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Öznur Kızılarslan

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How do digital nomads tax the united states? The advantages that the United States offers to individuals who have American citizenship but work abroad on a permanent basis.

Understanding the pros and cons of the US tax regime for digital nomads. How can you plan ahead to make the most of your global employment opportunities if you are a US citizen.

In recent years, the number of digital nomads – that is, US citizens and Green Card holders who work while traveling abroad – has been increasing. Technological progress has certainly allowed millions of people to live where they want, working with customers from all over the world. However, you should know that the United States, from this point of view, offers digital nomads who have US citizenship an important favorable tax regime.

In fact, many US citizens have the opportunity to become digital nomads (working remotely while traveling in different countries). Some of them mistakenly assume that if they just travel from one country to another, they will avoid the taxation of their income. Unfortunately, this does not happen and I told you about it in depth in this article dedicated to the Estonian E-residency: “E-residency in Estonia: how to get it and attention to use”.

You must know, in fact, that the United States is one of the few countries in the world that tax its citizens on the basis of their citizenship and not on the basis of their place of residence (tax). Below, I want to go and explain to you why digital nomads who have a US passport can legally reduce their tax burden.

$ 107,600 US taxable income exclusion for digital nomads

US citizens who meet three requirements are entitled to the so-called “exclusion of income from work abroad”. In particular:

The first requirement is to have foreign earned income which can be briefly described as income received for services performed in a foreign country.

The second requirement is that the tax domicile of the person concerned must be in a foreign country. The United States Internal Revenue Service (IRS) defines the term “tax domicile” as “the general area of ​​the main office of your business, work or service, regardless of where you keep your family home”.

The third requirement is that the individual must:

Reside continuously in one or more foreign countries for a period that includes a full fiscal year;

Be a citizen or citizen of a country that has a double tax treaty with the United States and must reside in one or more foreign countries for an uninterrupted period that includes a full tax year. This is the Bona Fide Residence Test (BF); or

Be physically present in one or more foreign countries for at least 330 full days over a period of 12 consecutive months. This is the physical presence test (PPT).

The texts of physical presence ppt

While the two criteria (Bona Fide Residence Test and Physical Presence Test (PPT)) may seem similar, they are actually quite different in terms of how they apply to your US taxes.

The PPT essentially means that a person has left the United States and has not returned for more than 35 days during the twelve consecutive months. This clause is not based on a calendar year. This test simply refers to any twelve month period (i.e. April to April or September to September). Also note that it does not refer to consecutive days.

So a digital nomad would be considered ineligible if he made several 2-7 day trips to the United States for a total of more than 35 days during the twelve month period in question. The key to satisfying the “physical presence test” is to have spent less than 35 days in the United States during a 12 month period.

Two other important things about the ppt

The 330 days of the year spent outside the United States must be spent on the actual land territory of another state. Therefore, if you spend time in international waters (ie on a ship), it does not count towards the days spent outside the United States;

The days you arrive and leave the United States (even if you are only transferring flights) count towards the days spent in the United States. For example, if you arrive in the United States on July 1 and leave on July 10, you should count a total of 10 days spent in the United States.

For digital nomads: The BF test is likely not to apply because you are not moving to a single country where you take steps to establish residency.

The $ 107,600 US tax exemption for digital nomads

US citizens who meet the three requirements above are entitled to a foreign earned income exclusion of USD 107,600 for 2020. Such US citizens also have the right to deduct or exclude certain amounts related to housing.

US citizens living abroad are subject to US income tax in excess of the exclusion of overseas earned income.

To avoid this, it is possible, for example, to incorporate a non-US company that will pay them a salary not exceeding the amount of the exclusion of foreign earned income. For example, if the foreign company earns $ 200,000 annually and pays $ 107,600 a salary to the U.S. citizen, the rest of the company’s earnings ($ 92,400) can be deferred or reinvested in tax, without the need to pay U.S. taxes. on them.

Of course, to plan options like this, the advice is to rely on experienced international tax professionals.

Financing: The most important costs of emigration at a glance. The wish to realize oneself in another country or continent entails financial burdens that should not be underestimated. Anyone who deals with the topic of emigration for the first time should focus on clear planning of specific costs from the start. Otherwise, you will not have enough change in the first few days to get off to a safe start.

Put together the seed capital

That no emigration is free may come as a surprise to few. Nevertheless, the country, the region and cost-specific criteria decide on the financing of the first few months. Before the suitcase is packed, the actual costs are calculated.

In this way, emigrants avoid unforeseen cost traps or a critical time that puts their own project to the test. In the worst case, there is a risk of returning to their home country with no financial means or reserves. In order to get around this, it is important to ensure that there is consistent financial preparation.

Calculate the cost of living

When it comes to emigrating to another European country, the costs of living are often similar to those in Germany. Outside of Europe, things look very different again. In South America, Asia and Africa in particular, living costs are only a fraction of that in Germany. Caution is advised when emigrating to major cities. Here the costs increase many times over.

So it is helpful to find out about the fixed costs, such as water, garbage, rent and other ancillary costs for heat and electricity, in order to set the budget for each month. At first, emigrants should get used to the idea that their own products are often many times more expensive abroad. This is due to the customs and import prices. Those who emigrate therefore get their hands on local and regional products.

Nevertheless, it would be an exaggeration to summarize the individual costs in detail. Here it is sufficient to orientate yourself on average values ​​at the beginning in order to get a point of reference for your own financing. Especially without a specific job on site, the budget should cover at least the first 12 months so as not to be under pressure from the beginning to raise funds.

This makes it possible to take a look around and tackle projects in order to create a financial basis. One of the common mistakes is a lack of a financial buffer to absorb inconsistencies abroad. If you don’t take into account exactly this cushion, you can fall over with the next headwind and put your entire existence at risk.

How to finance an upcoming emigration?

If the individual costs are now transparently compared, they are compared with your own assets or budget. Especially when it comes to climbing up the career ladder on site and starting a new phase of life, financing can put the springboard within reach.

