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Part II Developments in the Member States

Current topics and prospects; policy orientation

I The year 2011 was marked by a succession of tax measures, as the government reacted to a confidence crisis in the
financial markets. The December tax package in particular included substantial reforms of consumption, property
t and, to a lesser extent, personal and business taxation and social contributions. The reforms clearly go in the
a direction of increasing the share of indirect and property taxes in overall tax revenue.
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Following a 1 % hike on 17 September 2011, the government announced an additional 2-point increase in both the
y standard and the reduced VAT rates from October 2012, to be followed by a third 0.5 % hike in 2014; these hikes
may however not enter into force, if a comprehensive reform of the tax system is put in place by next October.
Excise duties also increased sharply (by about 10 cents per litre on fuels) from 1.1.2012. The package also sharply
hiked taxes on high-powered automobiles, private boats and aircraft (at rates diminishing over the time elapsed
since their registration) and introduced a retroactive tax on the amounts regularised under the 'Tax shield' amnesty.

Local property tax was increased sharply by abolishing the exemption on main residences and raising cadastral
values by 60 %, with some reductions depending on household composition; properties held abroad, too, were
made subject to a 0.76 % tax on their value. The regional PIT surcharge was raised by 0.3 % and a temporary 3 %
solidarity contribution on high incomes was introduced. The withholding tax on interest (except those from
government bonds) and dividends was unified at 20 % and a stamp duty on securities accounts was introduced.
The CIT rate was not modified, but a new allowance for corporate equity (Aiuto alla Crescita Economica, ACE),
similar to the Belgian notional interest deduction, was introduced. The ACE is retroactive to 2011 and applies to
capital increases of corporations and even unincorporated businesses (60). It effectively eliminates the tax
advantage to debt over equity for new capital increases, and should thus contribute to reducing high leverage, a
feature of Italy's business sector. In addition, the tax package widened significantly the deductibility from IRAP of
labour costs relating to females or to employees below 35 years of age, to boost their low employment rates.

Main features of the tax system


Personal income tax
PIT rates range from 23 % to 43 %; the top rate applies to incomes above € 75 000(61); a 3 % surcharge applies to
income above € 300 000 from 2011 to 2013. Regions levy surcharges on the PIT, ranging from 1.2 % to 2.0 %.
Finally, most municipalities levy an additional surcharge of up to 0.9%. PIT is withheld at source for salaried
workers. In 2007, most allowances were replaced by tax credits, typically sliding-scale or subject to limits, of
variable amount depending on the form of income (e.g. employment or self-employed income, pension income),
on personal circumstances and on admissible expenditure (e.g. for dependent persons, medical treatment, life and
health insurance, mortgage interest, tuition fees, and the renting of the main dwelling). Until 31 December 2012, a
36 % tax credit on home restructuring expenses (of up to € 48 000 per property), can be claimed in ten equal
annual instalments. Individuals earning professional and business income, besides PIT, are subject to the IRAP tax
(see below). Professional fees paid by businesses and professionals are subject to a 20 % advance withholding tax.

All categories of capital income are taxed. Final withholding tax rates of 12.5 % and 20 % apply, except for
Government bond interest, taxed at a 12,5% rate. However, as from 2009, 49.72 % (previously 40 %) of the
earnings realised on qualified shareholdings are taxed at basic PIT rates; capital gains on non-qualified
shareholdings and bonds are instead taxed at 20.0 %. Stock options are taxed as ordinary labour income. As from
2012, individuals setting up a new business or professional activity may choose a 5 % substitute tax regime for the
first five years or up to the age of 35. In addition, since 2011 landlords may opt for a substitute 21 % tax on rents,
in lieu of the ordinary PIT (19 % in areas with a housing shortage). As from 2012, after the introduction of the new
municipal property tax (IMU), PIT will no longer be charged on owner-occupied immovable property.

Individuals setting up a new business or professional activity may choose, if proceeds do not exceed € 61 974.83
(€ 30 987.41 in the case of services), a 10 % substitute tax regime for the first three years; those already running
(60) For the latter, a new government decree will specify how the allowance will be calculated
(61) In July, however, the Delegated Law on the Reform of the Tax System called on the government to work towards cutting PIT brackets from five to three and fix the new
rates at 20 %, 30 % and 40 %.

110 Taxation trends in the European Union