When registering for a value-added tax (VAT) number in Italy, there are several elements that need to be taken into consideration. The first is choosing the type of tax regime that is best suited to the business. Italy offers several different types of tax regimes: ordinary, simplified and flat-rate (although, for those who registered for a VAT number before 2015 and meet specific requirements, the "minimum tax regime" is still available). In this article, you will find out what the Italian flat-rate tax regime is, the requirements for accessing it and the advantages that it can offer a business.

What's in this article?

• What the flat-rate tax regime is
  
• Flat-rate tax regime: How it works
  
• Requirements for accessing the flat-rate tax regime
  
• Reasons for exclusion from the flat-rate tax regime
  
• Advantages of the flat-rate tax regime
  
• How to register for a VAT number under a flat-rate tax regime
  

What is the flat-rate tax regime?

The Italian flat-rate tax regime is a preferential tax regime designed for natural persons who run a business, or who are involved in artistic or professional activities. The Italian government introduced it with Law no. 190/2014 and it came into force on 1 January 2015, nullifying all the previous preferential tax regimes:

• The new business activities regime
  
• The advantageous tax regime, in force since 1 January 2012, which had absorbed the minimum tax regime
  
• The facilitated accounting regime (formerly the minimum tax regime)
  

The flat-rate tax regime serves to reduce the fiscal and administrative burden for businesses with limited earnings. It provides for a fixed rate based on earnings and simplified accounting management. Let's take a closer look at what it entails.

Flat-rate tax regime: How it works

Tax break

The main feature of the flat-rate tax regime is the application of a substitute tax (personal income tax or IRPEF, regional and municipal surcharges, and regional business tax or IRAP) with a fixed rate of 15%, which drops to 5% for the first 5 years of business activity in the following cases:

• The taxpayer has not carried out any artistic, professional or business activity in the previous three years, including in an associated or family form.
  
• The business activity performed does not in any way constitute a mere continuation of another business activity that has been previously carried out as employed or self-employed work (excluding the compulsory internship period for practising arts or for professions).
  
• If a business activity performed previously by another taxpayer continues, the amount of the related revenues and remuneration recorded in the tax period preceding the one in which the benefit was recognised does not exceed the limit that allows access to the regime.
  

Exemption from the application of VAT

Businesses that participate in the flat-rate tax regime are exempt from applying VAT on invoices to their customers. All they need to do is add the wording, "Operation not subject to VAT pursuant to Article 1, paragraphs 54–89 of Italian Law no. 190/2014 and subsequent amendments/additions" on their invoices.

Social security contributions in the flat-rate tax regime

In addition to taxes, businesses operating under a flat-rate regime must pay social security contributions, as they would in any other tax regime. As far as the payment of contributions under the flat-rate tax regime is concerned, there are three categories of activities to consider:

• Taxpayers registered for separate INPS (Italian National Institute for Social Security) management
  Separate INPS management concerns self-employed workers who are not part of specific professional categories. For example, these include freelancers who are not members of an association or whose association does not have a private fund. In this case, the taxpayer must register for separate INPS management with a fixed contribution percentage of 26.23% (as of 2023) applied to the taxable income.

• Artisans or retailers
  Businesses that fall into this category must pay fixed contributions – which do not depend on turnover, and amount to €4,208.40 for artisans and €4,292.42 for retailers as of 2023 – and variable contributions. If the taxable income exceeds €17,504, artisans pay 24% on the excess amount, while retailers pay 24.48%. However, taxpayers who fall into this category can benefit from a 35% reduction in social security contributions thanks to the INPS, which has also been confirmed for 2024. This reduction is not automatic and the taxpayer must submit a specific request to the INPS. Submitting an application for a reduction in social security contributions is only necessary in the first year. From that point forwards, tax relief will continue as long as the necessary conditions remain unchanged.

• Members of a professional association
  Flat-rate taxpayers who belong to a certain professional association pay contributions according to the regulations of the relevant social security fund.

Example of calculating the tax base under the flat-rate tax regime

In the flat-rate tax regime, it is not possible to deduct individual professional expenses to calculate the taxable base. Instead, the deduction of expenses is fixed and established by law, depending on the type of activity performed and therefore on the taxpayer's ATECO code. Each ATECO code corresponds to a certain profitability coefficient. These are listed in the table maintained by the Agenzia delle Entrate (Italian Revenue Agency). The main ones are as follows:

After identifying the coefficient corresponding to the relevant ATECO code, the next step is to calculate the revenues for the reporting year based on the cash principle. This means that only the revenue and remuneration that are actually collected in the specific tax period need to be considered. For example, if an invoice payment was issued at the end of 2023, but it was actually collected at the beginning of 2024, it will count as part of the revenue for 2024.

To find the taxable income, let's look at a gross revenue of €40,000 and a profitability coefficient of 78%:

Taxable income = (profitability coefficient x gross revenue)

(0.78 x €40,000) = €31,200 taxable income

Finally, it is important to note that as of 1 January 2024, electronic invoicing is also mandatory for taxpayers using the flat-rate tax regime. Here is a sample invoice for use under the flat-rate tax regime. Anyone using this regime should consult their accountant to ensure full compliance.

Requirements for accessing the flat-rate tax regime

To be able to access the flat-rate regime, the taxpayer must meet one subjective requirement and two objective requirements.

Subjective requirement

The taxpayer must be a natural person who performs a business, artistic or professional activity (including family businesses), and meets the established requirements. Partnerships, joint-stock companies, cooperatives and associations may not adopt the flat-rate tax regime.

