U.S.-Italy tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-Italy treaty apart

The U.S.-Italy treaty signed in 1999 took effect only in 2010, and it still withholds on interest and most royalties where newer treaties do not. Royalties come in three tiers: 0% for literary and artistic copyright, 5% for software and equipment rentals, and 8% for patents, trademarks, know-how and films. The 5% dividend rate needs a 25% holding kept for 12 months, and there is no 0% rate for parents. Main-purpose rules in the dividend, interest, royalty and other income articles can deny benefits even to a resident that passes the limitation-on-benefits tests.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 2010. Protocols in effect from: none listed. IRS country code IT.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-Italy treaty as a payer

Documents and dates

The convention and its protocol were signed in Washington on August 25, 1999, replacing the 1984 treaty. The IRS tables give January 1, 2010 as the general effective date; withholding taxes apply from the first day of the second month after entry into force. A person could keep the 1984 treaty for 12 months, but only in its entirety. Arbitration under Article 25(5) needs a further exchange of notes before it can operate.

Residence and transparent entities

Exempt religious, charitable, educational and scientific organizations, pension organizations and qualified governmental entities are residents (Protocol Art. 1(5)). The technical explanation treats RICs, REITs and REMICs as U.S. residents. Italy treats a U.S. citizen or green card holder as a U.S. resident only with a substantial presence, permanent home or habitual abode in the U.S. Partnerships, estates and trusts are residents only to the extent their income is taxed as a resident's, and the protocol extends this to any entity transparent under either country's law; partners resident elsewhere cannot claim. Dual-resident companies have no default rule; the competent authorities must agree.

Limitation on benefits and main-purpose rules

The limitation-on-benefits test sits in Article 2 of the protocol. It qualifies individuals, governmental entities, companies where all the shares in the classes making up more than half the vote and value are regularly traded, subsidiaries at least 50% owned by five or fewer such companies, exempt organizations, pension organizations with more than half their beneficiaries resident in either country, and companies passing an ownership and base erosion test. Income connected with an active business in Italy qualifies, with a safe harbor where the asset, income and payroll ratios each reach 7.5% and average more than 10%. There is no derivative benefits test and no headquarters test; the technical explanation says a pure headquarters company is managing investments, not carrying on an active business.

Articles 10(10), 11(9), 12(8) and 22(3) also deny benefits where a main purpose of creating or assigning the shares, debt or rights was to take advantage of the article. The technical explanation gives dividend washing through an Italian bank as an example. These rules apply on top of the limitation-on-benefits test.

Dividends

The 5% rate needs a company that has owned at least 25% of the voting stock for the 12 months ending on the date the dividend is declared (Art. 10(2)(a)); indirect holdings and non-voting shares do not count. Everything else is 15%. A qualified governmental entity holding less than 25% is exempt (Art. 10(8)), which covers government pension funds, but there is no general exemption for private pension funds. RIC dividends get 15%. REIT dividends get 15% only for an individual holding no more than 10%, a holder of 5% or less of a listed class, or a holder of 10% or less of a diversified REIT; otherwise the statutory 30% applies (Art. 10(9)). The technical explanation's reference to a 10% threshold in its look-through discussion conflicts with the treaty's 25%; the treaty controls.

Interest

Interest is capped at 10% (Art. 11(2)). It is exempt when beneficially owned by a qualified governmental entity holding less than 25% of the payer, when the debt is guaranteed or insured by a qualified governmental entity, and when it arises on a credit sale of goods, merchandise or services between enterprises or on a credit sale of industrial, commercial or scientific equipment (Art. 11(3)). REMIC excess inclusions are taxed under domestic law. Interest above an arm's-length amount may be treated as a dividend. The Code's portfolio interest and deposit interest exemptions still apply, because the treaty cannot increase tax.

Royalties

Article 12 has three tiers:

• 0% on copyright royalties for literary, artistic or scientific works, other than software, films and broadcast tapes;
• 5% on software and on rent for industrial, commercial or scientific equipment, which this treaty treats as a royalty;
• 8% on everything else: patents, trademarks, designs, models, plans, secret formulas or processes, know-how, and films and tapes for radio or television.

