Corporate Tax in Italy: A Practical Guide for Foreign Companies

Last updated: April 2026

Corporate tax in Italy can look confusing at first, because two corporate-level taxes that often run in parallel are applied. In most operating scenarios, foreign groups with an Italian footprint will face IRES (corporate income tax) and IRAP (regional production tax), each with its own tax base, rules and planning logic.

How Italy’s Corporate Tax System Works

Italy imposes two separate taxes on business income. They are not alternatives: in most cases, both apply simultaneously. Understanding the rationale behind each helps clarify what can and cannot be deducted, and why the planning approach differs.

IRES: Italy’s Corporate Income Tax

IRES (Imposta sul Reddito delle Società, meaning corporate income tax) is the main tax on corporate profits in Italy. It is levied at a standard rate of 24% on taxable income, as confirmed by the Agenzia delle Entrate, Italy’s tax authority.

IRES is calculated on net income, after deductions, and broadly follows accounting profit with a series of adjustments defined by the Italian Tax Code (TUIR). It applies to Italian-resident companies on their worldwide income, and to non-resident entities on income sourced in Italy.

IRAP: The Regional Production Tax

IRAP (Imposta Regionale sulle Attività Produttive, meaning regional tax on productive activities) is the second corporate tax, and it often surprises companies unfamiliar with Italian law. Unlike IRES, it is not a tax on profit. It is a tax on the value of production, essentially a gross-margin tax that does not allow the deduction of labour costs or financial charges in their entirety.

The standard IRAP rate in Italy is 3.9%, applied across most regions. Each of Italy’s 20 regions can adjust this rate by up to ±0.92 percentage points, which means the effective rate can range from approximately 2.98% to 4.82% depending on where the company is registered or has a permanent establishment (PE), meaning a fixed place of business that triggers tax obligations in that jurisdiction.

Why Two Taxes? Understanding the Logic

The dual structure reflects Italy’s fiscal federalism. IRES is a national tax, collected by the central government. IRAP is a regional tax, with revenue flowing to the region in which business activity takes place. The distinction matters for planning: labour-intensive businesses pay more IRAP relative to their profits, because the IRAP base is not reduced by most personnel costs.

In practice, this means a company can be loss-making for IRES purposes and still owe IRAP. Finance teams should note that the two taxes require separate calculations, separate advance payments, and are reported on the same annual tax return.

Who Pays IRES and IRAP: Resident Companies vs Foreign Entities

The territorial scope of each tax depends on how the foreign company has structured its Italian presence.

Italian Subsidiaries (SRL, SpA): Worldwide Taxation

A company incorporated in Italy, whether a SRL (Società a Responsabilità Limitata, a limited liability company) or a SpA (Società per Azioni, a joint-stock company), is treated as an Italian tax resident. Italian tax residents are subject to IRES and IRAP on their worldwide income.

In practice, most Italian subsidiaries of foreign groups derive virtually all their income from Italy. However, the worldwide taxation principle becomes relevant when the Italian entity has foreign subsidiaries of its own, when it receives dividends from abroad, or when transfer pricing rules determine how intercompany transactions are allocated.

Branches and Permanent Establishments: Italian-Source Income Only

A foreign company operating through an Italian branch, or deemed to have a permanent establishment in Italy, is taxed only on the income attributable to that Italian PE. This is a significant difference: the foreign entity pays IRES and IRAP solely on what it earns in Italy, not on global profits.

The attribution of profits to a PE follows the OECD authorised approach, which requires the PE to be treated as a separate and independent enterprise. Italy has incorporated this approach into domestic law, and the rules have practical implications for how head office costs, internal charges, and allocated overheads are treated.

The Three-Month IRAP Threshold for Non-Residents

IRAP applies to non-resident entities that conduct business activity in Italy for more than 3 months through a fixed place of business. This threshold determines whether a temporary presence crosses into a taxable production activity for IRAP purposes. Companies running short-term projects or seconded employees in Italy should assess their position carefully, as even a project office or a consistently used worksite may cross this line.

Branch vs Subsidiary: The Tax Decision Every Foreign Company Faces

The choice of entry structure affects the tax treatment in several important ways. Neither branch nor subsidiary is categorically more efficient: the answer depends on the nature of the business, the group’s transfer pricing policy, and the applicable double tax treaty.

For a detailed comparison of entity types, see our page on setting up a company in Italy.

IRES Treatment: Same Rate, Different Base

Both branches and Italian subsidiaries pay IRES at 24%. The difference lies in the tax base. A subsidiary is taxed on its own profit as a standalone Italian company. A branch is taxed on the income attributable to the Italian PE, which requires a specific attribution analysis and may involve deductions for head office services and allocated costs, subject to arm’s-length pricing rules.

