There is a tax treaty between the United States and Italy. A primary goal is to reduce any double taxation on Italians living in the U.S. and U.S. citizens residing within Italy. This treaty is essential to understanding where to pay taxes. Since each situation is different, it is advisable to speak with a knowledgeable tax professional to ensure the proper country gets paid the appropriate tax amount.
This article will briefly cover the peculiarities that regard Italian taxes due for foreign earned income. At the end of the article, you will find the link to contact us directly if you have any doubts or need tax assistance concerning your situation.
Case Study: Italian citizen, Director of an Italian company, who works and is a fiscal resident in the USA
Let’s consider the situation in which an Italian citizen (who doesn't have American Citizenship or a Green Card or a simple Visa) works and is a fiscal resident in the United States. This person is an employee or Director of an American company and a Director of an Italian joint-stock company (Spa or Srl) receiving an Italian source of formal compensation.
If this person has lived in the U.S. with their family for about 250 days, this person undoubtedly has fiscal residency in the United States.
In America, domestic corporations are U.S. tax residents, regardless of whether they are also residents of a foreign jurisdiction. Therefore, the IRS doesn’t frequently question when a formally Italian company is an American Corporation where fundamental corporate decisions are made is – in fact - the place of tax residence of one of its Directors.
Having said this, it's always a good idea to follow general warnings in a scenario with a Managing Director who has a foreign residence, namely:
- avoid appointing the person in question a Sole Director;
- ensure that other Board of Director members are resident in the country in which the Company is established (Italy, in this case);
- always keep well-organized minutes of the Board of Director meetings so that it will always be possible to demonstrate where and how the most crucial Company decisions are made.
A second essential premise is that the Italian citizen in question and all the family members are registered with AIRE to prevent any dispute from the Italian tax authorities concerning his or her Italian tax residence.
Where are taxes paid?
We know that the Director's compensation in Italy is an income subject to the same taxation and withholdings regarding income from employment. This income needs to be reported in the Italian tax return, where it is always good to highlight the foreign residence of the person in question.
Three factors will generate high taxation in this scenario.
Factor n. 1
The first element that causes high taxation in this case study derives from the fact that the Foreign Earned Income Exclusion (FEIE) is not applicable because this person is not resident in Italy but in The United States.
Therefore, the Director's Italian income is entirely subject to taxation in the USA.
The United States imposes both federal taxes and state taxes.
State income tax on individuals is very low or even zero in some States, such as in Florida, while in other states, such as California, they are exceptionally high.
Therefore, on the Italian source income deriving from the Director's remuneration, State of New York's State taxes are also paid. The individual in question may not deduct any foreign tax.
Factor n. 3
The third element involving high taxation concerns the American Tax Credit.
State taxes do not allow any Tax Credit for any taxes paid abroad on foreign source income. According to the Convention against double taxation between Italy and the United States, this is not the case for federal taxes, allowing a Tax Credit.
There is some relief for foreign earned taxes. Still, to mitigate the increase in tax liability, a taxpayer should employ a series of adjustments and corrections to his/her fiscal business relationships between Italy and the United States to avoid the negative impact of the three factors outlined in this article, optimizing the overall tax load.