Italy signed its first double taxation agreement with the United States in 1984. The treaty was replaced in 1999 with a new one, called the US – Italy Income Tax Treaty. Italy has made significant exceptions with respect to the source-country tax rates in order to obtain a partial foreign tax credit, which is what led to a better economic cooperation between the two countries. The agreement now follows theOrganization for Economic Co-operation and Development model. Our Italian lawyers can offer in-depth information about the tax treaty Italy – US and about how to start a company as an American citizen in Italy.
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Provisions of US – Italy double tax treaty
Among the provisions of the new double taxation treaty between Italy and the US, we mention the following:
- the elimination of the branch tax exemption in both countries,
- new regulations concerning the taxation system applicable to pensions,
- new arbitration regulations in Italy and the United States.
Our team of Italian lawyers can assist foreign investors with further information on the tax rates applied via this agreement. Foreign businessmen can also rely on ourattorneys for in-depth advice on the taxation system available in this country.
Taxation under the new Italy-US double tax agreement
Most of the changes brought to the new agreement refer to the taxation of passive income, business profits, profits and the taxation of branches offices in Italy and the US. The most significant changes were brought to the taxation of dividends, interests and royaltieswhich are now taxed at source.
The new tax rates for dividends are: 15% in most cases, 10% if the recipient is a corporation owning at least 10% of the voting power in the US or Italian company paying the dividends and 5% 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 the company paying the dividends for at least one year. The new tax rate for the taxation of interest has been reduced from 15% to 10%, but new exemptions have also been introduced.
At the same time, companies operating in Italy should know that, if they are tax residents of the United States of America, they can benefit from lower taxes regarding royalties, as stipulated by the provisions of the Italy – USA double tax agreement (DTA). Our law firm in Italy can offer legal advice on the taxes included in this agreement.
What are the taxes of the Italy – USA DTA?
Article 2 of the Italy – USA double tax agreement stipulates the main taxes on income that will be applied to the tax residents of the two contracting states. This part of the agreement mentions that the two countries will apply the same taxes, but differences can appear due to the national tax legislation of each jurisdiction.
Our law firm in Italy can offer an in-depth presentation on the manner in which American tax residents will be taxed when obtaining income on the Italian territory. As per the Article 2.(b) of the treaty, Italy will apply the following taxes: the individual income tax, the corporation income tax and the regional tax on productive activities.
In the case of USA, the treaty stipulates that Italian legal entities and natural persons obtaining taxable income while being on the American territory will be charged with the following: the federal income taxes that are prescribed by the Internal Revenue Code and the federal excise taxes. When referring to the federal income taxes of the Internal Revenue Code, it is necessary to know that the USA will impose a set of taxes, with the exception of the social security taxes.
What are the main entities to which the treaty is addressed to?
The Italy – USA double tax treaty takes into consideration a wide range of entities that will be taxed following other provisions mentioned in the agreement, referring to natural persons, legal entities, sub-divisions of foreign companies and it also prescribes the legal framework under which specific business activities will be taxed in each country. It is important to know that the treaty refers to the following:
|Natural persons||According to the Article 4 of the treaty, the term “person” can refer to natural persons, partnerships, trusts or body of persons.|
|Companies||The treaty defines all types of corporate entities that are treated as corporate bodies in terms of taxation.|
|Enterprise of a contracting state||It defines a corporate body of a company registered as a tax resident of one of the contracting states which develops business activities in the other contracting state through a type of permanent establishment.|
|International traffic||The provisions of the treaty also refer at the taxation of the trading and traffic activities between the two contracting states, developed by air or sea.|
What is a permanent establishment?
Any double tax treaty signed 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 the treaty, the term defines a wide range of places through which a business can carry its operations and it may refer to a branch office, a factory, a place of management, a factory, a mine, a building site and other similar locations. Our team of Italian lawyers can assist with more information on this subject.
Are there any stipulations concerning the taxation of immovable property?
Yes, the Italy – USA treaty provides a set of legal requirements concerning the taxation of immovable property. This is prescribed by the Article 6 of the agreement, which states that, if a tax resident of a contracting state obtains income from immovable property in the other contracting state, he or she will be taxed in the latter state.
When discussing of immovable property, it is necessary to know that the Italy – USA double tax agreement also 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 in Italy 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. Our team of lawyers in Italy can provide more information on the manner in which property can be taxed in this country.
Other provisions of the Italy-US double tax treaty
The new double taxation agreement allows the United States to tax US branches of Italian companies. The new treaty also allows Italy to tax a foreign company on a dividends equivalent amount. The agreement also changes the way pensions and other benefits are taxed.
According to the new provisions, these incomes are taxable only in the recipient’s resident country. US and Italian employees and 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 the US – 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 the tax 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 by Italian company owners in USA. There are other types of taxes mentioned by the US – Italy double tax treaty that 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 our lawyers in Italy.
6. What are the provisions of the Italy – US totalization agreement?
Italy and USA also signed a totalization agreement that 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 the tax 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 the tax treaty Italy – US can be detailed by our tax 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 the double 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 a company’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:
- In terms of total FDIs for 2019, Italy registered around USD 446 billion.
- The greenfield investment sector absorbed almost USD 7 billion in the same year.
- The 2020 Doing Business report ranked Italy 58th for simplified business formalities and more.
- UK, Luxembourg, the Netherlands, and France are the main investors in Italy.
- The manufacturing sector is quite prolific in Italy and it absorbed around 26% of the total FDIs registered in 2018.
For relevant information about the US – Italy double tax treaty, please contact our law firm in Italy.