Citizenship, residency and tax liability

Citizenship, residency and tax liability

Tue 08 Oct 2019 11:08 AM

“I am a U.S. citizen and I plan to move my residency to Italy. I will continue working remotely for my U.S.-based company and will continue paying my taxes in the U.S. What should I do to comply with Italian regulations too? You mentioned the importance of declaring foreign bank accounts in Italy. I was wondering if you could give me more information on that?”

This is a question I recently received from a client on the common topic of taxes in Italy, which lead to this article about citizenship, residency and tax liability.

The situation occurs frequently in two specific scenarios: 1) when a foreign person is planning to obtain a permit to stay that allows him/her to remain in Italy for an indefinite amount of time (work visa, family visa, elective residency); and 2) when the foreign person is planning to recover Italian citizenship and he/she is concerned that because of his/her new Italian status, he/she will be liable for Italian taxation even if he/she lives abroad (which, as you will see, is not necessarily true).

Photo by Juliana Malta on Unsplash

Residenza fiscale and worldwide taxation

If you are living in Italy for more than 183 days a year (regardless of whether you have registered as a resident or not), you must pay taxes on your worldwide income here. If you are living in Italy for fewer than 183 consecutive days over a 12-month period, you will only pay taxes on the income you earned in Italy. Your obligation to file your taxes in Italy is related to your presence in Italy.

If you fall in the first bracket, you have to declare (please note that I say declare, not necessarily pay) to the Italian government any income you generated worldwide, even if that income was already taxed in your home country. Therefore, even if your income is completely and solely generated abroad, according to this worldwide taxation principle you are responsible for declaring taxes in the country where you spend most of the year and, at the least, for informing the Italian authorities of the amount of taxes you already paid in your home country, therefore determining whether you have to pay something to the Italian government or not (depending on the tax brackets applied to that income). Fortunately, thanks to no double taxation principle, your income and assets that has already been taxed in one country will not be taxed again in the other country, and you can only be liable for the difference between the tax bracket applied in Italy and in the home country.

What assets do I report in my denuncia dei redditi?

In the Italian tax report, known as the denuncia dei redditi, in addition to worldwide income and any real estate you have in Italy), you need to mention all the assets you have anywhere in the world. Therefore, if you have mutual or retirement funds, real estate and bank accounts in your home country you have to declare them in your Italian tax report. Declaring overseas bank accounts is painless most of the time (sometimes you won’t have to pay anything or a very small percentage). Usually, there is hardly anything to pay for the money you keep in bank accounts in the U.S.

On the other hand, failure to comply with this declaration requirement can result in negative consequences if and when you are caught by the Italian IRS, known as the Agenzia delle Entrate. The most common situation that determines a check by the Italian authorities occurs the first time you move money from your U.S. bank account to your Italian one (maybe to buy a house or a car). In this case, your Italian bank will send an automatic notification about the arrival of foreign capital to the local revenue agency. If they decide that the operation came from someone who failed to declare this to the Italian authorities, an alert will be issued and it is likely that they will ask you about where the money originated. When you naively explain that it came from the “college savings that you and your parents meticulously collected for you since you were a teenager in the U.S.”, the Italian IRS will ask you why you didn’t report it to them in your annual tax report. At that point, Pandora’s box will have been opened and you will need to have a good explanation or a good legal adviser.

Citizenship and tax liability

“Is it true that if I become Italian I have to pay taxes in Italy?” The answer is, only if you actually live in Italy. Being an Italian citizen does not make you liable for the payment of taxes in Italy.

As I explained earlier, if you don’t spend more than 183 days in Italy or you don’t have any other strong connection with Italy, then you won’t have to declare anything to the Italian authorities, even if you have Italian citizenship. Therefore, if you plan to recover Italian citizenship while maintaining residency in your home country, you will not become liable (just because of the new citizenship) for filing taxes in Italy. Only your presence and assets in Italy make you liable for the appropriate tax report.

This is very different to the U.S. system. As far as I am aware, the U.S. government wants you to report your income generated worldwide even if you don’t live in the US. Whereas, as Italian citizens, you will report your taxes to Italian authorities only if you live in Italy and if you remain registered as a resident in the civil records of an Italian city. If you formally communicate to the Italian government that you don’t live in Italy, you will not be liable for your income taxes. It is likely that you might only have to pay the property taxes on the assets you have in Italy. This is the reason why Italians who plan on moving abroad permanently are invited to remove their names from the civil records office and register in the so-called “AIRE”, the register of Italians living abroad.

All materials have been prepared for general information purposes only.
The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. It is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal advice from a qualified attorney.

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