Corporate Tax in Italy and Dividends to Israel: IRES and IRAP in 2026, Treaty Withholding Tax and What Happens in Israel

This guide is intended for Israeli business owners who have a company in Italy, or are planning to set one up, and want to understand how much tax the company pays and what happens when the profit is taken out to Israel. Setting up the company itself, the legal forms and the registration obligations are set out in a separate guide on setting up a company in Italy. The rates here are correct as of November 2026.

1What is the corporate tax rate in Italy in 2026?

As of November 2026, according to PwC Tax Summaries, the corporate tax rate (IRES, imposta sul reddito delle società) is 24% of taxable profit. A company resident in Italy is taxed on its worldwide income. Alongside IRES there is IRAP, a regional tax on productive activity, discussed below.

For the 2025 tax year only, a reduced rate of 20% was set for companies that reinvested part of their profit in fixed assets and met further conditions. According to PwC and the Italian sources we checked, the benefit was not extended to 2026. Instead, the 2026 Budget Law introduced enhanced depreciation (iperammortamento) on investments in capital assets made between 1 January 2026 and 30 September 2028, under the conditions set by law.

2What is IRAP and who pays it?

IRAP (imposta regionale sulle attività produttive) is a regional tax paid alongside IRES, at a base rate of 3.9% as of November 2026, according to PwC Tax Summaries. It is levied on the net value of production of the business, not on accounting profit. The tax base differs from that of IRES, and in some cases certain costs are not deductible. Each region may vary the rate within a range of up to 0.92 percentage points, and banks, financial entities and insurance companies have different rates.

3What are the VAT rates in Italy?

As of November 2026, according to PwC Tax Summaries, the standard VAT (IVA) rate in Italy is 22%. Reduced rates apply to certain goods and services: 4% on some foodstuffs and on certain books and electronic newspapers, 5% on certain health services and certain maritime transport, and 10% on certain types of electricity, medicines and other products. An Italian company is required to issue electronic invoices. According to PwC, the e-invoicing obligation does not apply to a foreign business not established in Italy, even if it is registered there for VAT.

4How much tax is withheld from a dividend paid to Israel?

As of November 2026, according to PwC Tax Summaries and the Israel-Italy tax treaty, withholding tax on a dividend paid to Israel is 10% for an Israeli company holding directly at least 25% of the capital and 15% in any other case, instead of 26% under Italian domestic law. Under Italian law, a dividend paid by an Italian company to a shareholder not resident in Italy is subject to a final withholding tax of 26%. A non-resident may request a refund of up to 11/26 of the tax withheld, if it proves that the dividend was taxed in its country. The reduced rate of 1.2% applies only to companies resident in the EU and the European Economic Area, so it is not relevant to an Israeli company.

The tax treaty between Israel and Italy, signed in Rome on 8 September 1995 and ratified in Italy by Law 371/1997, limits the withholding. According to PwC's summaries for both countries, the rate is 10% when the shareholder is a company (other than a partnership) that directly holds at least 25% of the capital of the distributing company, and 15% in any other case. To benefit from the treaty rate, an Israeli tax residence certificate and the forms required by the paying company usually need to be provided before payment. Otherwise 26% will be withheld, and a refund will have to be requested.

5What happens in Israel when an individual receives a dividend from an Italian company?

Usually 25%, or 30% for a substantial shareholder, as of November 2026 according to PwC Tax Summaries, and Israel gives a credit for the tax withheld in Italy. An Israeli resident is liable to tax on worldwide income. A dividend from a foreign company is usually taxed for an individual at 25%, and at 30% if he is a substantial shareholder, meaning he usually holds 10% or more of the means of control. In 2026 the Israeli surtax of 3% also applies to taxable income above 721,560 ILS a year, and on capital income such as dividends above the same threshold an additional 2% applies.

For the tax withheld in Italy, up to the treaty rate, a credit is given in Israel up to the amount of the Israeli tax on the same income. Tax over-withheld in Italy, beyond the treaty rate, is not credited in Israel but must be reclaimed from Italy. It is therefore important to ensure the correct rate already at payment.

6And what if the shareholder is an Israeli company?

As of November 2026, according to PwC Tax Summaries, an Israeli company receiving a dividend from a foreign company is usually liable to tax at 23%, with a credit for the tax withheld in Italy. According to PwC, in certain cases the company may elect to be taxed at the corporate tax rate and also receive an indirect credit for the corporate tax that the Italian company paid on the profit from which the dividend was distributed. The indirect credit is subject to conditions in the Income Tax Ordinance, and it is worth considering in advance with the accountant.

When the Israeli company later distributes the profit to its shareholders, the individuals will pay dividend tax in Israel. Planning therefore needs to look at the entire chain: Italy, the Israeli company and the shareholders. In the guide on taxation of a foreign project company we explained these considerations in the context of real estate.

7Can an Italian company be treated as a controlled foreign company?

