A Guide for US Retirees in Italy

Carlo Bertoncello, Luca Biancardino and Giuseppe Calisi
4 hours ago
9 min read

Written by: Carlo Bertoncello, Luca Biancardino and Giuseppe Calisi

The dream of "La Dolce Vita" often leads American retirees to the sun-drenched coasts of Italy. However, once the suitcases are unpacked in a beautiful villa in Liguria, the reality of cross-border taxation sets in. For US citizens, this transition is particularly complex due to the unique "citizenship-based" taxation of the United States interacting with Italy's residence-based system.

To illustrate how these cross-border considerations can arise in practice, consider the hypothetical case of John (75) and Susan (66), a retired American couple who have recently established tax residency in Liguria.

John and Susan’s Balance Sheet

John and Susan Bianchi have accumulated significant assets over their careers. Their primary objective is wealth preservation for their own retirement and eventually for their two children: Giorgia (31), who lives in the U.S., and Federico (36), who resides in Italy. Both children are married and independent, meaning John and Susan are a separate tax household.

Their financial situation is structured through two brokerage accounts (one each), one U.S. revocable living trust to avoid US probate, and their individual retirement accounts (IRA).

The Balance Sheet

With financial planning, it helps to zoom out and take the helicopter view of the entire family net worth as the first step. We look at John and Susan household net worth before stepping into the Italian tax simulation.

DF_example_of_balance_sheet_ITA

A Tax Simulation

As Italian tax residents, John and Susan are subject to tax on their worldwide income. In Italy, US Revocable Trusts are generally considered "fiscally interposed" (transparent). This means the Italian Revenue Agency (Agenzia delle Entrate) looks through the trust structure and taxes John and Susan directly as the beneficial owners of the underlying assets. Moreover, often the trustees are the same settlors, thus, despite the qualification of the trust by the Italian Revenue Agency (either transparent or not), as the settlors are Italian residents, also the trust will be considered subject to Italian tax law.

For the tax simulation we look at the assets in Susan’s and John’s taxable accounts at Interactive Brokers. We will put more ink to paper to look at the details of tax treatment of foreign trusts in Italy in future articles. In future articles will delve further into the specific tax treatment of foreign trusts in Italy.

Redditi di Capitale (Capital Income)

This category includes dividends and interest payments. Italy applies different imposte sostitutive (substitute taxes) depending on the asset type.

Combined, we have about €3.9M in their taxable accounts. The assets are structured as such:

Let’s calculate the taxes capital income for equities:

For the bonds instead, we have to use two different tax rates because the portfolio is split between US Treasuries and global corporate bonds. Let’s look at the tax calculation:

Tax rate on white list government bonds: 12.5%
Tax rate on corporate bonds: 26%

Cash/Money Market (€301k): Assuming a 3% yield, generating €9,050 of interests.

Total Tax on Redditi di Capitale: €25,068

In the above mentioned cases of equities and bonds, it shall be considered that the taxable base is the gross amount of the dividends/interests, as commissions, other costs and US taxes are not deductible from Redditi di Capitale. However, under the Italian-US Double Tax Treaty (DTA), US ordinary taxes might be offset.

Taxes on financial instruments are full of exceptions and require a deep knowledge to avoid mistakes: one of these exceptions is about non-harmonized ETFs. Keep reading for more information.

Redditi Diversi (Capital Gains)

This represents profit from selling assets. Unlike the US, where long-term capital gains have preferential rates, Italy taxes realized financial gains at a flat rate.

Scenario: John and Susan rebalance their portfolio, selling some equities for a realized gain of $43,094.

There is one caveat with holding ETFs in their portfolio and capital gains tax in Italy: Susan and John cannot harvest their losses. We will explain that in a moment, stay with us!

The point is that capital gains, only with reference to ETFs, are considered Redditi di Capitale, that means the capital gains are seen as an interest. On the other hand, capital losses are considered Redditi Diversi. Gains and losses from these two categories of income (Redditi di Capitale and Redditi Diversi) cannot be offset. Thus, capital losses cannot be used to harvest the capital gains from ETFs; however they can be used against capital gains of other financial instruments, such as shares and bonds.