The technical explanation follows the U.S. software regulations: a retail shrink-wrap sale is not a royalty at all. After-sales service, technical assistance and professional services are not royalties. Royalties arise where the payer is resident, but a royalty for use of property in a country may be treated as arising there; the technical explanation's example has an Italian franchisor licensing U.S. rights to a Mexican company, and the U.S. withholds 8%.

Services

Italy keeps an independent personal services article: an Italian individual's fees are taxable in the U.S. only if a fixed base is regularly available here (Art. 14), with no day count. Construction projects and drilling rigs become a permanent establishment after 12 months. Italy would not agree to a rule protecting combinations of preparatory activities, so those are judged on their facts. Employees are exempt only if present 183 days or fewer in the fiscal year, paid by a non-U.S. employer and not borne by a U.S. permanent establishment or fixed base (Art. 15(2)). Directors' fees are taxable in the company's country only for services performed there. Performers and athletes are taxable if gross receipts for the year, including reimbursed expenses, exceed $20,000, or they are present more than 90 days; above $20,000 the whole amount is taxable (Art. 17).

Pensions and Social Security

Private pensions are taxable only in the country of residence (Art. 18(1)). Lump sums and severance paid after a move, for work done in the former country while resident there, are taxable only in that former country (Art. 18(3)). Social Security, including tier 1 Railroad Retirement, is taxable only in the country of residence (Art. 18(2)), so U.S. Social Security paid to an Italian resident is not withheld on. Alimony and child support are taxable only in the recipient's country, and not at all if the payer cannot deduct them.

Teachers, students and other income

Professors and teachers visiting for an expected two years or less to teach or research at a university, school or recognized institution, or a government-funded medical facility, are exempt for up to two years, with no dollar limit (Art. 20). Students and business trainees present exclusively for education or training are exempt only on payments from outside the U.S. (Art. 21). Other income, including gambling winnings and punitive damages, is taxable only in Italy (Art. 22).

Where payers get it wrong

• Giving 5% to a 10% shareholder. The Italian 5% rate needs 25% of the voting stock held for 12 months.
• Using one royalty rate. Literary copyright is 0%, software and equipment rent 5%, patents, trademarks, know-how and film 8%.
• Treating interest as exempt. The treaty rate is 10%; only the listed government and credit-sale categories are exempt, plus whatever the Code exempts.
• Counting performer days or dollars alone. Either more than $20,000 or more than 90 days makes the performer taxable.
• Stopping at the limitation-on-benefits test. The main-purpose rules can still deny the dividend, interest or royalty rate.

Read from the treaty documents: Convention and Protocol of Aug. 25, 1999; Treasury Technical Explanation. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Italy treaty's LOB provision is Article 2 of the Protocol).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• f Includes alimony.
• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• h In Italy, interest paid or accrued on the sale of goods, merchandise, or services between enterprises is exempt. Interest paid or accrued on the sale on credit of industrial, commercial, or scientific property is exempt. In addition, interest paid to a qualified governmental entity that holds, directly or indirectly, less than 25 percent of the capital of the person paying the interest, or paid with respect to debt obligations guaranteed or insured by a qualified governmental entity of Italy or the U.S. and beneficially owned by a resident of Italy is exempt.
• ii In Canada, the 15% rate does not apply to a lump-sum payment. In Italy, the exemption does not apply to lump-sum or severance payments received if the applicable past employment was performed in the United States while such person was a resident of the United States. In the Netherlands, the exemption does not apply if (1) the recipient was a U.S. resident during the 5-year period before the date of payment, (2) the amount was paid for employment performed in the United States, and (3) the amount is not a periodic payment, or is a lump-sum payment in lieu of a right to receive an annuity. In the United Kingdom, the exemption does not apply to a lump-sum distribution derived from a U.S. pension plan. In India, the exemption does not apply to a lump-sum payment.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
• tt Unless the treaty, technical explanation to the treaty, or any relevant competent authority arrangement provides otherwise, the copyright tax rate provided in column 12 applies to royalties for computer software. In Italy, for example, royalties for computer software are subject to the same rate as payments for the right to use industrial equipment.

Notes to the services table (IRS Table 2)

• 4 Does not apply to compensation for research work primarily for private benefit.
• 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
• 8 Does not apply to fees paid to a director of a U.S. corporation.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 25 Exemption does not apply if gross receipts (including reimbursements) exceed this amount.
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

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