Italian Limited Liability (SRL) Company Taxation
First, let’s understand how the income of a Società a Responsabilità Limitata (SRL), which is an Italian form of a limited liability company, is determined. Only after determining the business income can you define the taxable portion, which is the amount on which tax rates are applied. The income of an SRL, which should not be confused with the share capital, is the result of a subtraction: positive components minus negative components.
The positive components typically include:
- Capital gains
- Active surpluses
- Financial income
- Positive changes in ending inventory
The negative components typically include:
- Capital losses
- Passive surpluses
- Financial charges
- Certain types of current and deferred taxes
For the determination of income in an SRL under the ordinary regime, the accrual basis principle applies. This means that the components related to the accounting period are considered, regardless of whether invoices have been issued or payments have actually been made.
The taxes that have the greatest impact on the income of an SRL (Società a Responsabilità Limitata, or limited liability company) are primarily IRES, IRAP, and, in the case of profit distribution, IRPEF.
Let’s take a closer look at each of these:
IRES (Imposta sul Reddito delle Società – Corporate Income Tax):
IRES is the corporate income tax, governed by articles 72-142 of the Italian Tax Code (TUIR). It is a proportional tax with a fixed rate, currently set at 24%, and this rate does not vary with income levels. IRES is specifically levied on the income of the company.
The principle of derivation applies to IRES, as stipulated in Article 83, paragraph 1 of TUIR. This means that “the overall income is determined by adding the increases or decreases resulting from the application of the criteria established in the subsequent provisions of this section to the profit or loss resulting from the income statement for the fiscal year closed during the fiscal period.” In simple terms, taxable income is calculated by subtracting increases and decreases from the operating result.
The taxpayers subject to IRES include:
- All capital companies
- Public and private entities other than companies
- Trusts with the exclusive or primary purpose of carrying out commercial activities
- Non-resident companies
- Consortia and associations not recognized, for which the tax basis is configured in a unitary and autonomous manner.
IRAP (Imposta Regionale sulle Attività Produttive – Regional Tax on Productive Activities):
IRAP is a regional tax on productive activities, and it is considered a real regional tax that impacts the value of net production (VPN). VPN is the difference between the gross production value and the deductions provided for by law. Unlike IRES, IRAP also affects individuals and partnership companies. IRAP is paid in two installments, on June 30th and November 30th.
The standard IRAP rate is 3.5%. However, this rate may increase or decrease depending on the region in which the SRL operates.
IRPEF (Imposta sul Reddito delle Persone Fisiche – Personal Income Tax):
IRPEF is the personal income tax that affects single-member SRLs, transparent entities, and profits distributed to the shareholders of regular and simplified SRLs. Unlike IRES, IRPEF rates are divided into income brackets:
- < €15,000 (23%)
- €15,001-€28,000 (27%)
- €28,001-€55,000 (38%)
- €55,001-€75,000 (41%)
- €75,000 (43%)
These are the key taxes that impact the income of an SRL in Italy, with each tax having its own specific rules and rates.
Italian Joint-stock Companies (SpA) taxation
Società per Azioni (SpA), which are joint-stock companies, are subject to the payment of the Corporate Income Tax (IRES), which has a standard rate of 24%, and the Personal Income Tax (IRPEF).
To establish a Joint Stock Company (SpA), it is necessary to draft a public deed of incorporation in the presence of a notary, who will then proceed with the subsequent registration of the newly formed company with the Business Register at the Chamber of Commerce with jurisdiction in the area.
The minimum required share capital is 50,000 euros (rather than the previously required 120,000 euros, as was the case until a few years ago), with 25% of this capital (12,500 euros) to be deposited in a bank, and this transaction must be recorded in the deed of incorporation.
Depending on the economic activity being undertaken, the law may stipulate higher minimum capital requirements, as is the case for securities brokerage companies (SIM) or banking and financial SpA. If the company is established by a single shareholder, they must immediately contribute 100% of the share capital.
Based on the method of raising financial resources, SpA can be divided into two categories:
Open SpA, which raises capital through the equity market, and their financial reporting must be entrusted to an auditing company. A typical example includes publicly traded companies.
Closed SpA, on the other hand, rely solely on funds contributed by shareholders or third parties, and their financial management can be overseen by a supervisory board.
The key features of a SpA include limited liability for all shareholders and the division of share capital into shares. To cover all expenses and potential debts, a SpA utilizes its own assets. The capital and available financial resources are exclusively used, and shareholders are not obligated to use their personal assets or lend money to the company, even if it faces financial difficulties.
To establish a Società per Azioni (S.p.A.), you need to start from a notarial deed. You must present a public deed in the presence of a notary, who will register and file it with the Business Register with jurisdiction in the area where the company is located. Without this registration, the S.p.A. is not considered to be officially formed.
Provide Notary with Information: You need to provide the notary with the following information:
- Personal details of each shareholder, including up-to-date residence and occupation information. This requires a photocopy of a valid ID document and the tax code (codice fiscale).
- Proof of payment of 25% of the subscribed share capital.
- A sworn appraisal report (only in the case of non-cash contributions).
- Company name.
- Registered office.
- Corporate purpose.