Here, different conditions have to be weighed up, compared and taken out a loan with a financial service provider that is flexible, safe and easy to trade. In addition, enough time must be allowed for in applying for the financial means. It will hardly be possible, for example, to get funding from Germany from the United States of America and to get the urgently needed funds as quickly as possible within a few weeks. In addition, the personal securities and conditions form an essential part in the approval of the installments and assets.

Financing the housing situation

The choice of apartments or houses is not always easy in other countries or continents. At best, it is important to get an initial overview of the living situation on site before emigrating. The same applies to the costs incurred, which often go well beyond the rent. Many landlords charge an advance payment of several months’ rent as well as a rental deposit. In some states and regions, there is no chance at all of getting an offer of housing without a real estate agent. These additional costs should be included in the budget from the start.

The same is true of possessions such as furniture, electrical appliances or personal items that emigrate with. If you take a large part of your household items with you, you have to plan the costs for the transfer and also find a suitable property as soon as possible.

A targeted inventory of the existing furniture quickly finds out the benefits and added value of your own possessions. Anyone who moves across the ocean for a few years for professional reasons can have their furniture stored in Germany as a security. This storage is often many times cheaper than a new acquisition or transfer. On the other hand, there are opportunities to advertise used furniture in advance on the Internet in order to turn it into cash.

Analyze the job market and calculate with the family

It is extremely risky to emigrate without information about labor market conditions. The qualification, the existing training, the degree and the degree are linked to the offer on site. In addition, it is advisable to apply from Germany and send an application via online conferences, via Skype and by email. With a job offer in your pocket, it is much easier to calculate than to enter a blind job market.

Emigration with the whole family is particularly complex. Here parents not only take responsibility for their livelihood, but also for their children. Kindergarten, school, care and living conditions form the elementary points of emigration in order to restore security to the whole family at the new place of residence. In addition, it must be taken into account that the children do not yet speak the language in the target country, but will learn it faster than their parents in the next few months. Therefore, parents should prepare for the most important and catchy dialogues in a language course.

Tax types and taxable persons

Taxes in the USA. The tax burden in the USA is based on the place of residence in the respective state or city. There are states with low tax rates (such as Delaware) and those with high tax rates.

In addition, there are cities or municipalities that collect high tax rates or duties – e.g. Marco Island near Naples, Florida. This community has a very high property tax rate; Preferably millionaires live there.

With regard to taxes, a distinction is made between

-Residents, i.e. US residents

-Non-residents, i.e. people are living abroad. This includes those who have been within the United States for less than 183 days in the past three years.

No difference is made whether the taxpayers are “aliens” (legal foreigners) or American citizens.

The following is only a brief overview of US taxes. As tax legislation is constantly changing, it is essential to consult a specialist!

Income tax

As in Europe, income is taxable in the USA. The income tax is – depending on the annual income – between 10% and 38.6% of the annual income. The maximum rate is reached with an annual income of 307,500 US dollars (as of 2002).

There are numerous ways to reduce income, and you should definitely hire a specialist to do this. Up to an annual income of US $ 62,550 for a married couple assessed together, no taxes are paid in the USA. For children under 18, this amount is $ 6,050.

Medical bills, donations to political or charitable institutions are just as deductible as repair work on or in the house, be it owner-occupied or rented.

Value Added Tax

VAT is charged in almost all US states. This “consumption tax” (often also called “sales tax”) is variable, i.e. it is determined by the respective state and is between 0% (State of Delaware) and 8.75% (California and Texas) of the value of the goods. It is counted on the excellent price.

So don’t be surprised if you have to pay more at the checkout than what is stated on the price label. Sometimes everyday necessities are exempt from sales tax, such as shoes or clothing in the state of Pennsylvania.

Tax incentives for property purchases

The purchase of real estate is also tax-subsidized in the USA. If you sell a property within 60 months, then $ 250,000 per person is tax-free, or $ 500,000 for a married person. The prerequisite is that the house or apartment was the seller’s primary residence for at least 24 months within the last 60 months. If this is not the case, 15% “Federal Tax” is due on the profit (minus the tax exemption), plus local taxes, which are based on the state or municipality.

In the case of rental income in the USA from a foreigner living abroad, there is a choice: either submit a flat rate of 30% of the rental income as tax (WITHOUT tax return) or submit a regular tax return.

Taxes on real estate (comparable to German property tax in Germany) are much higher in the USA than in Germany. Depending on the size and location, houses are due in the tax of 8,000 to 10,000 US dollars per year, and often well above that. In areas that have seen a building boom and rising real estate prices in the last few decades, more and more elderly residents are being driven out of their homes due to the high property taxes: They can often no longer pay the very high property taxes.

For non-residents, a “flat tax” of around 30% is applied to income. Again, the following applies: involve experts! Binding information on tax matters is available on the homepage of the American tax authority Internal Revenue Service IRS.

Regulations for the self-employed

As a self-employed person in the USA, you need a so-called “Employer Identification Number”, or EIN for short. Depending on the income, the tax must then be paid either quarterly or monthly.

Your personal tax return must be submitted annually by April 15th. Be submitted to the IRS tax authority.

Providing answers in tax matters…

The tax authority IRS has published its own publication for foreigners with all the important information. This is the IRS Publication 519 (US Tax Guide for Aliens).

Further important information on the subject of taxes in the USA can be found on the homepage of the US Embassy in Berlin.

In particular, all-important questions are dealt with here, such as Deadlines that must be observed, from what income one is taxable in the USA, which forms must be filled out for which purpose, how real estate profits must be taxed, etc.

The branch of the American tax authority IRS, which is based in Frankfurt at the consulate, can also answer questions about taxes in the USA. It is responsible for the following countries: Germany, Estonia, Iraq, Iran, Italy, Yemen, Qatar, Latvia, Lebanon, Lithuania, the Netherlands, Austria, Poland, Romania, Slovakia, Syria, the Czech Republic, Hungary and the former Soviet republics.