Among the exceptions already mentioned, it must be taken into account that withdrawals from Roth IRA, generally are not recognized as tax-free by the Italian Revenue Agency, so they might be subject to tax in Italy.

IVAFE (Tax on Foreign Financial Assets)

This is Italy’s "wealth tax" on financial assets held abroad. It applies to the market value of the assets at year-end.

IVAFE applies to the asset values converted to EUR using monthly exchange rates approved by the Italian Revenue Agency. Also checking and savings accounts are subject to IVAFE but only if they exceed the annual average amount of €5K. For checking accounts IVAFE is calculated as a flat tax of €34 per account per annum.

It must be noted that alternative investments, such as paintings or musical instruments, under certain circumstances must be included in the Italian tax reporting obligation (section RW of the income tax return), but they are not subject to the wealth tax.

IVIE (Tax on Foreign Real Estate)

John and Susan own a property in the State of Washington, and being a tax resident in Italy implies paying taxes on your worldwide income. When owning properties outside Italy, tax residents must pay tax on foreign real estate called IVIE. Let’s see how much Susan and John have to pay for their US property and how to report it to the Italian tax authorities?

Usually the taxable base is equal to the purchase price of the property converted at an approved exchange rate at the time of the purchase. Let’s assume that John and Susan bought their US property in March 2009 and paid $325K for buying their property in the State of Washington. For calculating IVIE we need to convert the purchase price to euros at the historical FX rate. For simplicity, we are going to use the average mid rate for the month of March 2009 (USD to EUR 0.78).

Italy allows the deduction of US property tax paid in the same fiscal year. Often, US taxes on real estate are higher than Italian taxes, so frequently happens that IVIE is not due.

Total Annual Italian Tax Bill (Estimated)

Combining these figures, John and Susan’s estimated annual Italian tax liability on their assets is $52.5K as summarized below:

All amounts calculated are presented for illustrative purposes only and are based on multiple assumptions made in order to simplify the reasoning.

Special Investigation: The "Non-Harmonized" ETF Hurdle

While the simulation above assumes a standard 26% tax rate on equity dividends and gains, John and Susan must navigate a specific hurdle regarding their US-domiciled ETFs.

The Italian Regulator and Agenzia delle Entrate distinguish between harmonized (EU-compliant/UCITS) and "non-harmonized" funds. Because US ETFs do not comply with EU directives, they are classified as non-harmonized. Historically, and according to strict interpretation, income (dividends) and capital gains from non-harmonized funds do not qualify for the flat 26% substitute tax. Instead, they are added to the taxpayer's ordinary income and taxed at progressive IRPEF rates, which can reach 43% (plus regional and municipal add-ons of ~2-3%).

Implications for John and Susan:

If the Agenzia delle Entrate applies the ordinary income tax rates to their US ETFs:

The Dilemma: They cannot switch to European ETFs (UCITS) because the US would view those as PFICs (punitive US tax). They are caught between US PFIC rules and Italian non-harmonized fund rules.

Better Alternatives? Direct indexing and individual stocks and bonds.

To solve this, John and Susan should consider restructuring their portfolio to hold individual stocks and bonds rather than ETFs.

Direct Indexing: Instead of holding an S&P 500 ETF, they can use a "Direct Indexing" strategy - often available via US custodians for accounts >$100k (i.e. Interactive Brokers) - to buy the actual shares of the 500 companies or any other major index.
Tax Impact: Income and gains from individual stocks and bonds are always taxed at the flat 26% rate in Italy, regardless of whether the company is US or EU-based.
Result: By holding the underlying securities directly, they bypass the "non-harmonized" penalty entirely, securing the 26% Italian rate while remaining perfectly compliant with US tax laws (no PFICs).

The Critical Decision: Choosing a Tax Regime

To pay these taxes, John and Susan must choose one of three regimes. For US citizens, this choice is critical to avoid conflict with US tax rules (FATCA and PFIC). Let’s clarify what these different regimes are and how they differ from each other.