IRAP Treatment: Same Base Calculation, Different PE Rules

IRAP applies to both structures at the same standard rate of 3.9%. However, for branches and PEs, the IRAP taxable base is calculated only on the portion of production value attributable to Italian activities. The 3-month threshold discussed above determines whether IRAP even applies to non-resident entities in the first place.

Transfer Pricing and Intercompany Implications

Subsidiaries engaged in transactions with other group entities, whether for goods, services, IP licences, or financing, must apply transfer pricing rules. Italy follows OECD guidelines, and the Italian tax authority (Agenzia delle Entrate) audits transfer pricing with increasing frequency and sophistication.

Branches face a similar challenge: the allocation of costs and revenues between the Italian PE and the rest of the foreign enterprise must be documented and defensible. In both cases, maintaining contemporaneous documentation is not optional; it is the difference between a manageable audit and a significant adjustment.

Practical Considerations for Your Entry Structure

The branch model offers simplicity in some respects: fewer corporate formalities, no share capital requirement, losses immediately offsetting group income in jurisdictions that allow consolidated group taxation. However, Italy does not allow Italian branches to consolidate with other Italian or foreign entities, which reduces this advantage.

Subsidiaries, on the other hand, can participate in the Italian domestic tax consolidation regime, pooling results across Italian group companies. For groups with multiple Italian entities, this can be a significant benefit.

How IRES Is Calculated

The Taxable Base

The IRES taxable base, calculated under Italy’s corporate income tax rules at the standard 24% rate, starts from accounting profit as reported in the Italian statutory accounts (prepared under OIC Italian GAAP or IFRS for listed groups). A series of increases and decreases are then applied under TUIR rules to arrive at taxable income.

Common upward adjustments include non-deductible entertainment expenses, fines, and certain provisions. Common downward adjustments include the ACE (Aiuto alla Crescita Economica, a notional interest deduction on equity increases), though the ACE regime has been substantially modified in recent years and its current status should be confirmed with a tax adviser.

Key Deductions: Labour Costs, Interest, Depreciation

Labour costs are generally deductible for IRES purposes, subject to specific rules. Interest expense is deductible up to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortisation), with excess interest carried forward.

Depreciation follows Italian tax tables, which differ from accounting depreciation. Finance teams should be prepared for temporary differences between accounting and tax values, creating deferred tax assets and liabilities.

Dividend Income and the Participation Exemption (PEX)

PEX (Participation Exemption) allows Italian companies to exclude 95% of dividends received from qualifying subsidiaries from the IRES taxable base. This effectively reduces the tax cost on dividend income to 24% applied to 5% of the dividend, or 1.2% overall.

From 2026, the PEX and dividend exemption apply where the Italian company holds at least a 5% participation or where the investment has a value of at least €500,000. Finance teams should verify whether their specific holding structure meets these updated thresholds.

Loss Carry-Forward Rules

Tax losses can be carried forward indefinitely in Italy, but only up to 80% of taxable income in any given year. This means a profitable year cannot be fully sheltered by prior losses: at least 20% of taxable income will always be subject to IRES, regardless of accumulated losses.

How IRAP Is Calculated

The IRAP Taxable Base: Gross Margin, Not Profit

IRAP is calculated on the net value of production, which is broadly equivalent to gross margin from the income statement. Revenue minus cost of goods sold and certain service costs, before labour and financial charges. This design makes IRAP particularly burdensome for service companies and businesses with high headcount.

The starting point is the revenue and cost data from the statutory accounts, adjusted according to specific IRAP rules. Depreciation and amortisation are deductible for IRAP purposes, subject to limits. Financial income and costs are generally excluded from the base.

Labour Cost Deductions for Permanent Employees

A partial relief exists for IRAP on permanent employees. Companies can deduct a fixed amount per permanent worker from the IRAP base, and in certain regions and for certain categories of workers (including women and young employees under 35), additional deductions apply.

This is a significant planning point: companies with large permanent workforces in Italy may substantially reduce their effective IRAP burden through these deductions. Temporary or agency staff do not qualify for the same relief.

Regional Rate Variations Across Italy

The standard IRAP rate of 3.9% applies in most regions. However, regions can increase or decrease the rate by up to 0.92 percentage points. The result is a range from approximately 2.98% to 4.82%. Regions with higher rates tend to be those with greater fiscal autonomy or higher public expenditure commitments.

Companies with operations spread across multiple Italian regions may apportion the IRAP base across regions, paying each region’s applicable rate on the relevant portion of production value. This apportionment follows specific rules based on the location of fixed assets and payroll.

Withholding Taxes on Outbound Payments

Withholding Tax on Dividends from Italy to the Foreign Parent

When an Italian subsidiary pays dividends to its foreign parent company, a withholding tax (WHT) applies. The standard domestic rate is 26%.

For EU or EEA parent companies that are subject to corporate tax in their home country and meet certain conditions under the EU Parent-Subsidiary Directive, the effective rate is reduced to 1.2% (based on a 95% exemption applied to the base before the standard IRES rate).

