In recent years, media has enticed U.S. families to relocate to Italy, highlighting its favorable tax regime and affordable lifestyle. Italy garnered significant attention for its Digital Nomad Visa Program and is now listed as a top retirement location. However, the U.S. regime of global taxation, Italy’s forced heirship laws, different tax treatments, and the intricacies of cross-border treaties and tax present a myriad of important considerations. Here are a few issues to assess before moving to Italy:
Tax Implications of Relocation to Italy
Italy’s Flat Tax on Foreign Income
Wealthy global investors would find opting into the Italian flat tax regime that taxes new residents at 200,000 Euros especially attractive. All foreign sourced income, regardless of the amount, is subject to the flat rate if the taxpayer opts for the flat tax. Despite the flat tax amount doubling in 2024, the tax incentive continues to allure wealthy investors. Additionally, Italy’s tax regime exempts the wealth tax and reporting obligations on foreign assets and foreign income.
Incentivized Low Tax Rate For Retirees in Southern Italy
Retirees moving to Southern Italy also enjoy a 7 percent rate on foreign income for ten years. However, while the Italian tax regime may be alluring, the U.S. tax regime of global taxation requires additional consideration about the cross-border implications. The lower tax rate is aligned with Italy’s efforts, such as the offer of real property for 1 Euro with the requirement to build on the land, to create investment and development in certain parts of Italy. However, investment in real estate presents a variety of U.S. compliance obligations and misalignment, including FIRPTA, depreciation mismatches, and potential exposure to Italian transfer taxes.
Alignment with the U.S. on Digital Taxes
Recent policy decisions aligning Italy and U.S. on opposing discriminatory technology taxes may be beneficial for future trade and business opportunities between the two countries. While business incentives may support a founder or investor to relocate to Italy, the policy alignment does not reduce the compliance burden of reporting and determining tax liability globally. The U.S. remains one of two counties that taxes all assets and income globally from all sources derived. This tax regime subjects U.S. citizens, even after a relocation to Italy to significant reporting and compliance obligations in the U.S. under FBAR, FinCen, and tax reporting requirements.
Inheritance, Gift, and Succession Planning
Italy’s civil law succession system is based on a forced heirship model, which can directly contradict U.S. estate plans. Even though both Italy and the U.S. are parties to the International Will Convention, having a single will across both jurisdictions may negate benefits of separate wills and administration to separate the treatment of bequests in each country. Additionally, transfer instruments and foreign trusts may have a different treatment and recognition in each country. The U.S.-Italy tax treaties aim to mitigate some of the double taxation on income and for inheritance. Although, Italy exempts non-Italy based assets from tax under its flat tax system, Italy-situs assets would still be subject to Italian taxes. Further, the U.S. taxes the global income and assets of U.S. citizens and U.S. residents. Residency qualification and rules also vary between the countries. Therefore, the corresponding laws, including foreign credits and treaty applications have to be carefully navigated both in planning and administration to prevent a loss in wealth accumulation and succession.
Expatriation and Section 2801 Tax
Relocation may evolve into more than a change of permanent residency and into expatriation. Section 2801 of the Internal Revenue Code subjects certain transfers by U.S. citizens and permanent residents to the U.S. estate and gift tax of 40 percent. The rules apply where the expatriate is deemed a covered expatriate under Section 877/877A. U.S. beneficiaries receiving transfers from covered expatriates may be subject to the compliance and liability obligations. In January 2025, the IRS released proposed regulations and Form 708 to report these transfers but the final form is yet to be released. Cross-border planning spanning generations is essential to prevent unexpected tax liabilities before a U.S. taxpayer considers expatriation.
Bureaucracy and Tax Treaty Nuances
Even though U.S. and Italy have favorable tax treaties between them and have some policy alignment, relocation can be challenging for multinational compliance and tax exposure. Treaty specifics on the classification of income, deductions, and credits, and underlying tax exposure created by situations, such as being a covered expatriate may present unexpected surprises. Comprehensive planning prior to relocation and expatriation should include comprehensive asset protection, estate administration management, and compliance management planning as well as consider sources of liquidity such as through life-insurance and other investment option to cover unexpected liabilities. Relocation requires multilayered planning and securing a visa along with moving assets abroad is simply not enough.