Italy-US Convention on Double Taxation
INTRODUCTION We clarify the double taxation of income between Italy and the USA.
With the LAW of 3 March 2009, n. 20, published in the Official Journal n. 64 of 18 March 2009, the Italian Government and that of the United States of America have finally shed light on the problem of the double taxation of income taxes produced within one of the two Contracting States by citizens residing in the other State. By virtue of the aforementioned Convention the distortive effect deriving from said double taxation would seem to be solved through a "tax credit" granted by the States that are opposed to taxes already paid in the other State by a subject on the income received there. However the question, apparently of easy judgment, finds anything but simple replies in reality, which can sometimes arise in unpleasant surprises on the part of taxable subjects (legal persons or natural persons as the case may be), which could be found to have to pay sums (by way of tax) even very different from those considered, due to an incorrect and / or superficial assessment of a fiscal nature during the planning of one's business in the foreign State. Through this agreement the two Contracting States have also wished to put a stop to the phenomena of fraud and tax evasion, accentuating the exchange of information between the competent Authorities in tax matters (in Italy the Ministry of Finance and in the United States the Secretary of State for the Treasury or his delegate). The taxes to be considered and to which the Convention applies are: IRPEF, IRES and IRAP for Italy; federal income taxes provided by the "Internal Revenue Code" and federal taxes (excise taxes) applied to insurance premiums for the United States. It is important to underline that the Convention under examination, having been concluded by the United States Government, does not apply to the laws of every single American State; therefore only federal taxes and not state or local taxes will be compensated. On this line it is necessary to specify the distance between the concept of "stable organization" relevant for fiscal impositions at federal level, and that of nexus which applies for the purposes of state and local taxation; the two concepts of organization differ significantly in the level of economic penetration that configures them as such, and therefore activities that cannot be classified as stable organizations, and therefore do not activate federal taxes on the profits generated by these, can instead be configured as nexus and be the object of 'state or local taxes. Therefore, a person who works in one of the two Contracting States, but resides in the other State, through a structure that is configured as a "stable organization" is obliged to pay taxes in this State for the income produced through this organization and only for the part attributable to it. For example, this includes a management office, a branch, an office, a workshop, a laboratory, a construction site or a quarry. Instead, an installation for the sole purpose of storage, display or delivery of goods or merchandise belonging to the company, as well as the same goods or goods used for such purposes do not constitute a stable organization; likewise, a fixed business establishment does not constitute a permanent establishment which has the purpose of purchasing goods or goods or gathering information for the company, or for advertising or scientific research purposes. And it is still not considered a stable organization to carry out its activity by means of any intermediary person - a physical person - who enjoys an independent status and who acts in the context of his ordinary activity (or can conclude contracts on behalf of the company that they are limited to the purchase of goods for the company). In the case of self-employed professional activities, the usual use of a fixed base for the exercise of its activities is considered as the permanent establishment.
THE TYPES OF INCOME CONSIDERED IN THE CONVENTION
Real estate - Income deriving from direct use, rental or rent, as well as from any other form of use of immovable property can be taxed in the State in which these properties are located. Capital Income - Thus also the profits produced by the alienation of real estate are taxable in the State in which these properties are located. In the case of profits deriving from the alienation of movable assets, these are subject to taxation in the State where they are sold only if they can be traced back to activities performed by a non-resident (and therefore resident in the other Contracting State) through a permanent establishment . In all other cases the profits from the alienation of any other asset are taxable only in the Contracting State in which the alienator is a resident.
Business profits - These types of income, earned by a person who is resident in the other State, are taxed in the State in which they are generated to the extent that the subject achieves them through a stable organization, and only for the part to this attributable. In these cases, moreover, there is also another general principle, that of the "independent enterprise": in determining the taxable income of the permanent establishment, all the profits that it is believed would have been achieved if it were a separate enterprise should be considered. and separate operating in the same circumstances / contexts / conditions. These profits must be determined on an annual basis and always using the same method. With this we want to avoid opportunistic behaviors that arise in the distraction of portions of profits (the so-called transfer pricing phenomenon, increasingly common within large groups) removed from less convenient tax regimes. On the other hand, from the amount of the taxable amount determined in this way, it is possible to make deductions for expenses attributable to the activities carried out by the same permanent establishment, including a reasonable portion of management fees and general administrative expenses wherever these have been incurred. The general principle stated above also operates between associated companies (associates or subsidiaries) operating respectively in the two Contracting States, in the sense that: if by virtue of particular contractual obligations, the profits of one of the two impressed (and therefore the amount of the taxable amount) to be taxed) should be lower than those achievable by the company in the absence of such restrictions, then the State in which the company is located may proceed with an adjustment to the taxable amount to be subjected to taxation. In counterpart the other State, where the associated company resides, will provide for an equivalent correction but of opposite sign on the taxable amount attributable to it. The decreasing correction described above can only take place through the amicable procedure regulated in the Convention itself and which will be discussed later.
