"We live in Italy."
Translation:In Italia habitamus.
You have to use in when the noun does not use the locative. The locative is only used by names of cities, towns, small islands (only big enough to have a single city or town on it), and a handful of other nouns like domus. All other nouns need to make use of in with the ablative case to specify location.
Since Italia does not fall into any of those categories, we have to use in.