Option 1: Regime Amministrato (Administered Regime)

In this regime, you move assets to an Italian bank. The bank acts as a withholding agent (sostituto d'imposta), deducting the 26% or 12.5% tax automatically.

Pros: Simplicity. Anonymity from the Italian tax return agency.
Cons for Americans:
- The PFIC Trap: Italian banks typically sell European Mutual Funds (UCITS). The US IRS classifies these as Passive Foreign Investment Companies (PFICs). PFIC taxation is punitive (often >50% tax rate) and requires onerous reporting (Form 8621).
- Investment Restrictions: Due to EU PRIIPs regulations, Italian banks usually cannot sell the US ETFs that John and Susan currently own. They would be forced to sell their efficient US portfolio and buy punitive PFIC funds.

Option 2: Regime del Risparmio Gestito (Managed Savings Regime)

Here, a professional asset manager makes decisions for you.

Pros: Taxes paid by the manager, and avoid the non-harmonized ETF hurdle.
Cons for Americans:
- Tax Mismatch: This regime taxes accrued gains (maturato). You pay tax if the portfolio value goes up, even if you don't sell. The US taxes only realized gains. This creates a timing mismatch for Foreign Tax Credits. You might pay Italian tax in 2024 on accrual, but have no US tax to offset it against, leading to potential double taxation.

Option 3: Regime Dichiarativo (Declaratory Regime)

In this regime, John and Susan keep their assets in their US brokerage accounts. They calculate their own taxes and report them on the Italian tax return (Modello Redditi PF).

Pros:
- PFIC & FATCA Compliance: They keep their US ETFs, avoiding the PFIC nightmare. Their US accounts are fully compliant with FATCA.
- Control: They control when to realize gains, allowing for tax planning.
- Foreign Tax Credits: The timing matches. They pay Italian tax on realized gains/income, which generally aligns with the US system, allowing them to claim the Italian tax paid as a credit on their US return (Form 1116) to reduce US taxes.
Cons: Requires a knowledgeable commercialista (Italian equivalent of CPA) to calculate the taxes (converting USD to EUR) and file the return. Even better? Working with a team of tax professionals in Italy and the U.S. who can support you with both jurisdictions.

Option 4: wealth planning using structures

Italian law permits the use of specific legal structures, such as holding companies or Italian trusts, which may offer different tax treatment depending on structure and implementation.

It is crucial to verify that these options align with individual financial needs and goals, as they necessitate specialized cross-border planning. We will delve deeper into these structures in future publications. Stay tuned for further insights.

Conclusion: The Verdict

For John and Susan, and American expats in their position, the Regime Dichiarativo may provide the most coherent alignment with U.S. tax rules. However, the appropriate regime depends on individual circumstances.Adopting the Regime Amministrato or Gestito would require moving assets to Italy, likely forcing the sale of their US portfolio and the purchase of PFIC classified European funds. A tax disaster in the eyes of the IRS.

By staying in the Regime Dichiarativo:

They satisfy FATCA: Their US accounts are transparent and compliant.
They avoid PFICs: They retain their efficient US domiciled financial assets (ideally in the form of single stocks and bonds).
They may optimize Foreign Tax Credits: They pay the (total amount of the taxes in €) in Italian taxes via the F24 model and claim this amount as a credit on their US tax return, mitigating double taxation.

Living in Liguria offers a wonderful lifestyle, but it requires a "Declaratory" approach to finance: keep your assets American, but do your full Italian reporting.

The lesson from Susan and John's story is that building their new life in Liguria is possible, and how investment strategies cannot work away from your life strategy. It’s more than just about growth or income, it’s about positioning your assets in the right places, with the right tax structure that supports the life you have chosen. And sometimes, it is not possible to do it all yourself. With the appropriate cross-border financial and tax advice, these are surmountable hurdles. Don’t let them distract or derail you from the life you want to live.

When you want to help other people tell them the truth, when you want to help yourself tell them what they want to hear.

— Pablo Picasso

Want to learn more form Carlo Bertoncello and Luca Biancardino ? Visit their website: Bertoncello or email them at segreteria@bertoncellobpa.it

DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.