America’s Social Security System. Social security means being sure of the future. Social security system is a system that meets the needs of people in various social risks. In a sense, the social security system is a contract made between generations. We have stated in previous articles that there are 2 main social security systems in Canada as “Canada Pension Plan” and “Old Age Security” and explained in general.

The first country that comes to mind when talking about Canada is America. It is the country whose neighbor and relations are the most intense in every respect. Relationships are also advanced in terms of social security.

Just as there are many American citizens working in Canada, there are many Canadian citizens working in America. Again, many people have work in both Canada and America.

In this article, we will try to explain the current social security system in America.

In the United States, 6.2% of the earnings of employees up to $ 97.500 (usd) are deducted as insurance premium and 1.45% as health premium. Those who work in their own business; They pay the sum of both employee and employer premium rates (12.4% + 2.9%).

Those who are insured in the USA can retire at the age of 65, or if they are willing to receive a missing salary, they can receive a pension at the age of 62.

If you do not have legal immigration or citizenship status in America, you cannot obtain a social security number. When you do not get a social security number, you cannot get a work permit. Therefore, you cannot work with official insurance with check.

Some states grant work permits to international students, some do not.

If Canadian citizens work in America, American employers can get a work permit for Canadian workers.

Those who do not have a social security number and cannot obtain a work permit have to work in uninsured jobs.

Millions of people who live in the United States and do not have legal status, cannot obtain a social security number and do not have a work permit have been working uninsured and informally for years. Therefore, it causes the premium-income loss of the American social security system.

According to 2006 figures, there are 37 million Americans aged 65 and over.

If this goes on, it is estimated that by 2040 the number of American citizens over 65 will double, there will be 70-75 million people. Thus, the number of retirees will double at approximately the same rate.

This situation; That risk undermining the social security system, measures are not taken, the system will go bankrupt if the insurance system strengthened in the future (as in Turkey) will fall in income can not cover the expenses.

The American and European countries, whose elderly population is growing rapidly and whose young population is decreasing, will face major social and economic problems in the future if they do not take measures.

Although delaying retirement by making retirement conditions difficult provides benefits and relief in the short term, it is never a definitive and permanent solution.

The definitive, permanent and healthy solution is to grow the economy, open new business areas, increase the number of employees, and reduce unemployment.

In summary, while increasing the number of working young generations, equally more importantly is to ensure that they work as officially insured, to prevent unregistered work, thus to include employees in the social security system and receive premium.

Some of my readers may think, “ we are from Canada, what to us from America“.

I remind those who think like this how Canada has been negatively affected by the economic fluctuations and crises in America in recent years and I am content with the determination of a Canadian friend. “ Canada will have a cold if America sneezes ”

Those who work in America can request their service documents by calling the “ social security statement ” 1-800 772 1213, 1-800 633 4227, 1-877 486 2048.

Transfer of residence to states with subsidized regimes. The consequences are deriving from the transfer of residence abroad to countries with privileged taxation (blacklist countries).

The tax consequences deriving from the transfer of tax residence to blacklist states. The transfer of residence to countries with facilitated tax regimes.

When a natural person decides to make a transfer of residence abroad, he must inevitably ask himself some questions also from a fiscal point of view. Essentially, it is a question of problems concerning income taxation and aspects linked to double taxation phenomena.

I have already dealt with in this article, “Transfer of residence abroad: a guide”, all the aspects related to a transfer abroad. Now, however, I want to focus in particular on the effects of a transfer of residence carried out in a country with a favourable tax regime. These are the so-called “Blacklist countries”.

Moving to these countries, in fact, has important consequences as regards the taxation of income received, and the verification of the tax residence of the expatriate person. Precisely to avoid making these mistakes, I decided to dedicate this article to deepen these aspects. Of course, if all this is not enough for you, at the end of the article, you will find the link to contact me directly for personalized advice.

Tax discipline linked to the transfer of residence in blacklist states

Pursuant to art. 2 paragraph 2-bis of the TUIR (DPR n. 917/86) in force: “Unless proven otherwise, Italian citizens who have been cancelled from the registries of the resident population and emigrated to States or territories with a privileged tax regime, identified by decree of the Ministry of Finance to be published in the Official Gazette, are also considered residents.”

The states or territories with a privileged tax regime have been identified with the D.M. of May 4 1999 and are highlighted in the following list:

Table: Transfer of residence to blacklisted states for natural persons – list

Below is the list of blacklist states for the transfer of residence of individuals. These are the states identified by the D.M. May 4 1999 (as amended).

AlderneyAndorraAnguillaAntigua e Barbuda
Antille olandesiArubaBahamasBahrein
BarbadosBelizeBermudaBrunei
Costa RicaDominicaEmirati Arabi UnitiEcuador
FilippineGibilterraGibutiGrenada
GuernseyHong kongIsola di ManIsole Cayman
Isole CookIsole MarshallIsole Vergini BritannicheJersey
LibanoLiberiaLiechtensteinMacao
MalaysiaMaldiveMaurizioMonserrat
NauruOmanPanamaPolinesia Francese
MonacoSarkSeychellesSingapore
Saint Kitts e NevisSaint LuciaSaint Vincent e GrenadineSvizzera
TaiwanTongaTurks e CaicosTuvalu
UruguayVanuatuSamoa 

Particular situations of some states for the transfer of residence to blacklist states

It should be noted that the following have been removed from the list:

– Cyprus and Malta (D.M. 27/07/2010);

– San Marino (D.M. 12/02/2014).

Despite the agreements with Switzerland, Monte Carlo and Liechtenstein regarding voluntary disclosure, these countries remain heavenly, for the purposes of the D.M. 4/5/99 regarding the residence of natural persons.

The consequences of moving to blacklist countries

The transfer of residence to blacklisted states has consequences for individuals. Basically, through the above provision, the principle is introduced whereby a person, even if he has removed himself from the resident population, must continue to declare his income in Italy.

