This post is dedicated to all the American Citizens who want to move to Italy and continue working remotely for the American company they are working for, while being able to apply for the interesting Italian Tax Break "Regime Impatriati".
We will analyze what are the possible options for an employee, what could be the overall taxation and if there are any advantages in opening a self-employed position in Italy.
The first consideration to be made is that the solutions indicated in this post are useful not only for American Citizens who work for American companies but can be generalized to all cases in which a Non-Italian Citizen wants to move to Italy working for a Foreign Company. Obviously there will be slight differences for other Countries, in particular for the part that regards the Social Security aspects, but the bulk of the problem is the same.
The person: an American Citizen who lives in America.
The job: the American Citizen works for an American Company as an employee or a partner of a LLC or LLP.
Remote working: the American Company is willing to let the American Citizen working remotely.
The dream: to be able to relocate to Italy while continuing to work for the same American Company.
The goal: to be able to optimize the overall (Italian and American) taxation, keeping the contribution to the Social Security Administration in order to move to Italy in the smoothest way possible.
So let's take a look at the most common questions asked in this scenario:
1) Is it possible for me to move to Italy and continue working from remotely for my American Company?
2) Will I be able to apply for Regime Impatriati and reduce my Italian Income Tax?
3) Is it a good idea for me to continue working as an employee?
4) What if I am a partner of a LLC or LLP?
5) What happens to my Social Security if I move to Italy?
6) What will be my overall taxation, Italian and American?
Before analyzing the answers to these questions it's important to understand that the tax break "Regime Impatriati" is a very interesting one, as it will reduce the Italian taxable income of 70% for all people who become fiscal residents in Italy, even if they work from remote for an American company. This tax break can last up to 10 years.
The 70% reduction is applicable only to income from work produced in Italy: the remote working is considered produced where the person lives, e.g. in Italy. American income, like US rents, US interests and US dividends will be taxed in Italy without any any tax break.
For more insight, please take a look at the following article:
Relocate to Italy: the Employee case
Let's consider first the case of an American Citizen that is an employee and wants to move to Italy maintaining the same position inside the Company.
To answer to the aforementioned questions, we can refer to this article:
American citizens who work remotely from Italy as employees for American Companies: where should they pay their taxes?
The solutions indicated in this post for the case of an employee are all good options but there are also some difficulties that we must underlined.
Consideration #1: the steps to determine the overall taxation.
There are three different steps in the taxation process:
A) The US fiscal withholding applied to the employee by the American Company;
B) The Italian Taxation, which has the following characteristics:
- Italian taxation on the W2 income is calculated as follows: if Regime Impatriati is applied, taxable income will be 30% of the amount indicated in form W2.
- The withholding applied in the US cannot be used as a Foreign Tax Credit to reduce Italian Taxation.
C) The American taxation: American Citizen will have to file the American Tax Return, where he will tax the income as an employee entirely; in this Tax Return he will be able to offset the American Taxes with part of the Italian Taxes he had paid in Italy. This will bring to a partial refund of the withholding applied by the Employer.
This means that there could be a partial double taxation, due to a complicate combination of Conventional and Domestic rules.
The amount of this double taxation is very hard to calculate beforehand, as it depends on a lot of variables in both Italian and American Tax Returns.
What is important to understand is that if a partial double taxation emerges, the American Citizen who moves to Italy can benefit only of part of the tax reduction granted from Regime Impatriati.
Consideration #2: how to benefit entirely of the Regime Impatriati tax break.
The aforementioned "partial double taxation" can disappear when the income from the American W2 is under the threshold limit of the FEIE, the Foreign Earned Income Exclusion that right now is fixed at $112,000 and is yearly adjusted to inflation. For more insights on the FEIE, you can take a look at this article:
How to reduce American Taxes for who lives in Italy: Foreign Earned Income Exclusion and Foreign Housing Exclusion
If the income is under the FEIE threshold limit, no double taxation will emerge.
Consideration #3: is it possible to avoid the US withholding?
From a theoretical point of view, the US Company could avoid the application of the US withholding (while keeping the Social Security one) as the employee is a resident of Italy and must pay the taxes to Italy.
This solution is often difficult to apply, as American Labour Consultants are not willing to avoid application of fiscal withholding for fear to expose the company to IRS penalties.
Consideration #4: Remote working is compatible with Regime Impatriati.
The Italian Tax Break "Regime Impatriati" can be applied to American Citizens who move to Italy and continue working remotely for the same American Company they were working for. This is due to the fact that the income in case of remote working is considered produced where the person has the residency, e.g. in Italy.
Consideration #5: what happens to my Social Security?
On the Social Security side, there is absolutely no problem, as the contribution to pension continues on American side: nothing has changed.
Final considerations on the Employee case.
We can say that the idea to move to Italy and work as an EMPLOYEE from remote is feasible and has only some weak points.
But we must also say that, in the long run, this solution can bring some problems for the American company:
- Sometimes the American company prefers to open an Italian Company and hire the US Citizen from this entity: in this case, Social Security will be paid in Italy;
- sometimes the American company does not feel comfortable in letting an employee work from another Country for a long time, as this is one of the first signs of having a Permament Establishment in the other Country, that has several complicated tax consequences for the US company.
A good alternative to these problems is to move to Italy as an EMPLOYEE is to switch to a SELF-EMPLOYED position inside the same company.
