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Flat tax 15%: 2023 VAT taxation updates

For VAT holders under the ordinary scheme flat tax of 15% on part of their income.

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The 2023 Budget Law introduced the opportunity for all VAT holders to subject part of their income to a reduced rate of 15%.

On December 29th, 2022, the Budget Law 2023 (Law No. 197/2022) was published in the Official Journal which provided, in Article 1, paragraph 55, for the application of a flat tax at a rate of 15% on part of the business or self-employment income produced by individuals with VAT registration.

VAT payers in ordinary scheme: Irpef taxation

In Italy, VAT holder individuals receive income from business or self-employment, arts and professions. These are sole proprietorships and professionals who apply:

    • the flat-rate taxation scheme if they meet the requirements and are eligible for it;
    • the ordinary tax regime in all other cases.

VAT holder taxpayers who have not opted for the flat-rate scheme see their income subject to personal income tax (Irpef), according to the bracketed rates set out in Article 11 of the TUIR, as follows.

Total income:

    • up to 15.000 euro: 23% Irpef rate
    • from 15.001 to 28,000 euro: Irpef rate 25%
    • from euro 28.001 to euro 50,000: Irpef rate 35%
    • from euro 50.001: IRPEF rate 43%.

How the incremental 15% flat tax works

What is 15% flat tax

15% flat tax applies on a tax base that cannot in any case exceed €40.000.

The taxable base on which the 15% flat tax is calculated is equal to the difference between:

    1. the income from business, art or profession produced in 2023, and
    1. the highest income from business, art or profession produced in 2020-2021-2022.

This difference (A-B) must then be reduced by an amount equal to 5% of the income as reported in B.

This provides the taxable base on which the 15% Flat Tax is calculated instead of the Irpef rates by brackets. In fact, the amount subject to flat tax will not be taxed according to the ordinary Irpef rates and the relevant tax surcharge.

Which taxpayers are covered by the Flat Tax

Flat tax can be applied by all individuals holding a VAT who are engaged in business, arts or professions and who have not opted for the flat-rate scheme as stated in Article 1(54) to (89) of Law No 190 of December 23rd, 2014.

For instance, it cannot therefore be applied to the following types of income:

    • income from employment;
    • income from land or buildings
    • income received as partner in a partnership or shareholder in a corporation;
    • foreign income;
    • any other income other than income from business or usual self-employment.

How flat tax 15% is calculated: sample cases

Paragraph 55 of Article 1 of Law No 197 of December 29th 2022 provides that the substitute 15% flat tax introduced by the same paragraph is calculated:

…on a tax base, in any event not exceeding €40.000, equal to the difference between the business and self-employment income determined in 2023 and the highest amount of business and self-employment income declared during 2020-2022, reduced by an amount equal to 5% of the latter amount.

Thus, the norm provides for several calculation variables.

Below we provide some sample cases in which the incremental 15% flat tax is calculated.

Sample case 1

    • Income from business/self-employment year 2023: €100.000
    • Income from business/self-employment year 2022: €65.000
    • Income from business/self-employment year 2021: €55.000
    • Income from business/self-employment year 2020: €45.000

In this case, the following are taken into account:

    1. The 2023 income
    1. The 2022 income (as it is the highest income for the three-year period 2020/2021 instead of the ordinary/2022).

The taxable base on which the 15% rate can be calculated, in the case of opting for the flat taxcketed rates, is given by:

    1. Difference between 2023 Income – 2022 Income (A-B): €100.000 – €65,.00 = €35.000

 bra

    1. Reduced by an amount equal to 5% of 2022 Income: €65.000 * 5% = -€3.250

Flat tax taxable base: €31.750 (lower than the €40.000 limit and therefore fully subject to the 15% substitute tax).

The 2023 income will therefore be taxed as follows:

    • €31.750 with flat 15% substitute tax
    • €68.250 according to ordinary income tax rates (see point 1 of this article).

Sample case 2

    • Income from business/self-employment year 2023: €110.000
    • Income from business/self-employment year 2022: €65.000
    • Income from business/self-employment year 2021: € 55.000
    • Income from business/self-employment year 2020: €45.000

In this case, the following are taken into account:

    1. The 2023 income
    1. The 2022 income (as it is the highest income for the three-year period 2020/2021/2022).

The taxable base on which the 15% rate can be calculated, in the case of opting for the flat tax instead of the ordinary bracketed rates, is given by.

    1. Difference between .023 Income – 2022 Income (A-B): €110.000 – €65.000 = €45.000
    1. Reduced by an amount equal to 5% of 2022 Income: €65.000 * 5% = -€3.250

Calculated taxable base: €41.750 (greater than the limit of €40.000).

In this example, the calculated tax base exceeds the maximum amount provided for in Article 1, Section 55 of Law 197/2022.

…on a taxable base, in any case not exceeding 40.000 euros…

The 15% flat tax will therefore be applied to an amount of 40.000.

The 2023 income will therefore be taxed as follows:

    • €40.000 with 15% flat substitute tax
    • €60.000 according to ordinary income tax rates (see point 1 of this article).

Sample case 3

    • 2023 income from business/self-employment: €40.000
    • 2022 income from business/self-employment: €65.000
    • 2021 income from business/self-employment: €55.000
    • 2020 income from business/self-employment: €45.000

In such a situation, it is not possible to opt for the 15% flat tax because the 2023 income is lower than each of the incomes generated in the years 2020-2021-2022.

Flat tax 15%: disadvantages

It is important to specify that VAT holders are not obliged to apply the 15% flat tax. They may in fact decide to apply the ordinary tax regime on their entire 2023 income while qualifying for the new Flat tax.

What are flat tax disadvantages?

Flat tax provided for in the Budget Law 2023 is a substitute tax. Therefore, in the same way as taxes such as the ‘cedolare secca‘ or the substitute tax applied to the flat-rate scheme, it is a substitute for the personal income tax (Irpef) and its tax surcharge.

Therefore, the charges provided for in Article 15 of the TUIR (such as medical, veterinary, education, insurance, etc.) are not deductible from this tax, nor are the deductions provided for in Article 16bis of the TUIR for expenses incurred for building work (Bonus casa, Ecobonus, Sismabonus, etc.).

As a result, taxpayers with a reduced tax capacity in relation to the deductions they are entitled to may have no incentive to apply the flat tax to part of their income.

In addition, the part of the income subject to the 15% flat tax also contributes to:

    • determine the income taken as a reference for the verification of the requirements for certain deductions, detractions or benefits of any kind, including those of a non-tax type.
    • determine the Irpef and related additional payments due for the year 2024. More specifically, for the calculation of advance payments, the tax that would have been determined without the flat tax will be used as the tax for the previous year.

Regulatory Framework

Law No. 197 of December 29th, 2022 (2023 Budget Law)

Reference (Italian only)

Art. 11 Presidential Decree 917/1986 - TUIR

Reference (Italian only)

Artt. 54-89 Law 190/2014

Reference (Italian only)

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