Moving to Italy: how-to fiscal guide in 10 steps for American citizens who keep their investments in the US
Venice, Florence and Rome are some of the places that American citizens choose when they think of moving to Italy. Italy is a great country, with perfect weather, excellent food and fantastic historical sites. Moving to Italy can be a great experience for many American citizens, in particular those who are already retired and want to enjoy the beauties of the “Bel Paese”.
This is a 10-step how-to fiscal guide for American citizens about moving to Italy and the importance of setting up a US Trust.
Before starting the analysis, we will focus on the most common characteristics of the American citizens who approach the decision of moving.
In many cases, it's a person who is already retired, or close to retirement, who wants to keep his financial investments in the States and also who whises to have a family assets rearrangement before moving.
Step 1: You must plan it
Before moving, it’s crucial to analyze beforehand what the effects of this shift of residency will be and have a clear idea of what will happen from every perspective, especially the fiscal one.
The planning process starts when the American citizen is still in the US, by asking questions like:
The planning process starts when the American citizen is still in the US, by asking questions like:
When can I be considered an Italian resident?
How can I manage my assets from Italy?
Where will my pension be taxed?
What will be my tax duties once I move to Italy?
What if my children remain in the US?
There are several aspects to be considered befor moving so let's start with the residency issues.
Step 2: Understanding the change of residency
The second step has to do with the change of residency. We have to clarify that there are two concepts of residency: the first one is administrative, the second one is fiscal.
We will spend some time on these two concepts, as their clear understanding is instrumental for the American citizens that wants to move to Italy.
The administrative concept of residency has to do with the fact that, once the American citizen has obtained the "Permesso di Soggiorno", they must register themselves in the "Ufficio Anagrafe" of the municipality ("Comune") of the town where he has decided to live. This can be done once the American citizen has already moved to Italy. In the precise moment in which the person registers himself, he is "resident" in Italy from an administrative point of view.
The fiscal concept of residency is, instead, a qualification that can be acquired only at the end of the year if the American citizen has spent more than 183 days in Italy.
So let's look at some examples to better understand these concepts:
Example 1:
Suppose that the American citizen A.J. has moved to Italy the 15 September 2019 and that he was able to register in the Municipality of Florence the 29th of September 2019.
He, then, was resident from an administrative point of view in Florence from the 29th of September 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
Obviously, having moved in Italy from the 15th of September, he has spent less than 183 days in Italy and so he does not qualify for fiscal residency.
So, from the 29th of September to 31st of December 2019 he is resident of the Florence Municipality from an administrative point of view but he is not a fiscal resident in Italy for 2019.
Example 2:
Suppose that the American citizen A.J. has moved to Italy the 15th of April 2019 and that he was able to register in the Municipality of Florence the 29th of September 2019.
He, then, was resident from and administrative point of view in Florence from the 29th of September 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
Obviously, having moved in Italy on the 15th of April, he has spent more than 183 days in Italy and so he does qualify for fiscal residency.
So, from 29 September to 31 December 2019 he is resident of the Florence Municipality from an administrative point of view and he is fiscal resident in Italy for 2019.
We focus on these two concepts as there are several concequences connected to them. In particular, once the American citizen qualifies for "fiscal residency" he must report in the Italian Tax Return not only the Italian-source income, but his worldwide income, i.e. also the American-source income. This must be very clear in particular in those situations in which the person registers in the Italian Municipality before having definitely moved to Italy: this situation is sometimes suggested in order to receive the "Permesso di Soggiorno", but it's important to have a clear idea of what the fiscal consequence of this move will be.
Moreover, the interpretation of administrative residency is quite formal in Italy: take a look at this example:
Example 3:
Suppose that the American citizen A.J. has moved to Italy the 15th of April 2019 and that he was able to register in the Municipality of Florence the 22nd of April 2019.
He, then, went back to the States the 3rd of May 2019 to organize his definitive move in Italy and he came back to Italy the 22nd November 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
But then there is a contradiction: he has spent "physically" less than 183 days in Italy (from April 15th to May 3rd and then from November 22nd to December 31st) BUT he has mantained his registration in the "Anagrafe" for more than 183 days, i.e. from April 22nd 2019 until December 31st 2019.
In this situation it's important to understand that the formal fact of being registered for more than 183 days prevails over the fact that the person has been phisically in Italy less than 183 days, and thus the person is considered a "fiscal resident" of Italy. (there's a debate over the "formal" versus "substantial" way of considering residency. The formal approach is strongly criticized but is still the dominant one by the Italian fiscal Authorithies).