Objective requirements

The objective requirements for accessing the flat-rate tax regime are as follows:

• Annual turnover limit: The taxpayer's annual turnover must not exceed €85,000 (the previous limit of €65,000 was raised by the 2023 Budget Law). To check whether the limit has been exceeded, the taxpayer should consider the accounting regime applied in the year in question. If several activities are performed under different ATECO codes, the taxpayer should add up the specific revenues/remuneration relating to the different activities performed. When opening a new business, the taxpayer must reduce the €85,000 limit in proportion to the number of months of activity. This involves dividing 85,000 by 365 (the number of days in a full year) and multiplying the result by the number of days of actual activity. Let's say that a new business was started on 1 November 2024. Using the calculation (85,000 ÷ 365) x 61, the compensation limit to meet in 2024 will therefore be €14,205.
  If the €85,000 limit is exceeded, but revenue and remuneration do not go beyond €100,000, the taxpayer will remain in the flat-rate tax regime for the current year. They will just need to pay the required substitute tax to continue to enjoy the simplifications and tax breaks. However, the following year, they will not be eligible for the flat-rate tax regime and will have to adopt the ordinary regime. If the €100,000 threshold is exceeded, the taxpayer will be disqualified from the flat-rate tax regime immediately and they will have to start applying VAT on any subsequent invoices.

• Spending limit: The spending limit for employees or ancillary work must not exceed €20,000 (gross) per year. This threshold includes remuneration for employees and collaborators, as well as profit sharing for associates with contribution of labour only.

Reasons for exclusion from the flat-rate tax regime

In addition to checking that the business meets the requirements for accessing the flat-rate tax regime, it must also make sure that it does not fall under certain specific cases, under penalty of exclusion from the benefits of this tax regime. Unlike the requirements to access or remain in the flat-rate tax regime, which reference the year preceding the one in which the favourable regime is to be applied, the causes of exclusion apply with reference to the same year of application of the regime, with the exception of the case referred to in letter d-bis of paragraph 57.

According to the causes of exclusion, the following parties cannot access the flat-rate regime:

• Natural persons who adopt special regimes for VAT purposes or flat-rate income determination regimes.

• Parties who do not reside in Italy. The only exception is for those who reside in one of the member states of the European Union or a country that adheres to the European Economic Area Agreement – which ensures an adequate exchange of information – and those who generate at least 75% of their total income in Italy.

• Parties whose activities exclusively or predominantly concern the sale of buildings or portions thereof, building land or new means of transport.

• Parties who perform business, artistic or professional activities while participating in partnerships, professional associations or family businesses – or parties who control limited liability businesses or joint venture associations directly or indirectly, carrying out the same economic activities as the former, either directly or indirectly.

• Natural persons who carry out their activity mainly for employers with whom employment relationships are ongoing or have existed in the two previous tax periods, or for entities who are attributable to such employers either directly or indirectly, with the exception of individuals who start a new activity after completing the compulsory internship period for practising arts or for professions.

• Parties who in the previous year received employment income and/or similar with amounts exceeding €30,000. Even if this limit is exceeded, the party in question would still be able to access the regime if, in the previous year, they ceased to be employed and did not establish any new employment relationships or receive any pension income.

Advantages of the flat-rate tax regime

Below is a summary of the main advantages of the flat-rate tax regime:

• The tax rate is subsidised: Taxpayers pay a fixed tax rate of 15% – or 5% for 5 years if starting a new business.

• VAT is not applied to the sale of products and services: This constitutes a competitive advantage for business-to-consumer (B2C) businesses adhering to the flat-rate tax regime, as they will be able to sell their product or service at a cheaper price compared with their competitors.

• No requirement to keep accounting records: It is not mandatory to keep accounting records, unlike under the ordinary tax regime.

• INPS reduction for artisans and retailers: Artisans and retailers who join the flat-rate tax regime can request a 35% INPS reduction.

• Expenses are determined on a flat-rate basis: This could be convenient for businesses that incur few costs, such as professionals.

• Accounting costs are lower: Lower accounting costs can help businesses to allocate saved resources to initiatives aimed at growing the business.

• Exclusion from the application of ISAs: Businesses are excluded from the application of the synthetic indexes of fiscal reliability, thus easing administrative and tax obligations.

How to register for a VAT number under the flat-rate tax regime

Here are the main steps to register for a VAT number under the flat-rate tax regime:

• The first step to register for a VAT number under the flat-rate tax regime is to identify the ATECO code associated with the activity performed, based on the classification of economic activities (see the complete list of ATECO codes).
  
• The next step is to fill in the AA9/12 form to register for a VAT number – which is available on the Italian Revenue Agency website – and select the flat-rate tax regime.
  
• Once completed, this form can be submitted electronically on the Italian Revenue Agency's website. Alternatively, it is also possible to visit one of its offices in person.
  
• Once the request has been sent, it is a case of waiting for the VAT number to be assigned. This 11-digit number will be the taxpayer's VAT number for the entire duration of their business activities. Alternatively, an accountant can be appointed to take care of registering for a VAT number under the flat-rate tax regime on the taxpayer's behalf.
  

If someone has already registered for a VAT number under the ordinary or simplified tax regime, but they meet the requirements to benefit from the flat-rate tax regime, the transition is even easier and they will not need to notify the Italian Revenue Agency. This is because the flat-rate regime is considered to be a natural regime. All they need to do is start keeping their accounts and issuing invoices in accordance with the methods defined for this regime.

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