Let's see in the next case this option.
Relocate to Italy: the Self-Employed case
The best solution to work from remote in Italy for a US company is to be self-employed and open an Italian business position, "aprire una partita IVA", in the Italian jargon.
Obviously there are several differences between employment and self-employment, as the relation with the Company is quite different, and the two contracts are different: the employer is in a dominant position with the employee, while the position is (at least theoretically) equal in the self-employment case. On the other side, the self-employed person has an higher responsibility and is generally less protected than the employee. We are not going through all these differences, as it would be something beyond the scope of this article.
What is interesting for the present analysis is to understand that if there is the possibility and the will by both sides, worker and employer, to continue the job from remote in the form of self-employment, it is surely an option to consider, as there are several advantages compared with the Employee case.
The first important point to consider in this case is that the self-employed position must be opened in Italy and not in the US. This is due to the fact that income derived from a sole-proprietorship is always produced in the Country where the person has the fiscal residency: so Italy is the place where the self-employment must be opened.
In Italy to start a self-employment position is said to "open the Partita IVA", as the Partita IVA is the eleven digit number that identifies the persons that has a personal business. To have more information on what are the requirements necessary and steps to open a partita IVA, you can contact us.
Each month the American Citizen will prepare an invoice to the American company and they will pay him in his American Bank account.
Let's see mow what are the main advantages of the self-employed case.
Advantage #1: it's a solution also for LLC and LLP partners.
The first advantage to consider is the fact that the self-employed case can apply not only to employees but also to partners of LLC and LLP who want to move to Italy. Generally speaking, be the partners of such companies in the US is probably one of the most complex situation to move to Italy, at least from the fiscal perspective.
So one possibility is to continue the work with the partnership in a different way, becoming a self-employed person.
This switch (from LLC's partner to self-employed person) must be carefully reviewed by the American CPA, as it has multiple consequences, but it can surely be a good option.
Advantage n. 2: there is no US withholding.
One of the main advantages that we have in comparison with the Employee case is the fact that there is no withholding applied in the US, as the income is produced in Italy.
So the steps of the taxation in the self-employment case will be the following two:
A) The Italian Taxation, which will have the following characteristics:
- Taxable income on self-employed income is the difference between the revenue received from the American company and the costs that person has to pay for his job.
Let's see the following example: the US Company pays yearly by contract an amount of $80,000.
The costs that can be inherent to the business are the following:
- Phone and internet: $1,000;
- Rent of the house: $12,000; this cost is deductible at 50% at it's not only an office, but also a house.
- Consultation costs: $2,000;
- Books: $700;
- On-line courses: $3,000.
So we have:
- Total revenue is $80,000.
- Total costs are $18,700 but only $12,700 are deductible.
So the taxable income is: $80,000 - $12,700 = $67,300.
- In the case of the Regime Impatriati, it's possible to apply a 70% reduction to this income, so the final Italian taxable income will be:
$67,300 x 30% = $20,190.
The American Citizen will pay taxes in Italy on $20,190.
B) The American Taxation: the American Citizen will have to file the American Tax Return, where he will tax the income produced in Italy; in filing this Tax Return we have to remember:
- On one hand, the US will tax the income entirely, without the 70% reduction of the Regime Impatriati.
- On the other hand, some of the costs that are not deductible in Italy could be deductible in the US: so it would be possible to reduce the taxable income by reporting the entire costs paid for the self-employed position.
From the American tax calculated it's possible to offset the taxes paid in Italy on the same income.
In that case, if there are no other incomes in the US, the entire taxes paid in Italy can be considered Foreign Tax Credit in the American Tax Return, in order to avoid any double taxation problem.
The FEIE, Foreign Earned Income Exclusion, can be applied also for the case of self-employment.
So, the biggest advantage is that in the case of Self-Employment the problem of double taxation is in many cases avoided, or at least reduced.
Also, the withholding application problem that we have considered previously does not exist in this case.
Advantage n. 3: it's possible to continue with the US Social Security.
If a person opens an Italian business position, he is obliged to open also a Social Security position. Depending on the Citizenship, these are the possibilities:
- Only Italian Citizenship: the person must mandatorily enlist in the Italian Social Security, called INPS (Istituto Nazionale Previdenza Sociale: INPS);
- Only US Citizenship: the person must mandatorily enlist in the American Social Security, the Social Security Administration (SSA).
- Double Citizenship: the person may decide whether to make the election to the Italian or the American Social Security contribution. In this case it's necessary to apply for a specific Form in order to tell the two Social Securities Entities what is the election made. For any insight on this topic, please refer to the following article:
In the majority of cases of American Citizens relocating to Italy, we are dealing with the double citizenship case, e.g. the decision to apply for the US Social Security: in this case the person relocating won't lose any of the previous contributions to the Social Security Administration and can pay the Self-Employment Tax.
The Self-Employment Tax is not a tax but is a contribution to the Social Security Administration that is paid inside the American Tax Return.
The Self-Employment Tax rate is 15.3% on the taxable income (calculated in America).
Final considerations on the Self-Employed case.
The self-employed case is surely a very good opportunity to continue working with the American Company from remote, and is an option that has several good aspects in comparison with the Employee case.
Our Tax&Business Firm is able to assist a US Citizen through all the several steps and options of this process, allowing the client who wants to move to Italy to find the combination to relocate in Italy in the best way possible.
Contact us for any information.