Understanding applicable taxes on Corporate income in Italy

Before starting business activities in Italy, the tax regime is one of the most important aspects that need to be completely understood. This is primarily because tax knowledge positively influences tax awareness, increases tax compliance, and reduces tax liability for your business. 

In Italy, the Corporate Income tax rate is one of the tax types that should be under because it applies to all companies that derive income from Italy. 

The Italy corporate income tax is collected from companies, and its amount depends on the net income companies normally acquire while exercising their business activity during one business year. 

Italian corporate entities and non-resident companies (only on Italian source income) are subject to a corporate income tax, known as IRES (imposta sul reddito sulle società), and to a local tax on productive activities, known as IRAP (imposta regionale sulle attività produttive) 

The headline rate of tax on corporate profits in Italy 

• IRES 

The taxable base is the entire income shown in the profit and loss account prepared for the applicable financial year in respect of the company law rules and adjusted according to tax law provisions. The tax basis can be reduced through numerous deductions provided by tax law provisions. 

The standard rate of IRES is 24% but as for financial intermediaries (banks, insurance companies, etc.), an extra 3.5% rate applies (up to 27.5%). Also, a 10.5% increase applies to so-called shell companies. 

• IRAP 

The IRAP is a regional production tax, in Italy. The tax rate of the IRAP is the net value of production acquired in each Italian region and the way the taxable base is calculated will depend on the type of taxpayer. 

The standard rate of IRAP is 24% but different IRAP rates are applicable for specific entities (i.e. banks and financial institutions, and entities with a specified governmental exclusive right to provide services). 

Also, some regions in Italy have the power to slightly increase or decrease IRAP rates annually, within the limit of 0.92%. 

Tax exemption in Italy: There are some corporate tax exemptions in Italy, e.g., companies generating in special economic zones in Italy, and the ones dealing with intellectual property investments are either subject to tax exemptions or lower tax rates. 

What companies must pay corporate tax in Italy? 

Companies with commercial activities in Italy must pay the corporate tax rate, whether they are domestic or established with foreign capital. 

In essence, all companies operating as one of the following must register for and pay this tax in Italy: 

• limited liability companies, 
• cooperative companies, 
• joint-stock companies,
• European companies and European cooperatives,  
• public and private entities resident in Italy, and all kinds of companies and other legal entities. 

The basic highlights of other taxes in Italy 

• Substitutive tax on reorganizations (mergers and de-mergers) 

Italian companies involved in mergers or de-mergers will not pay the corporate tax during this process, but they will pay a tax known as the “substitutive tax”. This tax is charged at rates varying from 12% to 16% of the company’s financial value. 

The Italian substitutive tax is charged on a progressive technique of 12% to 16% (e.g.. 12% up to EUR 5 million, 14% for between EUR 5 million to EUR 10 million, and 16% for more than EUR 10 million) to be paid by the deadline of the tax payment of the fiscal year in which the reorganization took place or the subsequent fiscal year. 

• The tonnage tax 

Shipping companies with operations and permanent establishments in Italy can be subject to the Italian tonnage tax regime. 

To qualify for the tonnage tax in Italy, ships must have a net tonnage of over 100 net tons, be used for the transportation of goods and passenger transportation, towing, and other services, and operate in multinational shipping as defined by the rules guiding Italian International Registry. 

The tax is based on the net tonnage of the qualifying ships allotted to the effective shipping days. The IRES applies to the tonnage income in Italy. 

For more detail on tax compliance in Italy or help in establishing yourself in this country, let’s go ahead and contact your Damalion expert now. 

Understanding applicable taxes on corporate income in Italy — IRES and IRAP scope, surcharges, withholding, participation exemptions, interest limitation, loss relief, CFC, and compliance calendar for foreign-owned and domestic companies.

For entrepreneurs, holding companies, SPVs, private equity, family offices and international groups • Damalion facilitates tax scoping with counsel, compliance sequencing, and bank-ready documentation. This content is informational and not tax advice.

Last updated:

What drives your Italian corporate tax outcome?

Three levers matter most: (1) tax base (book-to-tax adjustments, participation exemption, group relief), (2) rates & surcharges (IRES base rate and IRAP regional rates, sectoral uplifts), and (3) timing (installments, loss carryforwards, interest limitation). We facilitate a clean fact pattern and documentation so advisers and auditors can reconcile positions efficiently.

