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Tax Treaty Considerations for Expats in Italy

Submitted: March 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Italy, and intend bring money earned from them into Italy during your stay. They also apply if you build up some investments in Italy during your stay, and intend to leave them there after you have left Italy. Italy has a network of tax treaties in force with over 90 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Italy; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Italy on dividends sent to a country without a tax treaty is 20% (1.375% for residents of EU and EEA countries), if sent to a country with a tax treaty the rate is generally reduced to 15%. While not directly related to withholding tax, you should also be aware that Italy maintains a black list of countries (mainly tax havens) regarding which special rules apply with regards to the treatment of dividends. There is an explanation of the rules and the complete list here.

The withholding tax rate in Italy on interest sent to a country without a tax treaty is 20%, if sent to a country with a tax treaty they are generally reduced to 10%.

The withholding tax rate in Italy on royalties sent to a country without a tax treaty is 22.5%, if sent to a country with a tax treaty they are generally reduced to 10%. As a result of the EU Interest and Royalties Regime, it is possible to apply for an exemption from withholding tax on royalties, provided certain conditions are met.

Italy’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge Italian residents to 15% on dividends, and 10% on interest and royalties.

For the complete rules and rates it is necessary to read the treaty itself. A link to each Italy treaty in force can be found here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Prior to arriving in Italy you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Italian country to one with a more favourable tax treaty, or even to Italy itself, to reduce the tax rate paid.

If your home country has a generally higher rate of tax than Italy, you may benefit by becoming tax-resident in Italy as early as possible. At the end of your stay in Italy you can also rearrange your affairs to ensure that any on-going income from Italian employment or investments is also taxed at the lowest rate possible in the future.

 

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