Royalties and Interest

Royalties paid to a non-resident are subject to a standard WHT of 30% under domestic law, before treaty application. Interest payments to non-residents are subject to 26% WHT under domestic rules. Both rates are frequently reduced or eliminated by applicable double tax treaties.

Italy’s Tax Treaty Network

Italy has one of the most extensive treaty networks in the world, with 103 double tax treaties in force. Treaty benefits can significantly reduce WHT on dividends, interest, and royalties, and can affect whether a PE is deemed to exist.

Under the Italy-US treaty, WHT on dividends is 5% where the parent holds at least 25% of the Italian company, and 15% in all other cases. Under the Italy-UK treaty, the same 5–15% rate structure applies based on the level of shareholding.

Finance teams should always verify the treaty position before repatriating income, as the conditions for reduced rates (minimum holding thresholds, qualifying company structures, beneficial ownership) must be met and documented.

Key Filing Deadlines and Payment Obligations (2026)

Corporate Tax Return: Modello Redditi SC

The Modello Redditi SC (the Italian corporate income tax return, replacing the former UNICO model) must be filed electronically by 31 October for companies with a calendar year ending 31 December. Companies with a non-calendar fiscal year must file within 10 months of their year-end.

IRAP is reported in a separate section of the same filing. Both taxes are declared together but calculated independently. The Agenzia delle Entrate provides further guidance on filing obligations for corporate entities.

For a full overview of compliance obligations, see Accounting & Tax Compliance in Italy.

Advance Payments: June and November

Italy operates an acconto (advance payment) system, where companies pre-pay taxes based on the prior year’s liability.

• First advance payment: 30 June, covering 40% of the prior year’s IRES and IRAP liability
• Second advance payment: 30 November, covering the remaining 60%

The balance, if any, is paid at the time of filing. Companies expecting significantly lower results than the prior year can calculate the acconto on the basis of their actual current-year estimate rather than the prior year’s figures, but must be prepared to justify this position.

Finance teams should also note that the VAT annual return is due by 30 April, and that VAT operates on a separate compliance cycle from IRES and IRAP.

How to Pay: Modello F24

All Italian tax payments, including IRES, IRAP, and social security contributions, are made via the Modello F24 (the standard Italian tax payment form). Payments are made electronically, either through the company’s Italian bank account or via an authorised intermediary. Each tax has a specific tax code (codice tributo) that must be entered correctly on the F24 to avoid misallocated payments.

Late filing penalties apply even where no tax is due: a minimum of €250 per return. Where tax is also owed, the penalty increases to 120% of the unpaid tax. Voluntary correction through the Italian ravvedimento operoso (self-correction) mechanism significantly reduces these penalties if applied before an audit begins.

IRES and IRAP Updates for Italy in 2026

IRES Premiale: The 20% Reduced Rate

Italy introduced a temporary reduced IRES regime (often referred to as IRES Premiale) for the 2025 tax period (declared/paid in 2026). The standard 24% rate can be reduced to 20% if the statutory conditions are met, including (in summary) profit retention/earmarking, qualifying investments and employment-related conditions, with additional technical requirements defined in the implementing framework.

This is not automatic: eligibility is condition-based and documentation-heavy, so it should be verified before filing.

Dividend Exemption and PEX

Dividends received by Italian resident companies from Italian companies or from companies resident in countries other than tax havens (i.e. not included in the “blacklist”) are excluded from the IRES taxable base for 95% of their amount.

Dividends are generally excluded from the IRAP taxable base.

Practical Takeaways for Finance Teams

• IRES at 24% and IRAP at 3.9% are cumulative, not alternative taxes. Both apply to most Italian entities in normal operating conditions.
• IRAP is not a profit tax: a company can break even or make a loss for IRES purposes and still owe significant IRAP, particularly if it carries a large payroll of temporary or agency workers.
• The choice between branch and subsidiary affects not only the tax base but also transfer pricing exposure, treaty eligibility, and consolidation options.
• Italy’s 103 double tax treaties can substantially reduce withholding taxes on dividends, royalties, and interest, but treaty benefits require careful documentation of conditions and beneficial ownership.
• The IRES Premiale reduced rate of 20% for FY2025 is a meaningful saving, but all three conditions must be met and documented before the benefit can be claimed.
• Advance payments in June and November require accurate forecasting: paying too little triggers interest and penalties, while overpaying creates cash flow inefficiency.

How HRIT Can Help

Foreign groups entering Italy usually need support that connects entity structuring, compliance, and day-to-day accounting workflows to the realities of IRES and IRAP Italy. We help clients assess whether a branch or subsidiary is more appropriate, manage filings and payments, and align tax positions with documentation and governance expectations. For a full overview of what is involved, see our accounting and tax services.

If you are reviewing your Italian tax position or planning a new entry into the Italian market, Accounting & Tax Compliance in Italy is a good starting point.