0

NOTE: the goal of asking this question is not to avoid paying legitimate taxes, but to simply determine which state has precedent for payment of taxes due.

Based on the U.S. Italy Tax Treaty income should not be double taxed in both Italy and the United States. However it is less clear which country has precedence on certain types of income earned (and therefore which country should receive the tax payment at the time of filing, particularly since the U.S. taxes must be paid first), e.g Dividends from a U.S. based company earned by a U.S. Citizen living in Italy. In particular Article 10 section 4 appears to imply that in some situations Dividend income will be taxed in the U.S. (and not in Italy).

Can anyone confirm this interpretation (ideally with precedent that demonstrates this has been approved by both Italy and the U.S.).

Situation

  • A U.S. Citizen is living in Italy (financial Resident more than 183 days).
  • U.S. Citizen receives Dividends from a U.S. Based LLC (S-Corp) with a "permanent establishment" in the United States.
  • Dividends are paid to the U.S. Citizen's U.S. based Bank account.

Interpretation

Based on Article 10 section 4, it appears that Italy will not tax dividends from a company permanently established in the U.S. See section 4 below [BOLD WORDS MY OWN]:

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends [U.S. CITIZEN] (being a resident of a Contracting State [ITALY], carries on business in the other Contracting State [U.S], of which the company paying the dividends is a resident [U.S. BASED COMPANY], through a permanent establishment situated therein, or performs in that other State [U.S.] independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the dividends are taxable in that other Contracting State [U.S.] according to its own laws.

Summary

  1. The U.S. citizen is "owner of the dividends" who are "resident of Contracting State" (Italy).
  2. The U.S. citizen carries on business in "other Contracting State" (U.S.) from a "permanent establishment" (business location in the U.S.).
  3. Therefore the "dividends are taxable in that other contracting state" (U.S.) and not in Italy.

Resources

This IRS Tax Treaty Explanation Guide may be useful for interpreting Article 10 Section 4.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.