This, by virtue of the relative legal presumption, contained in the rule in question, that the transfer, even when it has occurred by passing through a third country not included among those in the list above, is only instrumental to obtaining an undue tax benefit.

With this provision, the taxpayer bears the burden of providing, by any means, excluding testimony and oath, a valid document to overcome the presumption of tax residence in Italy. This evidence may consist of facts or deeds that confirm the effectiveness of the situation that materialized through the cancellation of the resident population from the registry office. This, in line with the assumption of a real and lasting relationship with the immigration state and with the interruption of significant relations with the Italian state.

The content of the taxpayer’s proof

As we have seen in the transfer of residence in blacklist states, proof of the taxpayer is essential. As regards the content of the test, the same circumstances can be used, in negative, in order to substantiate the formality of the cancellation of the resident population registry. The aim is the demonstration of the non-existence in our country of the habitual residence (residence) or of the complex of relationships concerning business and interests, extended not only to economic aspects but also to family, social and moral ones (domicile).

The list of white list countries still not applicable

The 2008 budget amended the criteria for identifying the so-called tax havens by replacing art. 2, paragraph 2-bis, of the TUIR, which reads as follows:

“Unless proven otherwise, Italian citizens are also considered residents who have been deleted from the resident population registers and transferred to states or territories other than those identified by the decree of the Ministry of Economy and Finance to be published in the Official Gazette.”

This rule will come into force when the Ministry of Economy and Finance proceeds with the identification of the states and territories that will make up the so-called “white list”. Therefore, when the white list is published, reference will no longer be made to blacklists like the one above.

Until the eventual issue of this new white list, the old list contained in the D.M. September 4, 1996.

The burden of proof in the event of a transfer of residence abroad

Let’s see, now with a simple example the effect in terms of transfer of residence in blacklist states by the taxpayer.

On this aspect, it is necessary to point out application problems that have not yet been confirmed at the level of practice. I refer to situations in which the financial year of a natural person does not coincide with the calendar year. This is the case, for example, of the United Kingdom, where the tax period runs from April to April.

Transfer of residence to blacklist states and assessment

In particular, the elements to be monitored that could lead to the identification of suspicious situations regarding the effectiveness of the foreign tax residence of the subjects registered with AIRE may be different.

In particular, based on the information and experience in this area, we can identify a number of elements that can lead the tax administration to assess the tax residence in Italy of a taxpayer. These elements can be summarized as follows:

-Declared residence in one of the states and territories with privileged taxation, identified by the Decree of the Ministry of Finance of 4 May 1999; (relevant for the purposes of Article 2, paragraph 2-bis of Presidential Decree no. 917/86);

-Capital movements to and from abroad, transmitted by financial operators as part of the tax monitoring referred to in Legislative Decree n. 167/1990;

-Information relating to real estate and financial assets held abroad, transmitted by foreign tax administrations in the context of European directives and automatic exchange of information agreements;

-Residence in Italy of the taxpayer’s family unit (“center of vital interests”);

-Deeds of the register indicating the effective presence in Italy of the taxpayer;

-Active electricity, water, gas and telephone utilities;

-Availability of motor vehicles, motor vehicles and pleasure craft;

-Ownership of an active VAT number;

-Significant equity investments in resident partnerships or companies with a restricted share base;

-Ownership of corporate offices;

-Payment of contributions for domestic workers;

-Information transmitted by withholding agents with the single certification and with the 770 declaration form;

-Information relating to transactions relevant for VAT purposes, communicated pursuant to art. 21, D.L. n. 78/2010 as well as pursuant to Legislative Decree no. 127/2015.

Expatriates and tax residence assessment: advice and consultancy

If you are thinking of moving abroad and you have read this article, you will surely have doubts about the transfer procedure you are implementing. Getting on a selective list of subjects to check is not pleasant.

For this reason, you can contact me to receive personalized advice on your:

Personal position and on

How to better manage your transfer of residence abroad.

This is in terms of fulfilments and chrono-program of the aspects to be implemented and of the documentation to be kept in order to face a future tax assessment in the best possible way.

If, on the other hand, you have already moved abroad and believe you have not adopted the right procedure, contact me to understand your situation better. And to eventually have all the tools that I will show you available for a possible check. Being prepared for the arrival of an invitation or questionnaire is essential for a successful check.

Foreign Financial Activities and Estate Planning. The valuation of foreign financial assets with a view to succession planning. The planning of the generational handover of one’s assets has always been an aspect that interests entrepreneurs and private individuals who own assets. This passage usually occurs through succession.

In terms of succession planning, Italy certainly represents a country with a “favourable” tax regime thanks to:

-Reduced rates (from 4 to 8%);

-High deductibles (€ 1 million between spouses and in a straight line), e

-Conservative calculation of values ​​(on real estate, in fact, at the cadastral value and on unlisted equity investments, the book equity).

However, we must ask ourselves what happens when within the estate subject to succession, there are also financial assets held abroad. Let’s try to deepen this topic below to allow you to better manage your estate planning even in these cases.

Declaration requirements for inheritance purposes for assets abroad

The declaration of the succession of a person residing in Italy includes, based on Article 2, paragraph 1, of Legislative Decree no. 346/1990, (TUS) also financial assets and assets held abroad.

From a practical point of view, these assets, substantially (avoiding problems of non-declaration) are those attributable to the RW part of the tax return of the deceased. As for the RW framework, the taxation principle is that of taxation worldwide. In this case, it is the assets existing worldwide that enter the scope of the succession.

Pursuant to art. 26 of the TUS is responsible for the deduction of the tax paid abroad for the same succession and for existing assets in the foreign state, up to the amount of

part of the inheritance tax proportional to the value of the assets themselves, without prejudice to the application of international treaties or agreements.

International conventions on inheritance matters with Italy

The countries that have stipulated conventions with Italy on inheritance taxes are those listed in the following table.