Corporate tax components at a glance

Component	Scope / Mechanics	Notes
IRES (corporate income tax)	Applies to worldwide income of Italian residents; Italian-source income of non-residents with PE.	Base statutory rate commonly referenced at 24%. Surcharges may apply to certain financial sectors.
IRAP (regional production tax)	Levied on net production value; disallows certain deductions (e.g., labor/interest depending on rules).	Standard framework around ~3.9%, with regional/sector variations.
Withholding taxes	Dividends, interest, royalties paid to non-residents.	Domestic rates reduced by EU directives/treaties where eligible; documentation required.
Participation exemption	Qualifying dividends/capital gains may be largely excluded from IRES.	Subject to holding period, nature of subsidiary, anti-abuse and black-list rules.
Interest limitation	Net interest generally deductible up to a cap linked to EBITDA (ATAD-aligned).	Excess typically carried forward; group rules may apply.
Loss relief	Carryforward subject to percentage offset limits and anti-avoidance rules.	Change-of-control/activities rules can restrict use.
CFC rules	Attribution if low-taxed controlled foreign company meets tests.	Substance, effective tax rate and passive income mix are key.
Incentives	R&D, patent box–style regimes, investment allowances.	Compliance and nexus documentation required; periodic updates.

Documentation and controls tax teams expect

• Chart of accounts, statutory FS, and book-to-tax reconciliation workpapers.
• Intercompany agreements, transfer pricing master/local file, benchmarking.
• Substance evidence: premises, personnel, decision-making minutes, board packs.
• Participation files: acquisition docs, holding period, business purpose, residency/treaty certificates.
• Interest limitation computations and support for EBITDA and group rules.
• Loss continuity tests and anti-avoidance assessments post M&A or restructurings.
• WHT relief files: beneficial ownership, forms, residency, treaty/EU directive positions.

Compliance sequence — facilitator-led

1. Scoping. Confirm residency/PE status, group perimeter, sector specifics and incentives.
2. Tax base build. Book-to-tax adjustments, participation exemption tests, TP margins.
3. Rate application. IRES and IRAP rates/surcharges; regionalization; incentives interaction.
4. Positions & files. Draft memoranda, computations and supporting documentation.
5. Payments & returns. Schedules for installments, annual filings and disclosures.
6. Audit management. Coordinate clarifications and maintain a single clean evidence trail.

Filing and payment cadence (high level)

• Advance installments during the tax year based on prior-year liability or current-year forecast.
• Annual returns for IRES/IRAP following financial year-end within statutory deadlines.
• Withholding returns and certifications on periodic schedules; TP documentation at filing.

Related reading

• Register your company in Switzerland as a non-resident
• Register a company in Italy
• More articles on tax

Frequently asked questions

Who is subject to IRES in Italy?

Italian tax-resident entities on worldwide income and non-residents on Italian-source income attributable to a permanent establishment.

How does IRAP interact with IRES?

IRAP is a separate regional tax on production value with its own base and rates; it coexists with IRES and is computed independently.

Are dividends received by Italian companies taxable?

Qualifying dividends may benefit from participation exemption rules, subject to conditions and anti-abuse provisions.

Are capital gains on shares exempt?

Capital gains on qualifying participations may be largely excluded from IRES if holding period, nature of the participation and other tests are satisfied.

What are the standard corporate tax rates?

IRES commonly referenced at 24%; IRAP framework around ~3.9% with regional/sector variations. Sector-specific surcharges may apply.

How are intercompany transactions treated?

They must be at arm’s length and documented via transfer pricing files (master/local) with appropriate benchmarks and functional analyses.

Can interest expense be fully deducted?

Generally limited by an EBITDA-linked cap under ATAD-aligned rules; excess can often be carried forward, subject to conditions.

How long can tax losses be carried forward?

Carryforwards are permitted subject to percentage offset limits and anti-avoidance constraints, especially after ownership or business changes.

What withholding taxes apply to outbound payments?

Domestic WHT may apply to dividends, interest and royalties, potentially reduced or eliminated by EU directives or treaties with adequate documentation.

Do CFC rules apply to foreign subsidiaries?

Yes, where effective taxation is low and qualitative tests are met; income may be attributed to the Italian controlling entity.

Are there incentives for R&D and IP?

Yes, incentive regimes may provide enhanced deductions or preferential treatment subject to nexus and compliance requirements.

How are permanent establishments taxed?

PEs are taxed in Italy on profits attributable to the Italian PE based on separate-entity principles and proper attribution keys.

What documentation is needed for treaty relief?

Residence certificates, beneficial ownership representations, forms and, where applicable, pre-clearance or notification evidence.

When are advance payments due?

Advance installments typically fall during the tax year based on prior or current year estimates; balances are settled with the annual return.

Is this legal or tax advice?

No. This material is informational. Obtain advice from qualified Italian tax counsel based on your specific facts and objectives.