5. TAXATION

There are on-going attempts to rationalise and simplify the tax system and to lower the overall tax burden on businesses. However, the general consensus is that until Italy seriously handles its burgeoning pension system and its national debt problem there will be little real scope for tax reductions. Broadly speaking, therefore, the tax system is as follows:

5.1. Direct taxes:

(a) Personal income tax (IRPEF) is imposed on: (1) worldwide net income (n.i. = gross income - excluded income -deductible expenses) of Italian residents, and (2) non-residents' income produced in Italy or related to property located in Italy (however, most of the treaties to prevent double taxation to which Italy is a contracting state are modelled pursuant to the Organisation for Economic Co-operation and Development Treaty). Tax rates are progressive.

(b) Corporate income tax (IRPEG) is imposed on: (1) worldwide net income of both resident companies and foreign companies having their main office or their business purpose in Italy for more than half of the tax period, and (2) net income produced in Italy by non-resident companies having a permanent establishment in Italy.

Regional income tax (IRAP) is applicable on income produced in Italy by both resident and non-resident companies having a permanent establishment in Italy. Some forms of income, such as dividends, are not subject to IRAP . The tax rate is a percentage of turnover net of certain costs but excluding labour costs.

A local tax is levied by city authorities on real property (ICI) at a rate variable from town to town.

5.2. Indirect taxes:

VAT is an EU-wide tax imposed on the sale of goods or services provided in Italy by a business enterprise or by professionals. Exports are exempt from this tax. VAT is not imposed on financial transactions, sales of securities and sales of businesses. VAT charged may be set off against VAT payable to an enterprise on sales or services supplied, until it vests in the final consumer.

Registration tax applies to any deed and contract made in Italy of a civil, commercial judicial nature (also awards) and to contracts made abroad concerning immovable property located in Italy. The tax applies to capital contributions to a company, subscribed capital increases and to bond and debenture issues. The tax is either proportional to the value (ranging from 0.5 per cent to 15 per cent) or fixed depending on the kind of deed or contract. The tax does not apply where the transaction is subject to VAT.

Further to Registration tax at applicable rate a Cadastral tax is applied on every transfer of immovable property. Mortgage tax is applied on every inscription or annotation into the real estate public records. A Corporate licence tax is applied for the registration of any company.