We will spend some time on these two concepts, as their clear understanding is instrumental for the American citizens that wants to move to Italy.
The administrative concept of residency has to do with the fact that, once the American citizen has obtained the "Permesso di Soggiorno", they must register themselves in the "Ufficio Anagrafe" of the municipality ("Comune") of the town where he has decided to live. This can be done once the American citizen has already moved to Italy. In the precise moment in which the person registers himself, he is "resident" in Italy from an administrative point of view.
The fiscal concept of residency is, instead, a qualification that can be acquired only at the end of the year if the American citizen has spent more than 183 days in Italy.
So let's look at some examples to better understand these concepts:
Example 1:
Suppose that the American citizen A.J. has moved to Italy the 15 September 2019 and that he was able to register in the Municipality of Florence the 29th of September 2019.
He, then, was resident from an administrative point of view in Florence from the 29th of September 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
Obviously, having moved in Italy from the 15th of September, he has spent less than 183 days in Italy and so he does not qualify for fiscal residency.
So, from the 29th of September to 31st of December 2019 he is resident of the Florence Municipality from an administrative point of view but he is not a fiscal resident in Italy for 2019.
Example 2:
Suppose that the American citizen A.J. has moved to Italy the 15th of April 2019 and that he was able to register in the Municipality of Florence the 29th of September 2019.
He, then, was resident from and administrative point of view in Florence from the 29th of September 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
Obviously, having moved in Italy on the 15th of April, he has spent more than 183 days in Italy and so he does qualify for fiscal residency.
So, from 29 September to 31 December 2019 he is resident of the Florence Municipality from an administrative point of view and he is fiscal resident in Italy for 2019.
Moreover, the interpretation of administrative residency is quite formal in Italy: take a look at this example:
Example 3:
Suppose that the American citizen A.J. has moved to Italy the 15th of April 2019 and that he was able to register in the Municipality of Florence the 22nd of April 2019.
He, then, went back to the States the 3rd of May 2019 to organize his definitive move in Italy and he came back to Italy the 22nd November 2019.
At the end of the year he has to consider the overall solar year 2019 and he must see if he has spent more than 183 days to become also "fiscal" resident in Italy.
But then there is a contradiction: he has spent "physically" less than 183 days in Italy (from April 15th to May 3rd and then from November 22nd to December 31st) BUT he has mantained his registration in the "Anagrafe" for more than 183 days, i.e. from April 22nd 2019 until December 31st 2019.
In this situation it's important to understand that the formal fact of being registered for more than 183 days prevails over the fact that the person has been phisically in Italy less than 183 days, and thus the person is considered a "fiscal resident" of Italy. (there's a debate over the "formal" versus "substantial" way of considering residency. The formal approach is strongly criticized but is still the dominant one by the Italian fiscal Authorithies).
Step 3: Family asset rearrangement
The decision of moving is also often connected with a general rearrangement of the family’s assets and with the destination of the wealth to the children and other members of the family.
Common questions are:
Should I divide the wealth between my children before I move?
Should I make a will?
Should my heirs pay estate taxes in Italy or in the US?
Is there a double taxation problem?
It's pretty obvious that the destination of the wealth to the members of the family is always a very delicate issue, but this can be even more delicate if the residency of the American citizen is in one country (Italy) while the assets are in another country (United States) or if the assets of the family are in two different countries.
So the decisions related to the destination of the wealth are striclty connected to the decisions of where to have the fiscal residency as well as to the decision of where to keep the investments.
So the decisions related to the destination of the wealth are striclty connected to the decisions of where to have the fiscal residency as well as to the decision of where to keep the investments.
Step 4: Keeping the financial investments in the US
Clients who want to move usually request to keep their financial investments in the United States. This choice is natural as they have already established a long-lasting trust relationship with their American financial advisors.
Also moving the investments from the US to Italy can be pretty problematic as capital gains must be calculated over the financial investments and taxes paid.
Also moving the investments from the US to Italy can be pretty problematic as capital gains must be calculated over the financial investments and taxes paid.
So the questions are:
Will my financial incomes be taxed in Italy?
How high are Italian tax rates on financial incomes?
What would be my overall taxation?
How could this affect my investments?
Keeping the financial investments in the US and shifting the fiscal residency in Italy is absolutely possible, but this change can have several consequences: in fact, we have already seen that the fiscal residency in Italy means that the American citizen has to pay taxes on his worldwide income, i.e. also on the American source income. So the question on how high are Italian tax rate on dividends, interests and capital gains is very important.
