Italy-USA Double Taxation Treaty

Updated on Thursday 14th February 2019

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Italy-USA-Double-Taxation-Treaty 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 the Organization for Economic Co-operation and Development model.

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 and 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 our attorneys 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 royalties which 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. For relevant information about the taxation of foreign companies, please contact our law firm in Italy.