What the US-Italy tax treaty means for expats
If you're living, working, retiring, or doing business between the United States and Italy, your taxes can quickly become complex. Fortunately, the US-Italy tax treaty exists to prevent double taxation – establishing clear guidelines on how different types of income are taxed and which country has the right to tax it.
This article simplifies the United States-Italy tax treaty for expats, dual residents, retirees, and cross-border business owners. Discover how to reduce your tax burden, file the right forms, and stay fully compliant.
United States-Italy tax treaty summary
| Double taxation relief | US expats in Italy can avoid double taxation by claiming the Foreign tax credit, while Italy offers similar relief through its own tax credit system. |
| Dual residency | When both countries claim tax residency, tie-breaker rules determine the true resident based on home, personal ties, daily life, and nationality. |
| Income, inheritance & property rules | Different income types are taxed uniquely under the treaty, while inheritances and gifts are usually only taxed in the country of domicile. |
| Social security | Under the totalization agreement, US expats in Italy pay into US Social Security for up to 5 years, then switch to the Italian system, with benefits combined for retirement eligibility. |
| Filing requirements | US forms: 8833 (treaty-based return position), 1116 (FTC), W-8BEN (beneficial owner declaration). Italian forms: Modello 730 (simplified return for employees/pensioners), Modello Redditi PF (comprehensive return for others). |
What the USA-Italy tax treaty means for you
The USA-Italy tax treaty was signed in 1984 and updated with a protocol in 1999. This bilateral agreement prevents double taxation, reduces withholding rates on dividends and other income, clarifies residency rules for cross-border workers, and facilitates cooperation between the IRS and Italy’s Agenzia delle Entrate to ensure fair tax treatment.
Who gains from this treaty’s protections
The treaty delivers targeted benefits to:
- US citizens and green card holders residing in Italy
- Italian tax residents with income from the US
- dual nationals earning across borders
- retirees receiving pensions from either country
- businesses with cross-border operations
- students and academic professionals on assignment abroad
NOTE! If you’re a dual-status alien – taxed as both a US resident and nonresident in the same year – the tax treaty between US and Italy may still apply. But you’ll need to carefully follow the tie-breaker rules in Article 4, Paragraph 2 to determine where you're officially a tax resident.
Key provisions of the USA–Italy tax treaty
The United States of America and Italy tax treaty outlines how each country may tax different types of income, helping prevent double taxation and ensuring fair treatment for taxpayers. Below are the key provisions — explained, structured, and matched to their corresponding treaty articles.
Taxation of dividends, interest, and royalties (Articles 10–12)
Dividends paid to a company that owns at least 25% of the voting stock of the payer for a 12-month period are taxed at 5% – all others face a 15% rate. Interest payments are taxed at no more than 10%, providing significant relief for investors with cross-border income.
Royalties benefit from tiered treatment: 0% for literary, artistic, or scientific copyrights; 5% for software or technical uses; and 8% in all other cases. This structure allows individuals and businesses to minimize tax friction on passive income streams.
Example: You’re a US expat who owns 30% of an Italian tech firm and receives dividends. As long as your ownership has lasted at least a year, Italy can tax those dividends at only 5% – and you can claim a credit on your US return.
Permanent establishment (PE) rules for businesses (Article 5)
Under the tax treaty between America and Italy, a business is only taxed in the source country if it has a permanent establishment – meaning a lasting physical presence like an office or branch, not short-term projects or agents.
Income from employment, pensions, and social security (Articles 15 & 18)
The treaty ensures that income from work and retirement is taxed fairly and not twice. Each type of income – wages, pensions, and social security – is treated differently depending on residency, duration of presence, and the nature of the work or benefits.
Employment income: Taxed in the country where the work is performed, but may be exempt in the source country if the stay is under 183 days, the employer is not a resident there, and the income isn't locally deductible.
Pensions (private or occupational): Typically taxed only in the recipient's country of residence and include benefits from prior private employment.
Public pensions and social security: Generally taxed solely by the paying country, with the US-Italy totalization agreement preventing double contributions and allowing combined work credits for benefits.
Taxes for entertainers, athletes, students, and teachers (Articles 17, 20 & 21)
Entertainers and athletes are taxed where they perform – no matter who pays – while visiting teachers may enjoy a two-year exemption and students can often receive grants or scholarships tax-free during full-time study abroad.
Example: A US professor teaching in Italy for under two years may qualify for Italian tax exemption – thanks to Article 20. Students can also benefit – scholarships received while studying in Rome may be tax-free.
Capital gains taxation rules (Article 13)
Capital gains from real estate are usually taxed where the property is located – other assets are taxed based on where you live. But the US saving clause can override treaty benefits, meaning Americans may still owe US tax even when the treaty says otherwise.
“Notwithstanding the foregoing limitations on taxation of certain gains by the State of source, the saving clause of paragraph 2 of Article 1 ((Personal Scope)) permits the United States to tax its citizens and residents as if the Convention had not come into effect...” – USA-Italy tax treaty
Always confirm eligibility under Article 2 of the Protocol before assuming exemption.
Skip double taxes – keep more of your income
No one wants to pay taxes twice on the same income – and with the USA-Italy tax treaty, you don’t have to. This treaty includes powerful protections to prevent double taxation, allowing you to claim credits for taxes paid in Italy against your US tax bill – or vice versa.
Foreign tax credit – Article 23 in action
The foreign tax credit (FTC), as defined in Article 23 of the tax treaty between the United States and Italy, is your first line of defense against double taxation. US citizens or residents taxed by Italy can use this credit to offset their US taxes, usually by filing Form 1116. The credit is limited to what you would owe on that income in the US – so if Italian taxes are higher, you might not get a full offset, but you’ll still significantly cut your liability.