Step 5: Setting up a US Non-Grantor Trust
A very interesting and effective way to deal with all these issues is to set up a US Non-Grantor Trust, with certain specific characteristics. With this kind of trust the American citizen can keep all his investments in the US, while he’s able to appoint the members of his family as beneficiaries of the trust. In this way, most of the inheritance problems are solved while he can continue to receive his pensions or annuities on a personal basis. With the US Non-Grantor Trust it’s possible to plan the generation wealth transfer process smoothly, avoiding the juridical complications of a will with assets in two countries and also preventing the change of residency of the American citizen from leading to a different taxation on incomes from his financial investments: interests, dividends and capital gains will be taxed in the US by the Trust.
Step 6: Making a preliminary tax assessment
We always suggest that the decision-making process starts with a preliminary tax assessment in the hypothesis of moving to Italy.
This analysis is particularly important as the financial assets are the lifetime savings and thus the primary form of protection for the entire family.
With this assessment we calculate the overall taxation that the American citizen would face once he’s moved to Italy. This analysis is really important as it gives the American citizen a precise idea of what are some of the fiscal consequence of the shift of residency. This assessment is not only limited to the income taxes, but it involves also property taxes (taxes paid on real estate in Italy) and estate and gift taxes ("imposte di successione o donazione").
Step 7: What are the tax duties in the two countries?
This is another critical point: the American citizen who becomes resident from a fiscal point of view in Italy must report all his personal worldwide income in the Italian tax return. Consequently, he will be taxed in Italy for incomes he receives on a personal basis, like his pension.
In the American tax return, which he must file because of his US citizenship, he must report the worldwide income again and calculate the American taxes, but he can report also the tax credit for the taxes that he has already paid in Italy. This is fundamental in order to avoid double taxation issues.
There are several tax duties and also the deadlines of the two countries are different: first, it's necessary to file the Italian Tax Return, and then it's necessary to file the American one.
There are not only the Tax returns, but also other reports to file, like the American FBAR and the Italian form RW.
A deep knowledge of both fiscal systems and the convention against double taxation between Italy and the US is fundamental in making a correct tax compliance in both countries.
We usually take care of all fiscal duties for our clients American citizens who move to Italy.
Step 8: Where will my pension be taxed?
Another aspect of the change of residency is the differencies on the taxation of the pension. Pensions are usually taxed in the country of residency (Italy, in our case), but this does not means that they don't have to be reported also in the other country (the US).
The two most important questions are:
Are there some exceptions to this rule?
Yes, in case of double Citizenship, pensions can be reported ONLY in the country of residency.
In this case, how can I avoid the US entities (Social Security Administration, for example) from applying the withholding?
This request can be sometimes complicated, but it's feasible with our help.
There are not only the Tax returns, but also other reports to file, like the American FBAR and the Italian form RW.
A deep knowledge of both fiscal systems and the convention against double taxation between Italy and the US is fundamental in making a correct tax compliance in both countries.
We usually take care of all fiscal duties for our clients American citizens who move to Italy.
Step 8: Where will my pension be taxed?
Another aspect of the change of residency is the differencies on the taxation of the pension. Pensions are usually taxed in the country of residency (Italy, in our case), but this does not means that they don't have to be reported also in the other country (the US).
The two most important questions are:
Are there some exceptions to this rule?
Yes, in case of double Citizenship, pensions can be reported ONLY in the country of residency.
In this case, how can I avoid the US entities (Social Security Administration, for example) from applying the withholding?
This request can be sometimes complicated, but it's feasible with our help.
Step 9: Personalizing the approach
A personalized approach is not only suggested, but necessary in order to adapt to all the peculiarities of the client. The focus of our working method is to find the best balance between what the client wants and what is technically feasible, while respecting all the civil and fiscal laws of both countries.
Every situation is different, and needs a specific adaptation process to the client’s wishes.
Step 10: Dealing with the US Trust in Italy
One of the most difficult part, from a technical point of view, is to set up a US Non-Grantor Trust with specific characteristics that fit the Italian fiscal law and that can be instrumental to the wishes of the American citizen who want to move and destinate part or all of his wealth to his family members. In order to be able to plan and correctly execute the entire structure, a combined expertise in US trusts, American taxation and Italian taxation is necessary. Knowing how to qualify and how to deal with US trusts in Italy is decisive.
This expertise is our specialization.
CONTACT US FOR MORE INFORMATION
If you need more information you can send an email to:
enrico.povolo@dottcomm.net
or make a phone call to the following number:
+39 0444 322987
Enrico Povolo