Tax Treaty Italy - US - Legal Support for Foreigners (2024)

Italysigned its firstdouble taxation agreementwith theUnited Statesin 1984. Thetreatywas replaced in 1999 with a new one, called theUS – Italy Income Tax Treaty.Italyhas made significant exceptions with respect to thesource-country tax ratesin order to obtain apartial foreign tax credit, which is what led to a better economic cooperation between the two countries. Theagreementnow follows theOrganization for Economic Co-operation and Development model. OurItalian lawyerscan offer in-depth information about thetax treaty Italy – USand about how tostart a company as an American citizenin Italy.

Provisions ofUS – Italy double tax treaty

Among the provisions of thenew double taxation treaty between Italy and the US,we mention the following:

1. the elimination of thebranch tax exemptionin both countries,
2. new regulations concerning thetaxation systemapplicable to pensions,
3. newarbitration regulations in Italyand theUnited States.

Ourteam of Italian lawyerscan assist foreign investors with further information on thetax ratesapplied via this agreement. Foreign businessmen can also rely on ourattorneys for in-depth advice on thetaxation systemavailable in this country.

Taxation under the new Italy-US double tax agreement

Most of the changes brought to thenew agreementrefer to thetaxationof passive income, business profits, profits and thetaxationof branches offices inItalyand theUS. The most significant changes were brought to thetaxationof dividends, interests and royaltieswhich are nowtaxed at source.

Thenew tax ratesfor dividends are: 15% in most cases, 10% if the recipient is a corporation owning at least 10% of the voting power in theUSorItalian companypaying the dividends and5% if the beneficial owner is a corporation owning 50% of the voting power.

In order to qualify for the reduced rates, the beneficial owner must own the stock of thecompany paying the dividendsfor at least one year. Thenew tax ratefor thetaxation of interesthas been reduced from 15% to 10%, but new exemptions have also been introduced.

At the same time, companies operating inItalyshould know that, if they aretax residents of the United States of America, they can benefit fromlower taxesregarding royalties, as stipulated by the provisions of theItaly – USA double tax agreement (DTA). Ourlaw firm in Italycan offer legal advice on thetaxesincluded in thisagreement.

What are the taxes of the Italy – USA DTA?

Article 2 of theItaly – USA double tax agreementstipulates themain taxes on incomethat will be applied to thetax residentsof the two contracting states. This part of theagreementmentions that the two countries will apply thesame taxes, but differences can appear due to the nationaltax legislationof each jurisdiction.

Our law firm in Italycan offer an in-depth presentation on the manner in whichAmerican tax residentswill betaxedwhenobtaining income on the Italian territory. As per theArticle 2.(b) of the treaty,Italywill apply the followingtaxes: theindividual income tax, thecorporation income taxand theregional tax on productive activities.

In the case ofUSA, thetreatystipulates thatItalian legal entitiesand natural personsobtaining taxable incomewhile being on theAmerican territorywill be charged with the following: thefederal income taxesthat are prescribed by theInternal Revenue Codeand thefederal excise taxes. When referring to thefederal income taxes of the Internal Revenue Code, it is necessary to know that theUSAwill impose a set oftaxes, with the exception of thesocial security taxes.

What are the main entities to which the treaty is addressed to?

TheItaly – USA double tax treatytakes into consideration a wide range of entities that will betaxedfollowing other provisions mentioned in theagreement, referring to natural persons, legal entities, sub-divisions of foreigncompaniesand it also prescribes the legal framework under which specific business activities will betaxedin each country. It is important to know that thetreatyrefers to the following:

What is a permanent establishment?

Anydouble tax treatysigned between two contracting states will provide a clear definition of the term permanent establishment, which was mentioned above. The term permanent establishment defines a place where various business activities are developed by a company, regardless if the respective legal entity carries out in that location a part of its entire operations or all the business activities developed by the company.

As prescribed by the Article 5 of thetreaty, the term defines a wide range of places through which a business can carry its operations and it may refer to abranch office, a factory, a place of management, a factory, a mine, a building site and other similar locations.Our team of Italian lawyerscan assist with more information on this subject.

Are there any stipulations concerning the taxation of immovable property?

Yes, theItaly – USA treatyprovides a set of legal requirements concerning thetaxation of immovableproperty. This is prescribed by the Article 6 of theagreement, which states that, if atax residentof a contracting state obtains income from immovable property in the other contracting state, he or she will betaxedin the latter state.

