U.S. income tax treaty with Italy

Treaty documents and protocols

The IRS lists four items for Italy. The first, on the IRS server, is the convention signed at Rome on April 17, 1984, and the second is a technical explanation. The other two, hosted by Treasury, are the convention signed at Washington on August 25, 1999 and its Technical Explanation. The 1999 convention replaces the 1984 one, so the 1984 articles are history, not the current rules.^[1][7][8]

Under Article 28 the 1999 convention took effect for withholding from the first day of the second month after it entered into force, and for other taxes from the following January 1. IRS Table 3 shows a general effective date of January 1, 2010. Article 28(3) let a person elect the 1984 convention in its entirety for one twelve-month period if it was more favorable, and Article 28(4) ends the 1984 convention once the new provisions apply.^[5][7]

A Protocol signed with the 1999 convention is an integral part of it. It adds the limitation on benefits rules (its Article 2), extends the saving clause to former long-term residents, and defines terms such as qualified governmental entity. The Technical Explanation also refers to a Memorandum of Understanding that records the negotiators' shared reading of some provisions.^[7][8][3]

Convention article titles

The 1999 convention has 29 articles, followed by the Protocol. Their titles are Personal Scope; Taxes Covered; General Definitions; Resident; Permanent Establishment; Income from Immovable Property; Business Profits; Shipping and Air Transport; Associated Enterprises; Dividends; Interest; Royalties; Capital Gains; Independent Personal Services; Dependent Personal Services; Directors' Fees; Artistes and Athletes; Pensions, Etc.; Government Service; Professors and Teachers; Students and Trainees; Other Income; Relief from Double Taxation; Non-Discrimination; Mutual Agreement Procedure; Exchange of Information; Diplomatic Agents and Consular Officials; Entry into Force; and Termination.^[7]

Dividends, interest and royalties

Article 10 lets both countries tax dividends. If the beneficial owner is a resident of the other country, the source country's tax may not exceed 5 percent of the gross amount when the owner is a company that has owned at least 25 percent of the payer's voting stock for a 12 month period ending on the date the dividend is declared, and 15 percent in all other cases. The 1984 convention had different tiers, including 10 percent for a 10 percent holding. Dividends paid to a qualified governmental entity that holds less than 25 percent of the payer's voting stock are not taxed at source. The 5 percent tier does not apply to dividends of a U.S. regulated investment company, and a real estate investment trust's dividends get the 15 percent rate only in listed ownership cases. Paragraph 10 denies the article where a main purpose of creating or assigning the shares was to gain its benefit.^[7][6]

Article 11 caps source-country tax on interest at 10 percent of the gross amount when the beneficial owner is a resident of the other country, not the 15 percent of the 1984 text. Interest is not taxed at source in listed cases: interest owned by a qualified governmental entity holding less than 25 percent of the payer, interest on debt guaranteed or insured by such an entity, interest on a credit sale of goods, merchandise or services between enterprises, and interest on a credit sale of industrial, commercial or scientific equipment. The cap does not apply where the interest is effectively connected with a permanent establishment or fixed base, and a main purpose test applies here too.^[7][6]

Article 12 allows both countries to tax royalties but limits the source country to 5 percent of the gross amount for computer software and industrial, commercial or scientific equipment and 8 percent in all other cases. Under paragraph 3, a royalty for a copyright of a literary, artistic or scientific work, other than software, motion pictures, films, tapes or other broadcast reproduction materials, is taxable only in the beneficial owner's country of residence. The article does not apply where the right or property is effectively connected with a permanent establishment or fixed base, and it has the same special relationship and main purpose rules.^[7][6]

Residence and information exchange

Article 4 defines a resident by reference to liability to tax under a country's law because of domicile, residence, place of management, place of incorporation, or a similar criterion. A person taxable there only on income from sources in that country is excluded from the definition. If an individual is resident in both countries, the article first assigns residence to the country where the individual has a permanent home available. If a home is available in both, it uses the closer personal and economic relations. If that cannot be determined, or no permanent home is available in either, habitual abode controls. If habitual abode exists in both or neither, nationality controls. If the individual is a national of both or neither, the competent authorities settle the question by mutual agreement.^[7]

Article 26 has the competent authorities exchange information needed to carry out the convention or the domestic laws on covered taxes, and for the prevention of fraud or fiscal evasion, and says the exchange is not restricted by Article 1. Received information is secret in the same way as domestic information and may be disclosed only to persons and authorities involved in assessment, collection, enforcement, prosecution or appeals. A country need not take measures contrary to law or practice, supply information it cannot obtain in the normal course of administration, or disclose trade secrets or information contrary to public policy.^[7]

Limitation on benefits

Article 2 of the Protocol is the limitation on benefits provision. A resident of one country gets the convention's benefits only to the extent the article provides. An individual, a qualified governmental entity, a company whose main share class is regularly traded on a recognized stock exchange, certain entities owned by five or fewer such companies, and specified pension or not-for-profit entities qualify directly. Another person qualifies if, on at least half the days of the year, qualifying persons own at least 50 percent of each class of its shares or beneficial interests and less than 50 percent of its gross income is paid out in deductible payments to non-residents of either country.^[7][8]

A resident that does not qualify may still get benefits on an item of income connected with or incidental to an active trade or business in its own country that is substantial relative to the activity in the other country generating the income. A competent authority may also grant benefits. The IRS Table 4 list of limitation on benefits provisions points to Article 2 of the Protocol for Italy.^[7][8]

Saving clause and U.S. citizens

Article 1, paragraph 2 lets each country tax its residents, and its citizens by reason of citizenship, as if there were no convention. Under Article 1 of the Protocol, for the United States a citizen includes a former citizen or long-term resident whose loss of status had tax avoidance as one of its principal purposes, for ten years after the loss. Paragraph 3 preserves benefits including Article 9(2), certain pension provisions, and Articles 23 (Relief from Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure). Benefits under Articles 19, 20, 21 and 27 are preserved for individuals who are neither citizens nor have immigrant status in the country granting them.^[7][4]

Related reading

Related treaty pages include U.S. income tax treaty with Spain and U.S. income tax treaty with Japan. U.S. income tax treaty with Switzerland covers residence, income rules and information exchange. U.S. income tax treaty with Portugal connects treaty articles with residence and the saving clause.

Questions and answers

Related resources

Related glossary terms

• Income tax treaty: An income tax treaty may provide reduced U.S. tax rates or exemptions for specified U.S.-source income. Rules vary by country and income type under each treaty.
• Limitation on benefits: A limitation on benefits article sets conditions for entities in a treaty country to qualify for certain treaty benefits under the applicable U.S. tax treaty.

Related articles and guides

• U.S. income tax treaty with Spain: The U.S. income tax treaty with Spain is the 1990 convention as amended by a 2013 Protocol, which replaced the articles on income from investments in full.
• U.S. income tax treaty with Tunisia: The U.S. treaty with Tunisia is a 1985 convention with a 1989 supplementary protocol, setting dividend caps of 14 and 20 percent and a 15 percent interest cap.

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.