Usually not, if it is an operating company. According to PwC Tax Summaries (as of 2026), the rules apply mainly where most of the income is passive and taxed at an effective rate of 15% or less. The controlled foreign company rules in the Income Tax Ordinance allow Israel to tax an Israeli controlling shareholder on profits that the foreign company has not distributed, as if they had been distributed. According to PwC, the rules apply to a controlling shareholder holding 10% or more of any of the means of control, when most of the company's income or profits are passive (interest, dividends, rent, royalties, capital gains) and are taxed at an effective tax rate not exceeding 15%, and further cumulative conditions are met.

An operating Italian company that sells goods or services and pays IRES of 24% will usually not meet the conditions. An Italian holding company that receives mainly passive income and benefits from exemptions, for example on dividends from subsidiaries, needs a specific review of its effective tax rate.

8Salary or dividend for an Israeli director?

There is no single answer: salary and management fees usually reduce the profit subject to IRES, whereas a dividend is paid out of profit after corporate tax, with withholding of 10% or 15% under the treaty. An Israeli shareholder who serves as a director of the Italian company can receive director's fees or a salary, or leave the profit in the company and withdraw it as a dividend. The main differences:

• Director's fees: under the directors' fees article in tax treaties, they may be taxed in the country where the company is resident, i.e. Italy. In Israel the income is reported, and a credit is given for the Italian tax.
• Salary for work: taxation depends mainly on where the work is actually performed. Work performed in Italy is usually taxed there, and may also trigger Italian social security contributions. The cost to the employer in Italy includes social security contributions of about 30% of gross salary, according to PwC.
• Dividend: paid from profit after IRES and IRAP, with 10% or 15% withholding under the treaty, and tax in Israel with a credit.
• Deductible expense: salary and director's fees usually reduce the profit taxable under IRES. A dividend does not.

There is no single right answer. The comparison depends on your marginal tax rate in Israel, the extent of the work performed in Italy and the social security question. This is exactly a point for a joint calculation by an Israeli accountant and an Italian commercialista.

9When is an Israeli company considered to have a permanent establishment in Italy?

An Israeli company operating in Italy without a subsidiary may create a permanent establishment there (stabile organizzazione), for example through an office, a branch, a building site or an agent who concludes contracts on its behalf. If a permanent establishment is created, Italy may tax the profit attributed to it, usually under IRES and IRAP, and Israel gives a credit for that tax. The definition of a permanent establishment is set in Article 5 of the treaty and in Italian law. The options for operating in Italy without a subsidiary, including a branch and a representative office, will be set out in a separate guide on an Israeli company operating in Italy.

10What do the main scenarios look like in practice?

The table summarises, in principle, the layers of tax in each route. The data is not a tax calculation, and each scenario depends on the facts.

11What must be reported in Israel?

Mainly the holding in the foreign company, related-party transactions, dividends and credits, and an annual check of the controlled foreign company rules:

• Holding in a foreign company: an Israeli resident who holds a foreign company attaches a report on the holding to the annual return (Form 150).
• Related-party transactions: loans, services, management fees and royalties between the Israeli company and the Italian company require arm's-length pricing and appropriate reporting.
• Dividends and credits: reported in the annual return, with the withholding certificates from Italy.
• Controlled foreign company: check every year whether the company meets the conditions.

The full list of reports depends on the structure, so we recommend coordinating it with an Israeli accountant. In the overview of Israel's tax treaties you can compare the Italian treaty with other treaties.

12When are tax returns filed and paid in Italy?

As of November 2026, according to PwC Tax Summaries, IRES and IRAP returns are filed by the end of the tenth month after the end of the tax year, and the balance of tax is paid by the end of the sixth month. In detail:

1. IRES and IRAP returns are filed by the end of the tenth month after the end of the tax year, i.e. by 31 October for a company whose tax year is the calendar year.
2. The balance of tax is paid by the end of the sixth month after the end of the year.
3. The advances for the following year are 100% of the previous year's tax, and are paid as 40% by the end of the sixth month and 60% by the end of the 11th month. Taxpayers under the reliability indices method (ISA) pay two equal instalments.
4. Payments are made online using form F24.
5. The tax authority may assess until the end of the fifth calendar year after the year in which the return was filed, and until the end of the seventh year where no return was filed.

13What is worth planning before distributing profits?

Before a distribution, settle the holding structure, arrange the residence certificate and coordinate the Israeli side. These are the steps:

1. Decide who holds the shares: an individual or an Israeli company, and the percentage held, because this determines whether withholding will be 10% or 15%.
2. Provide the Italian company with an Israeli tax residence certificate and the required forms before payment.
3. Check with the Israeli accountant whether to elect the indirect credit, when the shareholder is a company.
4. Document where decisions in the Italian company are made, to reduce the risk of dual residence.
5. Price every payment between the companies at arm's length: interest, management fees and royalties.
6. Keep the withholding certificates from Italy for the credit in Israel.

This guide is general information correct as of November 2026 and is not tax advice. Rates, conditions and entitlement to a credit need a specific review with an accountant in Israel and in Italy.

More on doing business in Italy: Setting up a company in Italy · An Israeli company operating in Italy · Commercial disputes and litigation in Italy · Comparison of 8 countries · All guides for companies and businesses

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