Exemption methods – who qualifies and when
Some income earned while temporarily in the US may be exempt from US taxation under specific treaty articles. These exemptions are especially useful for Italian residents working short-term in the States – though they generally don’t apply to US citizens due to the treaty’s savings clause.
Here are some key exemptions:
- Employee compensation: up to 183 days in the US, any foreign employer – Article 15(2)
- Independent contractor income: no time limit, any contractor – Article 14(1)
- Public entertainers: up to 90 days, $20,000 cap – Article 17
- Teaching positions: up to 2 years, any institution – Article 20
- Student remittances: no limit on time or amount – Article 21
NOTE! These exemptions generally don’t apply if your pay is connected to a US-based employer’s permanent establishment.
Steps to unlock your US-Italy treaty tax perks
Ready to save on taxes in both countries? Here's how to activate your treaty benefits.
Step 1: Start by determining if you're a tax resident under the treaty using the tie–breaker rules – a set of criteria that assess where your permanent home, personal ties, and habitual abode are strongest when both countries claim you as a resident.
Step 2: On your US return, complete Form 8833 to report your treaty claim.
Step 3: Use Form 1116 if you're claiming the foreign tax credit rather than qualifying for a treaty-based exemption.
Step 4: In Italy, file via Modello 730 or Modello Redditi PF, depending on your income type.
Step 5: Declare US–sourced income and apply relief under Article 23 or 24, as applicable.
Step 6: Include proof of US taxes paid – such as tax transcripts – with your Italian return, and keep all filings and credit notices securely stored for audit readiness.
Residency rules – who gets to tax you?
Tax residency can be a game changer under the United States-Italy tax treaty. Italy considers you a resident if your registered home, center of vital interests, or habitual abode is in Italy. The US uses the substantial presence test or green card rule to make its call. It's not unusual to meet both definitions – and that's where tax complexity begins.
When both nations claim you as a tax resident, the treaty’s Mutual Agreement Procedure (MAP) comes into play. This collaborative process lets Italian and US tax authorities settle the score – so you're not taxed twice on the same income.
One common slip-up? Assuming a mailing address or dual citizenship sets your tax home. It doesn’t. Overlooking tie-breaker tests like permanent home or habitual abode can cost you.
USA-Italy totalization agreement for social security
The US-Italy totalization agreement ensures you're not paying into two social security systems for the same work. It clearly defines which country’s system applies when you work across borders.
- Request a Certificate of coverage from the appropriate authority (SSA for US, INPS for Italy).
- Confirm your work duration and employment terms meet treaty criteria.
- Work with a tax expert to ensure compliance and avoid overlapping liabilities.
The savings clause – why US expats must pay attention
Thanks to the "savings clause," the United States keeps its right to tax its citizens and residents as if the treaty doesn’t exist. That means even if Italy doesn’t tax your income under the treaty, the IRS still might.
For instance, business income earned entirely in Italy may still be taxable by the US, even without a US office or presence, simply because you're an American.
However, not all is lost. Key exceptions exist – like Social Security and certain pension income. Plus, you can often avoid double taxation through the foreign tax credit or foreign earned income exclusion. If this feels complex, our team at Taxes for Expats is here to guide you through it all.
State taxes the treaty doesn’t cover
When it comes to state taxes, the Italy-America tax treaty doesn’t shield you. Here's what every expat and cross-border worker should know:
- State laws don’t follow the treaty: While the federal government honors treaty provisions, US states do not. You might owe state tax even if your income is exempt federally.
- Cross-border workers should tread carefully: If you live in Italy but have US-source income, state tax liability can still apply depending on the state’s rules.
Cross-border tax forms
Navigating the Italian and American tax duties? Here's the quick guide to what forms you need, why, and when to file them.
| Form | Purpose | When to file |
|---|---|---|
| Form 8833 | Claim treaty benefits | Attach to Form 1040 – due April 15 |
| Form 1116 | Claim foreign tax credit | File with Form 1040 on same deadlines as above |
| Form W-8BEN | Reduce US withholding on passive income | Submit to withholding agent before income is paid |
| Modello 730 | Italy’s employee/pensioner return | Due by September 30 following the tax year |
| Modello Redditi PF | Full individual income tax return (Italy) | Due by October 31 following the tax year |
Avoid penalties – know your filing obligations
American citizens with financial ties to Italy must stay sharp. If your foreign accounts top $10,000 in aggregate, you’re required to file the FBAR. Under FATCA, Italian banks must report your holdings to the IRS – and yes, they will. These twin compliance giants aim to shut down offshore tax evasion, and failure to file can trigger penalties in the tens of thousands.
The IRS flags unreported foreign accounts, mismatched filings between Italy and the US, and missing FATCA forms – all common audit triggers. Individuals must report worldwide income, file FBAR if foreign accounts exceed $10,000, and may need FATCA Form 8938 based on asset levels. US-owned businesses in Italy must disclose accounts and assets or risk blocked banking and heightened audit exposure.
Your Italy-USA tax game plan starts here
The tax treaty between the USA and Italy can protect your income, reduce your tax burden, and help you avoid costly mistakes – but only if you know how to apply it. From understanding the rules to filing the right forms at the right time, smart strategy makes all the difference in minimizing withholding tax and avoiding double taxation.
At Taxes for Expats, we specialize in helping US citizens and green card holders navigate life abroad without falling behind on their IRS obligations making their cross-border tax compliance clear, correct, and stress-free.
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FAQ
Yes if you're a US citizen working remotely from Italy, the treaty may apply based on your tax residency and income source.
Yes Italy may tax Roth IRA withdrawals as income, as it doesn't recognize the tax-free status of these accounts.
Possibly US retirees moving to certain southern Italian regions may qualify for a 7% flat tax on foreign income.