DenmarkFrance
GreeceIsrael
UKUnited States
Sweden 

Countries with a succession agreement with Italy. On the basis of these indications, we can say that, of course, there is little attention in the international arena as regards the succession issue. On this aspect, the recommendation of the EU Commission 15/12/2011, n. 2011/856 / EU on measures to avoid double/multiple taxations in matters of succession.

Convenience choices on holding overseas assets for inheritance purposes

Wanting to carry out a convenience analysis on whether or not to hold financial assets and/or assets abroad, one cannot ignore:

From the type of assets that fall in succession with reference to their impact on direct taxes;

From the inheritance tax to be paid abroad which, although deducted from the inheritance tax due in Italy, may in some cases be substantial. In this context, it becomes important to determine the impact of inheritance taxes in the countries where the assets are located.

For the heirs, the main consequence of the succession for income purposes consists in the fact that the value at which they will bear the financial and patrimonial assets is given by the value taxed for the purposes of inheritance. The inheritance tax burden becomes part of the carrying amount of the asset.

For proper planning and evaluation of real estate and financial investments abroad of a natural person residing in Italy, it is essential also to know the inheritance taxes that are payable in countries where the assets are held.

How is the tax base of foreign assets determined in succession?

The general criteria for determining the value of the assets that form the hereditary assets are determined by the information provided in Articles 14, 15 and 16 of the TUS. In the case of assets held abroad, the taxpayer has the option of declaring the taxable value or providing the one agreed with the foreign state.

In practice, the taxpayer is left with the choice between indicating the value of the assets with reference to the legislation of the foreign country where they are held, or taking the TUS as a reference and thus determining the value. All this, taking into consideration the conventions against double taxation (if any).

On this point, the presence of C.M. 10/1/1973 n. 5 first chapter, which indicates:

“In principle, the offices will not be able to carry out any checks on the existence or the value of assets located abroad and must comply with any declaration by the interested parties. However, should particular circumstances justify it, they may contact the Italian consular authorities with a reasoned or detailed request.”

This is without prejudice to international conventions which provide for mutual assistance and exchange of information between the authorities of the various States, in order to combat evasion and facilitate tax assessments.

The differences between the indication of assets in part rw and the indications in the succession

Taking as a reference the main cases of assets and financial assets held abroad, the cases that may arise are the following. This, in relation to the differences between the enhancement of the activities in the RW framework compared to the succession phase.

ACTIVITIESSUCCESSORY VALUEFRAMEWORK VALUE RW
PropertyMarket valuePurchase cost
Unlisted shareholdingMarket valueNominal value
Quoted participationAverage value pricesMarket value at the end of the period

Basically, the deceased person does not realize capital gains on shareholdings and bonds, as well as on assets, such as real estate, jewellery, etc (art 67 TUIR).

The only exception applies to Mutual Investment Funds which must be virtually redeemed and repurchased by the heirs (which will have the book value at the time of purchase) with the realization of the capital gains which will be taxed in different ways depending on the nationality and nature of the Fund ( see ISIN). For the European funds subject to supervision, these capital gains represent capital income withholding tax in part RM sec. V letter b) of the Income Tax Form.

For European funds not subject to supervision or for non-European funds (CH, USA, Oriental country funds), capital gains are capital income subject to progressive taxation, cumulative with other income possessed and to be declared in part RL line 2 type of income 4 Such capital gains must be declared in the deceased’s tax return which must be presented by the heirs. (Circ 19 / E of 4 June 2013 p. 10).
Capital losses, on the other hand, are not allowed as a deduction.

Life policies

Insurance policies with financial content (units linked to the performance of the Funds or index-linked) or traditional life policies. These are policies exempt from inheritance tax, except for their eventual requalification in securities deposits and consequent taxability as financial assets, depending on the composition of the portfolio and the management methods. On this point, see C.M. 10/2015 (page 10).

Government bonds

Government bonds are exempt from inheritance tax but their tax value recognized to the heirs is the market value on the date of opening of the succession. In this case, possible revaluations or devaluations with respect to the original purchase value must be taken into account in the calculation of the Capital Gain.

The identification of blacklist countries

A decisive factor for the convenience choices on the possession of assets in a specific foreign state is its qualification as a country with a subsidized tax regime or not. As regards the countries with privileged taxation (blacklist), it is necessary to take into consideration some regulatory implications to be known and not underestimated. I refer to the following:

Art. 12 paragraph 2, 2-bis and 2-ter of the D.L. n. 78/2009 which entail the following:

-Paragraph 2: presumption of undeclared income for natural persons for amounts not declared in part RW, unless proven otherwise. In this case, the sanctions provided for in Article 1 of Legislative Decree 18 December 1997, no. 471, due to omitted or unfaithful declaration, are doubled. The countries indicated in the D.M. are taken into consideration without taking into account the limitations set out in the D.M. themselves;

-Paragraph 2-bis: doubling of the terms for the assessment based on the presumption referred to in paragraph 2;

-Paragraph 2-ter: doubling of the terms for the imposition of penalties on tax monitoring.

For further information: “Doubling of the terms of assessment for undeclared foreign financial assets”.

What solutions for risky situations?

In order to evaluate the convenience of holding a certain asset in a specific foreign country, the considerations analyzed above come into play: when risk arises from this analysis, for example, a high inheritance tax burden, it is necessary to examine the solutions possible in light of both the legislation of the foreign country and the Italian legislation.

Italian legislation now offers a solution to be explored: the Entry Tax referred to in art. 166-bis of the TUIR. This is a rule that governs the entry tax values ​​for commercial entrepreneurs who move to Italy from abroad.

Option for entry tax for entrepreneurs

The internationalization decree (Legislative Decree no. 147/2015), in Article 12, added to

DPR n. 917/1986 (TUIR) art. 166-bis entitled “Incoming tax values”. Article 166-bis of the TUIR establishes that commercial entrepreneurs who come from the states or territories listed in the art. 11, paragraph 4, lett. c) of Legislative Decree no. 239/1996 (the White list) and move to Italian territory, acquire residence for the purposes of income tax and “assume the normal value of the same as the tax value of the assets and liabilities, to be determined pursuant to Article 9 of the TUIR “.