When discussing of immovable property, it is necessary to know that theItaly – USA double tax agreementalso refers to income obtained from forestry or agriculture. More importantly, the term immovable property will be referred to as prescribed by the national legislation of the country in which the respective immovable property is located and thus, differences may appear between the legal understanding of the term inItaly or the USA.

However, both countries have agreed that the term immovable property will take into consideration similar terms, such as the ones prescribed under the Article 6.2 of the document. Ourteam of lawyers in Italycan provide more information on the manner in which property can betaxedin this country.

Other provisions of the Italy-US double tax treaty

Thenew double taxation agreementallows theUnited Statestotax US branchesofItalian companies. Thenew treatyalso allowsItaly to tax a foreign companyon a dividends equivalent amount. Theagreementalso changes the way pensions and other benefits aretaxed.

According to the new provisions, theseincomes are taxableonly in the recipient’s resident country.USandItalian employeesand employers will also benefit from deductions for cross-border contributions to pension schemes.

FAQ about the tax treaty Italy – US

1. What types of incomes are protected by the tax treaty Italy – US?

The corporate tax, the income tax, capital gains tax are mentioned by theUS – Italy double tax treaty. Normally, such taxes must be paid in the country where the incomes are registered.

2. When do US citizens in Italy need to claim tax credits?

According to thetax treaty signed by Italy and US, American citizens living in Italy and generating incomes in the country of origin could claim tax credits if they paid the taxes in this state. Specific forms for federal tax returns must be fulfilled.

3. How are Italian companies taxed in America?

The federal income tax and federal excise taxes must be paid byItalian company owners in USA. There are other types of taxes mentioned by theUS – Italy double tax treatythat can be detailed by our Italian lawyers.

4. How is the permanent establishment defined by the tax treaty Italy – US?

A permanent establishment refers to the business place of a company (factory, branch office, building site, etc.), whether in Italy or in USA. Enterprises with activities in one of the contracting states must align with tax requirements imposed.

5. How is the taxation of immovable property made according to the Italy – US double ta treaty?

The taxation of incomes derived from immovable properties is made in the country where these are registered, whether Italy or US. Further details and legal advice can be offered by ourlawyers in Italy.

6. What are the provisions of the Italy – US totalization agreement?

Italy and USA also signed atotalization agreementthat concerns the payment of social security taxes. In this context, American citizens living in Italy are not obliged to pay such taxes in both contracting states. The country in which such payments must be done depend on the length of stay in Italy.

7. What is the dividend tax rate stipulated by the US – Italy double tax treaty?

15% rate is the tax imposed on dividends, as mentioned by thetax treaty signed by US and Italy. A lower tax rate of 5% applies to corporations and recipients owning 50% of the voting rights.

8. What is the withholding tax rate on interest mentioned by the DTT signed by Italy and US?

The withholding tax rate imposed on interest was reduced from 15% to 10%. The new provisions stipulated by thetax treaty Italy – UScan be detailed by ourtax experts in Italy.

9. How are royalties levied according to the tax treaty signed by Italy and USA?

The treatment of royalties has been changed with the recent modifications of thedouble tax treaty signed by Italy and USA. As such, a reduced withholding tax of 5% applies to the gross amount of royalties.

10. How are pensions levied according to the agreement signed by US and Italy?

The social security payments are made in the country where the resident lives. In other words, the taxation is made in the residence state. More on this topic can be discussed with our Italian lawyers.

Making investments in Italy

Italy is a top business destination in Europe and host to many successful international companies. The optimal business climate ensures the smooth running of acompany’s activities in Italy, and foreign entrepreneurs can benefit from an experienced workforce, an advantageous taxation system, a well-developed infrastructure, access to free markets, various financial incentives, simplified procedures for company registration and much more.

Among the prolific sectors in which most companies generate high profits, we mention tourism, in close connection with the Italian gastronomy, but also the real estate field. Here are some statistics that largely underline the Italian economy and could draw your attention to future investments in this country:

1. In terms of total FDIs for 2019, Italy registered around USD 446 billion.
2. The greenfield investment sector absorbed almost USD 7 billion in the same year.
3. The 2020 Doing Business report ranked Italy 58th for simplified business formalities and more.
4. UK, Luxembourg, the Netherlands, and France are the main investors in Italy.
5. The manufacturing sector is quite prolific in Italy and it absorbed around 26% of the total FDIs registered in 2018.

For relevant information about theUS – Italy double tax treaty, pleasecontactourlaw firm in Italy.