Dividends - Taxes on dividends for activities carried out in one of the two Contracting States by a person who is resident in the other State are paid in the State where the recipient resides; The Contracting State from which the dividends come may subject them to tax, however privileged, if the dividends are not linked to profits generated by means of a permanent establishment (in this case they will be subject to the ordinary taxes of the state where this permanent establishment resides) ; the privileged rates are: • 5% on the gross amount of dividends if the stake in the paying company is at least 25% and maintained for more than a year; • 15% on the gross amount of dividends in all other cases. Furthermore, in the case of dividends, the United States recognizes to its residents a tax credit equal to the amount already paid in Italy on profits in relation to which these dividends are derived; however, there is a limitation: participation in the company in Italy must represent at least 10% of the capital with voting rights. Interest - In general, interest taxes operate like those for dividends; however, within the State where the debtor resides, the interests can be subject to taxation for an amount that does not exceed 10% of their gross amount (rate lower than the ordinary rate); this privilege is granted only if the actual beneficiary is a subject resident in one of the two contracting States. In addition, the tax rate drops to 0% for debts of a commercial nature or if a Government Entity is involved in the relations between the creditor and the debtor, which provides guarantees or insurance on the loan or is its beneficiary. The aforementioned benefits are not applicable if the debtor pays interest to a person resident in the other State who, however, has a stable organization in the State of his debtor or practices an independent profession through a fixed base situated therein and such credits are attributable to them ; in this case the normal taxes of the State where they are produced will be applied. The principle of the independent company also operates in the case of income deriving from interest paid for an amount exceeding the normal market conditions by virtue of particular relations existing between the parties; the surplus is taxed only in the state where the beneficiary resides.
Fees - Also the fees, like the two previous cases, are taxed in the State where the beneficiary resides, but can be applied by the State from which the privileged rates originate. Taxation should not exceed: • 5% of their gross amount if they are paid for the use of software or industrial, commercial or scientific equipment; • 8% of the gross amount of fees received in all other cases. The fees that relate, instead, to the granting in use of a copyright to artistic or scientific literary works are taxable only in the State where the beneficiary resides. Also with regard to the fees, the limitations deriving from the principles of the permanent establishment and of the independent company set forth with regard to interest apply.
Independent professions - A resident of a Contracting State who produces self-employment income in the other State must pay taxes in the latter if he regularly has a fixed base for the exercise of his activities; in this case, only the income attributable to the fixed base is taxable. In the case in which the autonomous professions concern the activities of professional artists or sportsmen they are taxable in the foreign State, even if practiced occasionally, in the case in which: a) the amount of gross income received by the artist or sportsman, including reimbursement of expenses, exceeds 20,000 Dollars or its equivalent in Euro in the fiscal year considered; b) your stay lasts for more than 90 days in total in the fiscal year under consideration. The fees and attendance fees are taxable in the State where this activity is carried out.
Employment - The income from employment of a resident of one of the two Contracting States received for services performed in the other State, are taxed in his country of residence in the cases in which: a) the employer is a resident of the latter; b) the burden of remuneration is not borne by a permanent establishment that the employer owns in the foreign state; c) the stay does not exceed a total of 183 days during the fiscal year considered. For the work income of professors and teachers who teach or carry out research (in the public interest) at a university, college, school or other recognized educational institution, or at a public medical institution, (of course in the State where they are not resident) the limit of 183 days extends up to a maximum of two years (points a and b are excluded). For students and apprentices the foreign State does not apply any tax on the amounts received as reimbursements provided they come from outside this State. Pensions and other similar remuneration (and except as provided in paragraph 2 of Article 19 on public functions) from the Contracting State where the subject is not a resident, are taxable where he resides. In the event that such a subject should change nationality at a certain point then such incomes would remain taxable in the first State. Annuities, on the other hand, received by a resident of a Contracting State are taxable only in that State. Family allowances paid by a resident of a Contracting State, other than the one in which the beneficiary resides, are taxable only in the State of the recipient is a resident. Furthermore, nothing is due from the latter if the person making the periodic payments has no possibility of deduction in his favor in the state where he resides.
The Convention also provides for a principle of non-discrimination and the respective competent Authorities are expressly prohibited from subjecting the income of subjects coming from the other Contracting State to a tax burden more onerous than that provided for national (similar) companies operating in the same sector. Furthermore, disputes that may arise from the application of the Convention must be resolved through the friendly procedure. According to the provisions of the law, if a subject believes that the measures adopted by one or both States do not comply with the provisions of the Convention, he may, regardless of the appeals provided for by the national legislation of the States, submit the case to the competent authority of the Contracting State of which he is a resident or, in the case of discriminatory conduct, to that of the State of which he is a national. The complaint must be made within the three years following the first notification of the measure that implies an imposition that does not comply with the provisions of the Convention. The competent Authorities, if the appeal appears to be founded, will do their best (as stated in art. 25, par 3) to resolve by mutual agreement the difficulties or doubts inherent in the interpretation or application of the Convention. They may also consult for the elimination of double taxation by communicating directly with each other. In fact, also in order to avoid tax evasion and avoidance, the Convention provides the authority for the authorities of the two Contracting States to exchange information; the dialogue, however, must be functional to the application of the Convention and / or aimed at resolving the disputes arising from it. Obviously the obligation to secrecy for sensitive information received remains.