If they come from states or territories other than the above:

If there is a prior agreement with these countries (art. 31-ter of Presidential Decree no. 600/1973, introduced by the internationalization decree) nothing changes and the value of the assets and liabilities will always be assumed to be equal to the normal value pursuant to art. 9 of the TUIR;

If no such agreement exists, the value of the transferred assets and liabilities will be assumed:

For assets equal to the lower of the purchase cost, the book value and the normal value always determined pursuant to art. 9 of the TUIR;

For liabilities equal to the greater of the purchase cost, the book value and the normal value.

The transfer of residence abroad with a view to succession planning

From the perspective of succession planning, it may make sense, in situations of uncertainty in the application of foreign provisions with a view to inheritance, to consider a transfer of residence abroad.

Transferring your residence abroad can be an option to consider not only to evaluate a change in your lifestyle, but also to plan your succession. In choosing a country to settle in, perhaps for the last part of one’s life, it may be interesting to evaluate countries that do not apply inheritance taxes. As we have said, in fact, it is the State of tax residence of the deceased that is directly concerned with inheritance taxes. Indirectly too are the States where foreign assets are held, but only partially.

It is in this context, in fact, that it may be useful to evaluate a transfer of residence abroad also in terms of succession planning.

Let’s see, therefore, in the following table which are the main countries in the world that do not apply taxation in case of inheritance.

Table: Countries that do not apply the inheritance tax

Hong KongSingapore
PortugalMacau
SlovakiaEstonia
MexicoCanada
New ZelandAustralia

Countries that do not apply the inheritance tax

Foreign financial activities and estate planning: consultancy

If you have read this article and are realizing that you need to analyze your personal situation, I invite you to contact us using the form at the following link. You will receive a quote for personalized advice able to resolve your doubts on the subject.

Only in this way, in fact, can you be sure of avoiding making mistakes, which in the future can be challenged and therefore sanctioned.

The Income Tax of Legal Persons in the United States. Under the corporate system in force in the United States, it is possible to distinguish the following different forms of companies:

The C-type capital company (C-corporation) or classic type capital company characterized by the possession of a legal personality and a corporate assets that are perfectly independent and distinct from the shareholders;

The capital company of type S (S-corporation) which, from a legal point of view, is identical to that of type C while fiscally, but is characterized by the possibility of opting, in the presence of certain requirements (such as the residence of the shareholders in the United States, the existence of only one class of shares and a maximum number of shareholders), for a “transparent” tax regime whereby income is taxed only once, directly to the shareholders;

The Limited Liability Company, a recently established company in the commercial and tax legislation of the United States, which in addition to the benefit of limited liability of the shareholders, typical of joint-stock companies, provides for the possibility of applying the “transparent” taxation regime, similarly to people;

The General Partnership which provides for the unlimited and joint liability of the shareholders who respond with their own assets for the obligations assumed by the company. From a fiscal point of view, the income produced by the partnership is not attributed to the latter but is attributed to individual shareholders by means of the so-called “transparent” taxation regime;

The Limited Partnership, similar to our limited partnership since it contains some limited partners who benefit from the limited financial liability to the amount of the share conferred.

Company Types

The following are subject to corporate income tax: C-corporations (with the exception of partnerships, S-corporations and LLCs if they are taxed “for transparency” by their shareholders); associations; insurance companies; the banks. US companies are taxed on their so-called income. worldwide, that is, without having regard to the location of the source of income and without detecting the place of exercise of its business or where the management and administrative center of the same is located.

The income of the companies is quantified on the basis of the regularly kept accounting records. The method of accounting for administrative events ordinarily envisaged is the accrual method, unless the volume of gross revenues in the previous three years has not exceeded the limit of 7 million dollars (in this case the criterion of cash (cash method) .The data obtained from the accounting are subject to a series of subsequent adjustments that make it possible to determine the taxable income.

It is possible to deduct all the expenses incurred for carrying out the business activity, such as: expenses of an “ordinary” nature; the depreciation rates; interest expense, subject to limitations; federal and local income taxes; contributions to charities; losses not covered by insurance; non-recoverable credits; research and development expenses (they are fully deductible in the relevant year, that is, they can be amortized over 60 months); organizational expenses; start-up costs; expenses related to the processing of natural resources (oil, gas, minerals, etc.).

Corporate tax and rates

The federal corporate income tax is configured as a progressive tax by income brackets; since 2011, the tax rates are between 15 and 35%.

There are also two additional rates, equal to 38 and 39% respectively, in correspondence with two intermediate income brackets, which have the function of “correcting” the tax inequalities emerging near the upper limits of the intermediate income brackets.

Income brackets (in USD)Tax rates
Up to 50,00015%
50.001 – 75.000$ 7,500 + 25% on income exceeding $ 50,000
75.001 – 100.000$ 13,750 + 34% on income exceeding $ 75,000
100.001 – 335.000$ 22,250 + 39% on income exceeding $ 100,000
335.001 – 10,000,000$ 113,900 + 34% on income exceeding $ 335,000
10,000.001 – 15,000,000$ 3,400,000 + 35% on income in excess of $ 10 million
10,000.001 – 15,000,000$ 5,150,000 + 38% on income exceeding $ 15 million
over 18,333,33335%

Companies, like natural persons, are also subject to the Alternative Minimum Tax (AMT), which is calculated on a wider tax base than ordinary taxation, using a single tax rate of 20%. The function of this tax is to ensure that all companies with significant income contribute to the federal tax burden while being entitled to a certain number of exemptions, deductions and tax credits.

The alternative tax is due if the amount of the same exceeds the tax calculated with the ordinary taxation method.

The AMT does not apply to small businesses or to companies that have an average amount of revenues, referring to the last three years, of less than 7.5 million dollars.

