The title of this article might surprise you.
The essential point lies within the phrase ‘within your own nation.’
What does it mean?
It means that in this article, I am addressing those who find themselves in the worst possible situation a business owner or a freelancer can be in, for which I will give an example.
They live in Italy, have their business in Italy, and their company is in Italy.
Today we’ll see how to resolve these situations (the example is specific to the Italian territory but can be adapted to any other nation in the world to a high degree), and then, in another article, we will explore how a correct and appropriate tax structure should be conceived using national and international law.
Let’s start by clarifying something.
In Italian, the terms ‘taxes’ and ‘duty’ are often used almost synonymously, but there are subtle differences between the two, especially in their use and context.
Using the correct language helps save significant amounts of money.
What does the term duty mean?
A duty is a tribute that the State or another public authority requires from citizens to finance their expenses and provide public services. It is a sum of money that is not directly linked to a specific service received by the taxpayer.
The duty is mandatory.
The payment of duties is required by law, and their evasion is, in many states, criminally punishable.
Duties are used to fund the general expenses of the State, such as security, education, and health.
Let’s give some examples for the Italian state.
VAT (Value Added Tax), Personal Income Tax, and IMU (Municipal Property Tax) are examples of duties.
Taxes, on the other hand, are payments required by a public entity in exchange for a specific service or for the exercise of a particular activity. Unlike duties, there is a direct correlation between the payment and the service received or the activity carried out.
In some cases, the payment of a tax can be avoided by not using the specific service to which it refers.
For example, the tax for issuing a passport, university enrollment fees, and government concession fees, just to name a few.
Once we have understood and internalized well the difference between taxes and duties, we must move on to further understanding the difference between the legal subject ‘person’ and the legal subject ‘company’
The difference between personal tax imposition (personal tax) and company tax imposition (company tax) lies mainly in the taxable subject and the nature of the taxed income.
For example, in the case of personal tax imposition, the taxable subject is the legal trust defined by the name and surname.
This includes employees, freelancers, and anyone who earns income as an individual.
Be aware that the term is not correct but is used with great caution.
We are not only talking about the name and surname but also, very clearly, about where the physical body is located, which is legally recognized with the trust assigned to it at birth.
Taxable income can include wages from employment, income from freelance activities, interest, dividends, earnings from investments, pensions, and other types of personal income.
Personal taxes are generally calculated on a progressive basis, meaning that the tax rate increases as income increases. This system aims to ensure a fairer approach, where those who earn more pay a higher percentage of taxes.
This is not the case in all nations, but it is one of the possibilities.
Individuals can benefit from various tax deductions and reliefs, which can include medical expenses, pension contributions, education expenses, and other personal expenses.
Let’s now look at corporate tax imposition.
Corporate tax is applied to legal entities such as companies.
This includes partnerships, capital companies, and other forms of business organizations.
Corporate taxable income includes the profits made from the business activity. This can include revenues from sales, services, operational costs, and other business expenses.
Corporate tax is usually calculated at a fixed rate or with a progressive system depending on the tax jurisdiction. The rates can differ substantially from those applied to personal income.
Companies can benefit from tax deductions for various operating expenses, including wages, purchase of goods, services, research and development, and other expenses related to the business activity.
After laying the basic groundwork to set up a healthy and proper tax structure, we can take the next step.
Taxes and duties are an inevitable part of life, but there are hundreds of legal ways to reduce them. This not only improves your financial situation but also allows you to reinvest resources in productive ways, such as business expansion or saving for retirement.
First of all, it is fundamental to understand how the tax system in your country works. This includes:
Different Tax Rates: Knowing the different rates and how they are applied at different income levels.
Tax Deductions and Reliefs: Familiarizing yourself with the tax deductions and reliefs available.
Recently Modified Tax Laws: Keeping up to date with the latest legislative changes that could affect your tax burden.
The use of appropriate business vehicles can lead to significant tax savings.
Just opening the first company that comes to mind to save on the accountant’s bill is never a good idea.
For example, in Italy, we have some interesting legal forms such as the Limited Liability Company (SRL) which allows separating personal income from business income, or even the Simplified Limited Liability Company (SRLS) up to the Joint Stock Company (SpA) that can offer tax benefits for higher business incomes.
Investments can be structured in a way to maximize tax efficiency. This includes, for example:
Investment Accounts with Tax Benefits: Such as pension plans or long-term savings accounts.
Real Estate Investments: Leveraging the tax benefits offered by real estate investments.
But we are just getting started.
Understanding the various deductions and tax credits is vital.
Therefore, ensure to deduct all legitimate business expenses as well as explore deductions for investments.
Many investments offer deductions or tax credits.
Another important point for reducing taxes on individual income is pension planning.
Let’s consider some examples:
Pension Funds: Contributions can reduce taxable income.
Individual Pension Savings Plans: Offer tax advantages for pension savings.
We still have an ace up our sleeve.
Charitable donations can provide significant tax benefits.
A choice that, besides the fiscal benefit, carries the added value of supporting worthy causes.
Last but definitely of utmost importance, is the choice of a tax consultant.
This professional is key to achieving maximum tax reduction for both your business and your personal income.
Such a professional must be honest, knowledgeable, and open-minded, and must have the mindset of being a partner in your business.
You don’t need an accountant or a professional who just tells you how much and why you need to pay taxes.
You need a professional who feels like a partner in your business and helps you pay as little as legally due without wastage and errors.
Be aware that a consultant alone is not the exhaustive key to serious and empowering work.
You are the one who, first and foremost, must have a broad and adequate tax culture to be able to interact with your tax firm or professional.
If you don’t know, you can’t know who really knows.
Of course, the technical depth of the subject, in every sector, should then be left to those who dedicate their lives to it.
And that is why consultants exist.
Author: Koan Bogiatto
Koan Bogiatto has explored approximately 123 countries around the world and, after living in Italy, Spain and then in the USA, Florida. He is the only Italian to have received the prestigious Green Card for Extraordinary Achievement and Outstanding Individual from the U.S. Government, in the fields of education and coaching. In the past Koan has served as a consultant for eBay, INA Assitalia, Wind, 21st Century,Alviero Martini, Politecnico di Torino,IUM Monaco, Sai, De’Longhi Group, and Sole 24 Ore. “He is the founder of several successful companies in various fields, including coaching, education, real estate, and cryptocurrency trading, to name a few.”