a part of my husband’s parents’ new house.

As they, too, are trying to access the superbonus, our life has been packed into boxes while we our living area and office is all squeezed into a garage.

I write this surrounded by scaffolding and orange construction barrier tape, now heavily pregnant, and trying not to lose hope that we’ll have our own place to go to.

Our building project has got no further than knocking down the old wreck and laying down the concrete foundations. One year on, there’s not even the bones of a structure.

READ ALSO:

So is it still demand for the bonus and materials that’s causing the delay?

Yes, but also a huge part is down to how you can claim the bonus.

2. Credit transfer problems stopped the banks lending

Another recent cause for a further slowdown is the change in how people could access the bonus and the increasing difficulty of obtaining credit.

There are a few routes to obtaining Italy’s superbonus. The option of offsetting tax from income is likely only financially viable for high earners, as any unused tax discount gets lost.

Image: moerschy / Pixabay

Let’s say your renovation costs come to €100,000, which are tax deductible at 110 percent for five years.

So, if you have a tax break of €22,000 every year for five years, therefore, but your tax bill from your income tax, known as ‘IRPEF’, falls short of that, you lose the deduction and will end up footing the rest of the renovation bill.

READ ALSO: Do you have to be Italian to claim Italy’s building bonuses?

Note – the latest changes specify tax deductions for the superbonus will be spread over four years, not five as previously.

Little surprise, then, that the other two options to access the funds – transferring the credit (cessione del credito) or discount on the invoice (sconto in fattura) – have been more popular.

It effectively means you either trade the tax credit for cash to an Italian financial institution, such as a bank, for the credit transfer, or directly to your contractor or supplier for the discount on the invoice.

Using the credit transfer system means you’ll get cash back that you paid, directly in your bank account.

It’s a slightly riskier route than a discount on the invoice, as the latter means the the supplier recovers the bonus on your behalf, taking a slice of it as a fee.

So, you get less of the bonus but you don’t have to deal with the paperwork and the contractor takes the burden of getting the credit.

“The easiest option is the discount on the invoice,” tax expert Nicolò Bolla of Accounting Bolla told us.

“It takes care of the credit transfer. If you deal with the bank yourself, it takes some expertise and requires a little knowledge of technology and the system, such as downloading and uploading invoices.

“Contractors have multiple sales, so they are more trained to do that,” he added.

However, billions of euros of fraudulent claims led the government to introduce stricter laws, blocking being able to access credit for months, putting the bonus – and renovation projects – on hold.

Our builders were using credit from financial services provider Poste Italiane, who reduced the threshold of credit. This pushed all the building jobs back by months with no word on when works would start.

In that time, they had to search for another bank willing to fund the bonus, while home construction sites lay dormant.

3. Banks blocked and refused credit halfway through projects

Some homeowners faced extra setbacks when they encountered not only delays, but an outright cancellation of prior agreed credit.

Peter (not his real name) told us that he had got the green light to access one of the other building bonuses that can be used in conjunction with the superbonus – the Renovation Bonus (Bonus Ristrutturazioni).

READ ALSO: Budget 2022: Which of Italy’s building bonuses have been extended?

It allows homeowners to apply for a 50 percent tax reduction on carrying out renovation work in both individual properties and condominiums.

The maximum limit on expenses of €96,000 and the 50 percent offset to taxes is divided into annual instalments for 10 years. Or you can apply for the invoice discount or credit transfer.

Photo by Cristina Gottardi on Unsplash

He applied and was approved for credit transfer for works on his home in Modigliana, Emilia Romagna. After buying a property with his partner in December 2020, they began renovations in January 2021, based on credit approved by Italian bank UniCredit.

He told us they carried out €60,000 of works for a new floor and underfloor, electrics and plumbing throughout, a new boiler, replastering walls and installing a new bathroom.

That means that €30,000 credit was due from the bank, but Peter told us they are now refusing to pay out.

“The excuse from the bank is that we didn’t sign with them, however they didn’t ask us to sign anything when they opened the portal for us at the beginning,” he told us.

So, while the bank registered the renovation jobs for them on the government’s portal in order to be able to claim the bonus, they now refuse to return the credit as originally agreed.

“The thing that upsets me so much with UniCredit is we made about 10 payments to builders and suppliers costing €7.50 a time (in administration fees) to make it, and taking the time to go into the bank especially, to get it registered correctly. And to be let down by them now, really is pretty bad,” he added.

Taking this route is “harder” according to Bolla, as “banks prefer to deal with larger businesses than to give credit to individuals,” he said.

For Peter, he now has the option of deducting the tax from his annual income tax bill or finding another bank to take on and transfer the credit.

4. Finding other solutions to open up the credit transfer system

As accessing finance slowed down and projects ground to a halt, the government intervened with yet another regulatory change to the superbonus.

Along with extending the deadline of 30 percent completion of works for single family homes by three months – to the end of September 30th 2022 – the authorities also looked at how to make accessing the funds more straightforward.

The reason for so many changes stems from how the superbonus originally started.