- Financial year end.
- The value of the share capital and the shares of each shareholder.
- Information on corporate bodies and their powers of administration and representation.
Additional Requirements for Corporate Shareholders: If another company is a shareholder, you will need to provide the following documentation for proper identification:
- ID and tax code of the legal representative.
- Updated corporate bylaws.
- Any resolutions from the board of directors delegating powers to the legal representative.
- Business register extract.
- Nationality and date of establishment of the company.
- Tax code and VAT number if different.
- Statute: Along with the deed of incorporation, you’ll also draft the company’s statute, which contains rules for proper management. Upon request by the shareholders, special regulations can be introduced to meet specific personal or business needs, provided they comply with the law. Often, the statute includes rules for setting limits or procedures for transferring share ownership.
Tax Code and VAT: Once the company is established and registered with the Business Register, the S.p.A. will receive its own tax code, which often serves as the VAT number.
The time required to complete this bureaucratic process is typically a couple of days, although it may take up to a week in some cases.
Italian personal companies (SNC and SAS) taxation
“Società in Nome Collettivo” (SNC)
Also known as General Partnerships, are a specific type of partnership company. SNCs are subject to specific rules regarding the content and form of their articles of partnership, with the rest of the regulations referring to those governing simple partnership companies.
The purpose of this unique set of regulations is to simplify the registration process in the Business Register, which is a condition of regularity and has declarative as well as constitutive effectiveness in establishing a certain degree of financial autonomy. However, registration is not a condition for the existence of the company. Each partner is obligated to make contributions as determined in the partnership agreement, either in the form of obligations to provide or to perform.
The power of administration encompasses the authority to carry out all acts falling within the scope of the partnership’s objectives, and it is held individually by each partner separately, unless there is an agreement to the contrary that may limit the administration power to only certain partners.
Non-administrator partners, on the other hand, have the right to be informed about the progress of the partnership’s management and to review the relevant documents. They also have the right to receive a report, similar to that of a mandatary, which serves to provide an account of the administrators’ actions.
A General Partnership (SNC) and its partners will be subject to the following taxes and contributions:
IRAP (Imposta Regionale sulle Attività Produttive): IRAP is calculated as a percentage (3.9%) of the company’s annual business profit.
IRPEF (Imposta sul Reddito delle Persone Fisiche): IRPEF is assessed on individual partners based on their share of the company’s profits, with rates determined by the personal income tax brackets.
INPS (Istituto Nazionale della Previdenza Sociale) for Artisans or Merchants: Each partner is required to enroll in the Artisans or Merchants section of INPS and pay contributions based on their respective shares of the profits.
While a General Partnership involves significant tax obligations, one advantage is that it provides coverage for INPS contributions for all partners. Partners are obligated to register in the Artisans or Merchants section of INPS and pay contributions proportional to their profit-sharing in the company.
Società in Accomandita Semplice (SAS)
It is a particular type of partnership. It is characterized by the presence of two different types of partners with varying degrees of liability. SAS differs from the other two types of partnership companies, simple partnerships (società semplice) and general partnerships (società in nome collettivo), due to the presence of two distinct categories of partners: managing partners (accomandatari) and silent partners (accomandanti).
Accomandatari (Managing Partners):
Managing partners have the rights and responsibilities of a general partnership. They are authorized to manage the company and are personally and jointly responsible for the company’s obligations.
Managing partners can bind the company, sign checks, hold the company’s bank accounts, and are required to enroll in the Artisans or Merchants section of INPS (National Institute for Social Security) for contributions.
Accomandanti (Silent Partners):
Silent partners are excluded from the management of the company and have limited liability, restricted to the capital they have contributed to the company.
They are not authorized to manage the company in any way unless delegated by the majority of managing partners.
Silent partners are primarily investors and are not obliged to pay INPS Artisans or Merchants contributions.
In summary, SAS is a partnership structure that allows for a division of roles and responsibilities between active managing partners and passive silent partners. The managing partners have broader powers and responsibilities, while the silent partners have limited involvement and liability.
Taxation in Società in Accomandita Semplice (SAS):
SAS is the most common form of partnership chosen by entrepreneurs when they decide to open a partnership company. One of the reasons for its popularity is that SAS includes two types of partners:
Those who have unlimited and joint liability for all the company’s obligations (similar to General Partnerships – SNC).
Those who have liability limited to the capital they have subscribed (similar to Limited Liability Companies – SRL).
This type of partnership is also particularly appealing from a tax perspective. In fact, SAS offers the following tax advantages:
On one hand, it allows for the distribution of the entire profit among the partners in proportion to their shares, and these partners are personally and jointly liable for Individual Income Tax (IRPEF).
On the other hand, it allows for the splitting of profits among multiple individuals, resulting in lower IRPEF rates for each partner.
Additionally, for the silent partners (accomandanti), the SAS regulations stipulate that they do not have to pay social security contributions, which can be a significant cost for SNCs. In the case of SNCs, social security contributions are calculated on 100% of the profits.
In summary, SAS offers flexibility in profit distribution, potentially leading to reduced tax liabilities for individual partners. Moreover, the regulations allow for savings in terms of social security contributions for silent partners.