What Are the Withholding Rates in the US-Italy Tax Treaty?

Tax treaties provide a framework for how income earned by a resident of one country is taxed by another, mitigating double taxation and establishing protocols to prevent tax evasion. The U.S.-Italy tax treaty, signed in 1999, serves this purpose for individuals and companies with financial ties to both nations. This agreement contains specific rules that can lower the tax withholding rates on various types of income flowing between the two countries.

Determining Eligibility for Treaty Benefits

To access the benefits of the U.S.-Italy tax treaty, an individual or company must qualify as a resident of either the United States or Italy. Article 4 of the treaty defines a resident as any person who, under that country’s laws, is liable to tax there based on domicile, residence, place of management, or a similar criterion.

For individuals considered a resident of both countries, the treaty establishes tie-breaker rules to assign residency to a single country for treaty purposes. The first test is the location of a permanent home. If a permanent home exists in both countries, the next factor is the individual’s center of vital interests, considering where their personal and economic ties are closer. If this cannot be determined, residency is based on their habitual abode.

Beyond establishing residency, a claimant must also satisfy the Limitation on Benefits (LOB) provision in Article 22. This provision prevents “treaty shopping,” where residents of third countries try to take advantage of a treaty. To be eligible, a resident must be a “qualified person,” which includes individuals, the contracting states, and certain publicly traded companies or their subsidiaries.

Treaty Withholding Rates by Income Type

The treaty sets maximum withholding tax rates for investment income paid from a source in one country to a resident of the other, which are often lower than standard domestic rates.

Dividends

Article 10 of the treaty outlines a two-tiered system for withholding tax on dividends. For most dividend payments, such as portfolio dividends an individual investor would receive, the maximum withholding rate is 15%.

A lower rate of 5% is available for certain intercompany dividends. To qualify, the beneficial owner must be a company that owns at least 25% of the voting stock of the company paying the dividend. This ownership threshold must be met for a 12-month period ending on the date the dividend is declared.

Interest

For interest income, Article 11 permits the source country to impose a withholding tax, capping the rate at 10%. This rate is a reduction from the default 30% statutory withholding rate in the U.S. for payments to foreign persons.

The treaty also provides for exemptions where interest payments are not subject to any withholding tax. These exemptions include interest paid to the government of the other country or its political subdivisions. Another exemption applies to interest on loans guaranteed or insured by a governmental body of the other country established to promote exports.

Royalties

Article 12 addresses royalties and establishes three potential withholding rates depending on the intellectual property. A 0% rate, a complete exemption from withholding tax, applies to payments for the use of a copyright of any literary, artistic, or scientific work.

For royalties related to the use of computer software or for the lease of industrial, commercial, or scientific equipment, the treaty sets a maximum withholding rate of 5%. For all other types of royalties, which includes payments for patents, trademarks, designs, or models, the withholding rate is capped at 8%. This category also covers payments for motion pictures, films, or tapes used for radio or television broadcasting.

Withholding Rates for Other Key Income

The treaty also provides rules for other income, such as pensions and capital gains, assigning the primary right to tax to one country to eliminate ambiguity.

Pensions and Annuities

Article 18 establishes that private pensions and other similar remuneration are taxable only in the recipient’s country of residence. For example, if a resident of Italy receives pension payments from a former private U.S. employer, only Italy may tax that income. The same principle applies to annuities, defined as a stated sum paid periodically at stated times.

Social Security Payments

The treatment of government-administered social security payments is distinct from private pensions. Article 18 specifies that social security benefits paid by one country to a resident of the other are taxable only in the country making the payments. For instance, U.S. Social Security benefits received by a resident of Italy are subject to tax only by the United States. This rule is an exception to the principle of residence-based taxation for retirement income.

Capital Gains

The taxation of capital gains is addressed in Article 13. The general rule is that gains from the sale of property are taxable only in the seller’s country of residence. For instance, if an Italian resident sells shares of a U.S. corporation, any resulting capital gain is taxable only in Italy.

An exception to this rule is for gains from the sale of real property. The treaty allows the country where the real property is located to tax any gains from its sale. This means if a resident of Italy sells a vacation home in the United States, the U.S. has the right to tax the capital gain. This exception also extends to gains from selling shares in a company whose assets consist principally of real property.

Required Documentation to Claim Treaty Rates

To receive reduced withholding rates, a foreign person must provide documentation to the U.S. payer, known as the withholding agent. The primary document for an individual is IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). This form certifies the individual is not a U.S. person and is the beneficial owner of the income, making them eligible for a reduced rate of, or exemption from, withholding.

Completing Form W-8BEN requires standard identifying information, such as name, address, and a foreign tax identifying number. In Part II, “Claim of Tax Treaty Benefits,” the individual must certify they are a resident of Italy.

The filer must also cite the treaty article under which they are claiming benefits. For example, an individual receiving dividends would reference “Article 10” for the 15% rate, while someone receiving interest would cite “Article 11” for the 10% rate. This provides the withholding agent with the basis for applying the lower rate.

How to Submit for Reduced Withholding

The completed Form W-8BEN must be provided directly to the withholding agent—the U.S. person or institution responsible for making the payment, such as a bank or brokerage firm. Upon receiving a valid form, the withholding agent is authorized to apply the reduced withholding rate. The form should be submitted to the payer before the first income payment is made to ensure the correct rate is applied from the start.

Form W-8BEN does not remain valid indefinitely. A properly completed form is effective from the date it is signed until the end of the third subsequent calendar year. For example, a form signed on September 15, 2024, would remain valid through December 31, 2027. The recipient of the income is responsible for providing a new form to the withholding agent when the previous one expires to ensure that treaty benefits continue.