“Two years ago, it was the Wild West. Anyone could get credit to use the bonus – a person, company or business. Due to that, the authorities lost track of sales and plenty of fraudulent claims slipped through the net,” according to Bolla.

“Everything stopped. Then they regulated too much, creating more bureaucracy and delays. So now, they’ve deregulated a little to reopen the transfer of credit,” he added.

Understanding why there were delays to accessing the bonus are complex and manifold. Along with the reasons above, banks also faced rising inflation, which in part caused them to stop lending.

“Somebody needs to offset the tax at some point. Many banks wanted to buy the credit and resell it to larger banks, but any credit that couldn’t be offset in their taxes got wasted.

“It made the banks less willing to buy credit, which in turn slowed down companies’ and individuals’ ability to access it,” he added.

Now, to keep better track of works being done, Italy’s Inland Revenue Agency (L’Agenzia delle Entrate) has introduced better tracking systems in its latest ruling. These will follow the trail of where the money is going, with the aim of cutting down on time lost to bureaucracy.

5. You might – legally – be left with a half-finished house

Depending on what you’ve agreed with your construction company, you may be taking a gamble with the superbonus no matter what, even if works have begun and the system has eased the bottleneck on claiming the funds.

Our builders would only go ahead with the project if we signed a document, in short saying that we understand the project won’t be finished if the funds aren’t available in time or if works roll on past the deadline.

Photo by Filiz Elaerts on Unsplash

The firm wasn’t going to be liable for paying for the construction of our home (and others’ projects too) if they continued to get caught in delays.

In this case, we had no choice. Sign it and hope for the best or lose the €200,000 that has already gone into the works and wreck purchase so far.

6. There are added fees to account for when claiming the superbonus

If you’ve ever sold or bought property in Italy, you’ll know there is an abundance of hidden costs associated with it.

From agency and notary fees, taxes to legal costs, buying a property in Italy can incur another ten percent of the purchase price. For a list of the hidden costs to watch out for, see our guide here.

When it comes to restoring properties using the superbonus, you’ll need to fork out for various certificates, including an energy certificate known as ‘Certificato Energetico APE’ to prove that the property would benefit from energy upgrades using government funds.

This will also need to be done afterwards to prove that the property meets the requirements of the superbonus and has jumped up at least two energy classes.

You may also incur charges from your local town hall or comune for making changes to the property. In our case, as it’s a considerable project, the administrative fee just for submitting our house plans to review cost €12,000.

In total, the cost of fees on our project – before any restoration works using the bonus have taken place – have come to €30,000.

7. The amount you claim and pay continues to rise

Since the superbonus began, the scope of house restoration projects has changed significantly.

The noted demand pushed up construction quotes and material prices continue to rise, vastly increasing the scale of a project’s budget.

It will come as a blow to home renovators who thought they were potentially getting considerable sums of money from the government and therefore making huge savings.

In fact, there will still be large pots of funds to come from the government, but the problem is the price you pay will track the increases and rise too.

Our particular home renovation project has almost doubled since we began.

We initially accounted for a final cost of €450,000 for all works, using the superbonus for almost half of that.

Instead, the quote we received in November was over €700,000 (on top of what we’ve paid for the wreck) and we were told this is unlikely to be the final cost, rising in line with continuing material price rises when works do finally get underway.

The impact of this is life-changing. In our case, it means we’ve had to apply for soaring monthly repayments for 25 years instead of 15. And that’s only if the bank agrees to grant us such a huge financial commitment – which it has, as yet, not done.

8. You might have to pay taxes if you sell your house after claiming the superbonus

At least for a while, you may have to stick with the property you’ve renovated using the superbonus.

Once you’ve claimed this building bonus, essentially you can’t sell it on for another five years if you want to avoid paying capital gains tax.

Tax expert Nicolò Bolla said that this depends on when you bought the property, however.

If you already owned the house for more than five years and took advantage of the superbonus, you can sell it on with no capital gains tax.

On the other hand, if you just bought the property to benefit from the bonus, and therefore have only owned it for under five years, you’ll be liable for the tax – that is, if you make a gain on its sale.

If you bought an old wreck and renovated it, for instance, it’s likely that you will.

For more advice on selling your property after using the superbonus, remember to check with professionals beforehand.

9. It continues to be popular and set back by delays

Despite the recently extended deadline, homeowners continue to wait in queues for their projects to begin or be completed.

Tax expert Bolla told us he gets “daily requests” for the superbonus, but issues a word of caution about the incentive.

“It is a long journey and you need to have some money to renovate your property with the bonus. It’s an expanded timeframe and there are still supply chain issues,” he said.

Despite this, though, Bolla believes it’s an “amazing” scheme. “We have a lot of energy dependence, so this is a good way to upgrade. Normally, the way we deal with our reliance on energy is to punish those who pollute more with higher energy bills, but those are always lower income people.

“Higher energy costs just punish the poor – this, instead, is a good way to solve the problem.”

See more in our articles about property in Italy on The Local.

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