IT | EN

Black and white image with a paper airplane with "startup" written on it that is about to launch

Starting a Business in Italy: A Guide for Foreigners – Part 3

Introduction

In previous articles in this series, we analyzed the general framework for foreign citizens entering the Italian business world (Part 1) and touched on the social security system and its various components (Part 2). In this third article, we address the tax system, with a particular focus on the regimes available to those starting a sole proprietorship in Italy: from the flat-rate regime, which has already been mentioned several times, to the ordinary regime, and finally some notes on the special regimes relevant to individuals coming from abroad.

The Tax System: First Steps

Before choosing a tax regime, anyone intending to conduct business in Italy must obtain a tax ID number and a VAT number, both issued by the Italian Revenue Agency. The tax ID number identifies the individual in all dealings with the government; the VAT number, on the other hand, is the number by which the taxpayer is identified in the conduct of business activities.

For more information on applying for an Italian tax ID number for foreigners, please refer to this article: https://antonellolawfirm.com/2025/03/05/cosa-e-e-come-richiedere-il-codice-fiscale-italiano-per-stranieri/

When applying for a VAT number, you must, among other things, identify and specify the ATECO code corresponding to the business activity you intend to carry out.

This code is not merely a formal requirement: it determines the profitability coefficient applicable under the flat-rate scheme and will affect your social security classification, as explained in Part 2.

It will therefore be necessary to carefully assess which code is most appropriate and consistent with the business or self-employment activity you will be carrying out.

The ATECO codes that identify these activities are classified byISTAT (the National Institute of Statistics) and can be found at this link: https://www.istat.it/classificazione/classificazione-delle-attivita-economiche-ateco/

The Flat-Rate Tax Regime

What It Is and Who Is Eligible

The main preferential tax regime reserved for individuals engaged in business, artistic, or professional activities. It is available to Italian nationals, EU citizens, and non-EU citizens legally residing in Italy who, in the previous year, earned revenues or compensation not exceeding 85,000 euros and who do not fall under any of the exclusion criteria set forth by the regulations.

The main grounds for exclusion are:

There are also certain grounds for disqualification which, if they occur, require the taxpayer applying the flat-rate regime to exit the scheme starting with the following tax year or, in certain cases, as soon as the ground for disqualification arises.

How the Flat-Rate Tax Regime works

The mechanism is simple in concept. Taxable income is not determined by the difference between actual revenue and costs, but rather by applying a profitability coefficient—established by law in relation to the ATECO code—to the revenue. For example, the coefficient is 78% for professional services, 67% for retail trade, and 40% for restaurants and food service businesses. A 15% substitute tax is applied to the taxable income calculated in this way, replacing IRPEF, regional and municipal surtaxes, and IRAP.

For individuals starting a new business who have not engaged in any artistic, professional, or business activity—including in partnership or as a family business—during the previous three years, the rate is reduced to 5% for the first five years. This is a significant tax break that makes the flat-rate scheme particularly attractive for those entering the Italian market for the first time.

The flat-rate regime offers numerous advantages: in addition to reduced taxation, the taxpayer is exempt from applying VAT to internal transactions (they do not charge VAT to their customers and do not claim it as a deduction on purchases), benefits from simplified accounting requirements, and—as mentioned in Part 2—can take advantage of a 35% reduction on INPS social security contributions.

The main limitation is the inability to deduct VAT and actual costs: the scheme is based on a flat-rate profit margin, which can be disadvantageous for those who incur high expenses (purchase of equipment, employees, rent, etc.) or primarily work with VAT-registered customers who cannot recover the VAT that was not charged. In these cases, a concrete cost-benefit analysis must be conducted on a case-by-case basis.

The Ordinary Tax Regime

When the Ordinary Tax Regime is applied

The ordinary tax regime applies mandatorily to all taxpayers whose revenue exceeds the 85,000-euro threshold, who meet one of the conditions precluding eligibility for the flat-rate regime, or who simply choose not to avail themselves of it.

Determination of Income and IRPEF Rates

Under this regime, taxable income is determined as the difference between revenue earned and costs actually incurred and documented, in accordance with the rules of relevance and timing of expenses set forth in the TUIR (the Consolidated Income Tax Law).

The progressive IRPEF tax rates in effect in Italy are applied to net income:

A clarification: this system is progressive by income brackets, which means that the taxpayer will not pay the highest rate on the entire amount of their income, but only on the portion that falls within that specific bracket. To give a practical example with a taxable income of 35,000 euros: 23% is paid on the first 28,000 euros, which amounts to 6,440 euros, and only on the second bracket—that is, on the remaining 7,000 euros (35,000 euros

– 28,000€), is subject to the higher rate of 33%, or 2,310 €.

In addition to this standard taxation, there are regional and municipal surcharges (which vary, averaging between 1.2% and 3.3%), representing the portion of taxes due to the regions and municipalities, respectively.

The taxpayer is also required to maintain a more complex accounting system and to apply VAT to their sales transactions.

Special Tax Regimes for Individuals Coming from Abroad

The Italian tax system includes certain provisions of particular interest to individuals who transfer their residence to Italy from abroad. Although these are regimes with specific requirements and their own complexities, they are worth mentioning here because they may influence the choice of tax regime for business activities.

The regime for impatriate workers

The impatriate regime allows individuals who transfer their tax residence to Italy to tax only a portion of the income generated within the country. In the version currently in force, it is relevant that the relief applies provided that the person has not been tax resident in Italy in the three tax periods preceding the transfer, that he undertakes to remain resident for at least four years, and that he carries out his work mainly in Italian territory.

The Flat Tax for New Residents (HNWI)

Another regime of great interest to individuals who transfer their tax residence to Italy is the one recently introduced by Article 24-bis of the TUIR, commonly known as the flat tax for new residents.

This option is available to individuals who have not been tax residents of Italy for at least nine of the ten tax periods preceding the move, and it replaces the ordinary IRPEF—limited to income earned abroad—with anannual flat-rate tax of 100,000 euros, regardless of the actual amount of such income.

The regime is therefore particularly advantageous for individuals with substantial assets or high levels of foreign income, for whom the substitute tax is lower than what would normally be due. Income earned in Italy—for example, that derived from business activities conducted in the country—remains subject to ordinary tax rules (or the flat-rate regime, if applicable).

This option may also be extended to family members of the new resident who also transfer their residence to Italy, with the substitute tax reduced to 25,000 euros per family member. It is exercised in the tax return for the tax year of the transfer (or the following one), is automatically renewed from year to year, and has a maximum duration of fifteen years. Before opting in, it is possible—and often advisable—to submit a request for a preliminary ruling to the Italian Revenue Agency to confirm that the requirements are met.

The Central Role of Tax Residency

For all the tax regimes described, a fundamental prerequisite is, in any case, the correct determination of tax residency. Under the TUIR, individuals are considered tax residents of Italy if, for the majority of the tax year (at least 183 days), they are registered in the resident population registry, or have their domicile or residence within the territory of the State pursuant to the Civil Code.

Tax residency determines the applicable tax regime—worldwide taxation for residents, source taxation for non-residents—as well as eligibility for the preferential regimes described.

In conclusion, the Italian tax system offers foreign individuals starting a business in Italy various tools and structures, each with its own rationale and scope of application. The choice between the flat-rate regime and the ordinary regime—or access to special regimes—is never a straightforward decision but depends on the type of business, the cost structure, the nature of the business, and, for foreign individuals, their prior residency status.