In the next article, we will explain detail of state and local taxes.

State and Local Taxes in the United States and Main Treaties Signed among Italy and U.S.A. In the United States, fiscal federalism assumes considerable importance, which provides for the presence not only of federal taxation, but also of taxation at the local level (states, counties and municipalities).

The coexistence of multiple tax entities entails the determination of a significant and particular tax burden on businesses.It should be considered that over 50% of tax revenues linked to a business activity carried out in the United States are the direct responsibility of individual federal states or authorities local administrative authorities (County and Municipality).

The most important “non-federal” taxes are ad. ex .: income taxes, sales taxes, registration taxes for company incorporation, corporate equity taxes, personal wealth taxes, unemployment taxes, road and fuel taxes , taxes on alcohol, tobacco, betting, and pollutants (Carbon Tax); manufacturing taxes; taxes on intangible assets, etc.

With reference to some types of taxes (especially with regard to corporate income tax), application problems may arise as there is the possibility that a company carries out its business in multiple states of the Union, for example by using multiple production plants. In this case, the fundamental problem is to be able to divide the company’s costs and revenues among the various production plants in order to be able to tax the income actually pertaining to each State in each State. Ordinarily, the income produced is therefore divided between the different states in which a company operates, referring from time to time to the actual connection of the business carried out by the company with each state.

Declarations, Instrumental Obligations, Payments

In the United States, the payment of taxes depends on whether or not the fiscal year coincides with the calendar year.

If the fiscal year does not coincide with the calendar year, the companies must submit the tax return by the 15th day of the third month following the end of the relevant year.

If it coincides with the calendar year, the return must be submitted by March 15 of the year following the reference year. In both cases, the aforementioned dates can be extended by six months if the company pays the taxes calculated in advance on the basis of an estimate of the presumed revenues.

The taxes due must be paid in full at the time of submitting the tax return, or, through the advance payment of four installments (15 April, 15 June, 15 September and 15 December), the amount of which must be defined on the basis of a estimate of the tax burden based on the taxes paid the previous year.

In case of omitted or insufficient payment, the company is subject to a penalty determined based on the amount and duration of the omission. On late payments, interest is usually due calculated at a rate that is published in the IRS Internal Revenue Bulletin.

Main Treaties Signed among Italy and U.S.A

Convention against double taxation signed in Rome on 17 July 1984 and ratified by Law no. 763 of 11 December 1985, and in force since 30 December 1985.

A new Convention, attached to Law no. 20 of March 3, 2009 ratifying and executing the agreement, published in the Official Gazette no. 64 of 18 March 2009, reinvigorates the bilateral relations between the two countries with a series of provisions replacing the previous one signed in Rome on 17 April 1984.

The intervention was necessary, as stated in the technical report attached to the provision discussed in the Chamber of Deputies, to regulate relations between the two countries in a more balanced way, also in light of the significant changes in their respective tax systems.

A protocol and a memorandum of understanding are attached to the Convention, which consists of 29 articles. On October 20, 1983, an information exchange agreement was signed in Washington. Finally, also in Washington, agreements for simultaneous tax audits were signed on March 31, 1983 and June 22, 1984.

Personal Income Tax in the United States. Individuals who are fiscally resident in the United States are subject to taxation on their income whatever the source and in any part of the world produced (principle of worldwide income), as is also the case in Italy.

In contrast, non-resident individuals are taxed only on US source income. Under federal law, an individual is deemed to be a tax resident of the United States for income tax purposes if they meet one of the following conditions:

-If you have American citizenship;

-If you have obtained residence in the United States (so-called green card);

-If it remains on the national territory for at least 183 days during a calendar year;

-If it exceeds the so-called substantial presence test or cumulative presence test which consists of the sum of the total number of days that the person is present in the United States in the reference year plus one third of the days in which he was present in the previous year and one sixth of the days of the year still earlier. If the sum obtained is equal to or greater than 183 days, the subject is considered fiscally resident.

The only exception to the “cumulative presence test” is to demonstrate that the economic entity has its main activity-business center not in the United States and that its family and social ties are relevant in another country and not in the United States.

In this case, it is not considered necessary to prove that the person also has tax residence in another country. The individual who produces an income in the United States must apply for a Social Security Number (obtainable at the Social Security Administration) and, since 1996, foreigners who are fiscally resident in the United States must apply for, and are assigned to from the IRS, a tax identification code, the cd Individual Taxpayer Identification Number or ITIN.

The tax base is composed of different types of income produced: eg. income from self-employment and employees; from investments; from business activities; from capital gains.

Employee income

All salaries regardless of the method of payment are included in the calculation of the tax base for the purposes of calculating the Individual Income Tax.

The employer operates as a withholding agent by operating withholding taxes on the salary (which may concern federal, state and local taxes, but also other taxes such as the so-called social security and Medicare Tax or the Alternatives Minimum Tax (AMT)) which must be paid on a regular basis.

The remuneration received by the directors for the activity carried out is assimilated to that of an employee. Expenses incurred by the employee are normally deductible unless they have been reimbursed directly by the employer.

In this regard, the following are characterized by exemption from tax: the services rendered by the employer to its employees if they are of the same type as those that it usually provides to its customers; discounts on the purchase of goods or on the use of services rendered by the employer; the benefits granted for the performance of work (the company machine, laptop, etc.); expense reimbursements and other benefits relating to transport needs; refresher courses and other training activities; meal vouchers and the provision of a company canteen service.

Investment income

The rate applied to the profits generated by holding equity investments differs depending on the ability to pay and the holding period of the investment made (holding period).

For dividends relating to equity investments held for more than 12 months, the rate is usually 15%. In order to benefit from the reduced rate on foreign-source dividends, a double taxation treaty must be in place with the source country.

Deductions

The federal tax system provides for two distinct types of deductions:

The deductions from the total gross income: are those that are applied to adjust the value of the total gross income and obtain the so-called adjusted gross income (Agi);

The deductions from the Agi: are corrections provided on a flat-rate basis each year by the tax authorities for the purpose of calculating the tax income.

