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Americans have a love affair with Italy. American expats are attracted by Italy’s food, culture, history, and landscapes. Movies like ‘Roman Holiday’ and ‘Under the Tuscan Sun’ have romanticized life in Italy. In moving to Italy, you need to be aware of how taxes apply to you in Italy. Let’s review what a US expat needs to know about taxation in Italy.
US expats in Italy need to be aware of two different national tax systems. First, virtually all US citizens are required to file an annual US Federal tax return, regardless of whether they live in the United States or Italy.
Second, by living in Italy, American expats also can be subject to Italy taxation. These two national tax systems can create confusion for Americans living abroad in Italy, as they potentially can be subject to tax liabilities in both jurisdictions. Here’s an overview of how the Italy tax system affects US expats living abroad in Italy.
Residents of Italy, for tax purposes, are subject to income taxation on their worldwide income. Thus, tax residents of Italy are also subject to taxation on foreign (“non-Italy”) sources of income. On the other hand, non-residents of Italy, for tax purposes, are only subject to taxation on income produced in Italy.
To understand taxes in Italy, it is essential to distinguish between individuals treated as residents for tax purposes and individuals treated as non-residents for tax purposes.
You are considered a resident in Italy for tax purposes if you have been for more than 183 days during the tax year and qualify in one of the following categories:
An individual who moves out of Italy must “de-register” with the Record of the Italian Resident Population. Failure to do so can unnecessarily result in the individual being treated as an Italian tax resident for more than 183 days and more adverse taxation on worldwide income in Italy.
Italy will tax the income of Americans living abroad in Italy at graduated rates based on the following:
There is an additional 10% tax on the net amount of certain “variable compensation” less base salary. This “variable compensation” relates to a bonus, stock option, or incentive plan paid to an executive or manager in the financial sector.
American expats in Italy are also subject to regional income taxation. Regional income tax rates range from 1.23% to 3.33%, depending on the applicable region of residence.
In addition, Americans living abroad in Italy can be subject to municipal income taxation. Municipal income tax rates range from 0% to .9%, depending on the applicable municipality of residence.
Italy imposes a value-added tax on the supply of goods and services in Italy. The standard value-added tax rate is 22%. However, certain specific supplies of goods and services are subject to lower rates (for example, 4% for listed food, drinks, and agricultural products) or even exemptions (such as hospital and medical care, education, and insurance services).
Residents for tax purposes in Italy are subject to a wealth tax on both real estate properties and financial investments owned outside of Italy. For real estate properties owned outside of Italy, the applicable tax rate generally is .76% of the value of the real estate. For financial investments owned outside of Italy, the applicable tax rate generally is .2% of the value of the financial investments
There is an inheritance tax in Italy, with a specific tax rate and applicable exemption dependent on the beneficiary’s relationship with the deceased person. For example, for inheritances by a spouse or direct line relatives, the inheritance tax is assessed at 4% of the value of the inherited assets above an exemption amount of 1 million Euros (per heir).
Property taxes are assessed on real estate owned in Italy. The primary property tax rates are 0.5% for a principal home and 0.86% for another real estate purchase.
Corporate entities in Italy are subject to two standard taxes.
There is a corporate income tax (known as “IRES”). The IRES tax base is the worldwide income of an Italian resident entity or the Italian source income of a non-resident entity. The standard IRES tax rate is 24%.
There is also a regional production tax (known as “IRAP”). The IRAP tax base varies depending on the nature of the business of the Italian entity. As an example, for sales and manufacturing companies, the IRAP tax base is generally represented by the company’s gross margin in its financial statements. IRAP is assessed on a regional basis. The standard IRAP tax rate is 3.9%, but regions can increase or decrease the standard IRAP tax rate up to .92%.
It is essential for US expats to remember that in addition to filing tax forms in Italy, they file tax forms in the United States, including:
Yes, Italy and the United States have a tax treaty. With this tax treaty, US expats living in Italy can avoid double taxation of the same income in both the United States and Italy.
Yes, Italy and the United States have a totalization agreement. This totalization agreement can help American expats living in Italy by both eliminating dual taxation with respect to Social Security and Medicare taxes and permitting dual Social Security coverage for easier benefit entitlement.
We hope this guide has provided you with more knowledge and a better understanding of Italy’s tax system and its effect on American expats in Italy. If you’d like to learn more about these issues, our team of expat tax experts would be happy to help you.