With regard to the first type of deductions, the main categories of deductible costs are: expenses related to the conduct of business activities; alimony paid to the separated spouse; transport costs and contributions to a Medical Saving Account.

With reference to the deductions from the Agi, the US tax administration has established a series of limits: for spouses under joint taxation and for widowers; for the unmarried head of the family; for individuals and spouses under separate taxation.

Annually, the tax administration determines what the deductible amount is for the taxpayer: for himself; for the spouse, in the case of joint taxation of the couple; for children under 19; for full-time student children under 24.

The federal tax system provides for two distinct types of deductions:

The deductions from the total gross income: are those that are applied to adjust the value of the total gross income and obtain the so-called adjusted gross income (Agi);

The deductions from the Agi: are corrections provided on a flat-rate basis each year by the tax authorities for the purpose of calculating the tax income.

With regard to the first type of deductions, the main categories of deductible costs are: expenses related to the conduct of business activities; alimony paid to the separated spouse; transport costs and contributions to a Medical Saving Account.

With reference to the deductions from the Agi, the US tax administration has established a series of limits: for spouses under joint taxation and for widowers; for the unmarried head of the family; for individuals and spouses under separate taxation.

Annually, the tax administration determines what the deductible amount is for the taxpayer: for himself; for the spouse, in the case of joint taxation of the couple; for children under 19; for full-time student children under 24.

The tax rates

The tax is applied on the basis of a progressive rate for income brackets, which differs depending on the type of return presented.

Individuals must submit their tax return to the tax authorities by the 15th day of the fourth month following the end of the relevant tax year (i.e. April 15th, if the tax year coincides with the calendar year) .

For income produced in the United States, non-resident persons are subject to the same tax regulations as for residents. Exceptionally, the expiration date for 2017 falls on April 18, due to a national holiday (Emancipation day) which is celebrated in the State of Columbia. The extension also applies to non-residents in this state.

Next article, we will discuss about the income tax of legal persons.

How to tax the United States on digital nomads? The advantages that the United States offers to individuals who have American citizenship but work abroad on a permanent basis.

To understand the advantages and disadvantages of the U.S. tax regime for digital nomads. How can you plan ahead to make the most of your global job opportunities if you are a U.S. citizen.

In recent years, the number of digital nomads – that is, U.S. citizens and Green Card holders who work while travelling abroad – has been increasing. Technological progress has certainly allowed millions of people to live where they want, working with customers from all over the world. However, you should know that the United States, from this point of view, offers digital nomads who have U.S. citizenship an important favourable tax regime.

In fact, many U.S. citizens have the opportunity to become digital nomads (working remotely while travelling in different countries). Some of them mistakenly assume that if they just travel from one country to another, they will avoid the taxation of their income.

You must know, in fact, that the United States is one of the few countries in the world that tax its citizens based on their citizenship and not on the basis of their place of residence (tax). Below, I want to go and explain to you why digital nomads who have a U.S. passport can legally reduce their tax burden.

$ 107,600 US taxable income exclusion for digital nomads

U.S. citizens who meet three requirements are entitled to the so-called “exclusion of income from work abroad”. In particular:

-The first requirement is to have foreign earned income which can be briefly described as income received for services performed in a foreign country.

-The second requirement is that the tax domicile of the person concerned must be in a foreign country. The United States Internal Revenue Service (IRS) defines the term “tax domicile” as “the general area of ​​the main office of your business, work or service, regardless of where you keep your family home”.

-The third requirement is that the individual must:

-Reside continuously in one or more foreign countries for a period that includes a full fiscal year;

-Be a citizen or citizen of a country that has a double tax treaty with the United States and must reside in one or more foreign countries for an uninterrupted period that includes a full tax year. This is the Bona Fide Residence Test (B.F.); or

-Be physically present in one or more foreign countries for at least 330 full days over a period of 12 consecutive months. This is the physical presence test (PPT).

The texts of physical presence ppt

While the two criteria (Bona Fide Residence Test and Physical Presence Test (PPT)) may seem similar, they are actually quite different in terms of how they apply to your U.S. taxes.

The PPT essentially means that a person has left the United States and has not returned for more than 35 days during the twelve consecutive months. This clause is not based on a calendar year. This test simply refers to any twelve-month period (i.e. April to April or September to September). Also, note that it does not refer to consecutive days.

So a digital nomad would be considered ineligible if he made several 2-7 day trips to the United States totalling over 35 days during the twelve-month period in question. The key to satisfying the “physical presence test” is to have spent less than 35 days in the United States during a 12 month period.

Two other important things about the ppt

1-The 330 days of the year spent outside the United States must be spent on the actual land territory of another state. Therefore, if you spend time in international waters (ie on a ship), it does not count towards the number of days spent outside the United States;

2-The days you arrive and leave the United States (even if you are only transferring flights) count towards the days spent in the United States. For example, if you arrive in the United States on July 1 and leave on July 10, you should count a total of 10 days spent in the United States.

For digital nomads: The B.F. test is likely not to apply because you are not moving to a single country where you take steps to establish residency.

The $ 107,600 US tax exemption for digital nomads

U.S. citizens who meet the three requirements above are entitled to a foreign earned income exclusion of USD 107,600 for 2020. Such US citizens also have the right to deduct or exclude certain amounts related to housing.

U.S. citizens living abroad are subject to U.S. income tax in excess of the exclusion of overseas earned income.

To avoid this, it is possible, for example, to incorporate a non-US company that will pay them a salary not exceeding the amount of the exclusion of foreign earned income. For example, if the foreign company earns $ 200,000 annually and pays $ 107,600 a salary to the U.S. citizen, the rest of the company’s earnings ($ 92,400) can be deferred or reinvested in tax, without the need to pay U.S. taxes on them.

Of course, to plan options like this, the advice is to rely on experienced international tax professionals.

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