For advisers: citizenship-based taxation, PFIC exposure, Roth and 401(k) treatment, SEC constraints and reporting when a US client moves to Italy.
The American case differs from every other relocation in one respect that governs everything else: the client does not stop being a US taxpayer. Citizenship-based taxation means the United States continues to tax worldwide income regardless of residence, so the client acquires a second tax system rather than exchanging one for another.
For the adviser this creates two distinct problems. The first is whether the firm can continue to hold the account. The second is that several structures which are efficient for an Italian resident are penalised by the US system, and vice versa, so optimising for one jurisdiction frequently damages the position in the other.
Related: PFIC Rules for US Citizens · Roth IRA in Italy · Adviser Guide: UK to Italy
This is where American relocations most often break down, and it is rarely the adviser who initiates it. Many US broker-dealers and registered investment advisers restrict or close accounts for clients with a foreign address, driven by state registration requirements, the extraterritorial reach of EU regulation, and internal risk policy rather than by a single prohibition.
The practical consequences are familiar to anyone who has handled one of these: the client is told the account will be restricted to liquidation-only, or that advisory services cannot continue, or that the account must be transferred. Some large custodians maintain international divisions that accommodate expatriate clients; many do not.
Establish the firm's policy on foreign-resident accounts before the client gives notice on their US home. A client who discovers in month two that their account is liquidation-only, while also learning that European institutions are reluctant to onboard US persons under FATCA, is a client with no custodian. This happens regularly.
Any non-US pooled investment — a UCITS fund, an Italian fondo comune, a European ETF — is a Passive Foreign Investment Company for US tax purposes. The default regime imposes tax at the highest ordinary rate plus an interest charge on deferred distributions, and the reporting on Form 8621 is onerous per holding.
This collides directly with the Italian position. An Italian resident is encouraged by the tax system toward harmonised EU funds taxed at 26%. A US citizen holding those same funds faces punitive US treatment. The intersection of the two rule sets is narrow.
| Holding | Italian treatment | US treatment | Workable? |
|---|---|---|---|
| US-domiciled ETF or mutual fund | Non-harmonised. Gains at IRPEF rates up to 43%. | Ordinary. No PFIC issue. | Poor for Italy, fine for US |
| EU UCITS fund | Harmonised. 26% substitute tax. | PFIC. Punitive. | Fine for Italy, poor for US |
| Direct equities and bonds | 26% on gains. | Ordinary capital gains. | Workable in both |
| Individually managed portfolio of direct securities | 26%. | Ordinary. | Generally the cleanest solution |
The practical answer for most US clients resident in Italy is a portfolio of directly held securities rather than funds, which avoids PFIC on the US side and the non-harmonised penalty on the Italian side. Where a fund structure is unavoidable, US-domiciled funds are usually preferable and the Italian cost is accepted — unless the flat tax regime applies, in which case foreign-source income is outside Italian taxation and the Italian half of the problem disappears.
The treaty addresses pensions but does not resolve every question, and the Roth is the clearest example of divergence.
A traditional IRA or 401(k) is generally respected: contributions were deductible, growth is deferred, and distributions are taxable. The Italy–US treaty allocates taxing rights on pension distributions and a foreign tax credit prevents double taxation in most cases.
The Roth is different. Its US tax-free character derives from US domestic law, not from the treaty. Italy has no domestic equivalent and no obligation to recognise the exemption, so a Roth distribution that is tax-free in the United States may be taxable in Italy — with no US tax paid against which to claim a credit. The position is not fully settled in Italian practice, and treatment has varied. For a client with a substantial Roth, this is a first-order planning issue rather than a detail.
Under the flat tax regime, foreign pension income falls within the substitute tax and the question largely resolves itself, which is one reason the regime is attractive for Americans with significant retirement assets.
The Italy–US treaty contains a saving clause permitting the United States to tax its citizens as if the treaty did not exist, subject to enumerated exceptions. The practical effect is that most treaty relief that would benefit a US citizen resident in Italy is switched off, and relief flows instead through the foreign tax credit.
The credit mechanism generally works where Italian tax exceeds US tax on the same income, which is often the case given Italian rates. It works poorly where the income is taxed in only one jurisdiction — the Roth scenario — or where the two systems characterise the income differently and the credit does not match.
The Foreign Earned Income Exclusion is available for employment income up to the annual threshold, but does not apply to investment income and interacts awkwardly with the foreign tax credit. Which mechanism is preferable depends on the income mix and requires modelling.
A US citizen resident in Italy files in both systems. On the US side: Form 1040 annually regardless of residence, FBAR for foreign accounts exceeding $10,000 in aggregate, Form 8938 under FATCA above the applicable thresholds, Form 8621 for each PFIC holding, and Forms 5471 or 8865 where foreign entities are involved. On the Italian side: the ordinary return, the RW section and IVAFE, unless the flat tax regime applies.
FATCA also affects the client's ability to open accounts in Italy. Italian banks report US account holders and many retail institutions decline US persons to avoid the compliance burden. Private banks generally accommodate, but the account opening takes longer and requires more documentation.
The Italian substitute tax regime is unusually well suited to US clients, because it removes the Italian half of most of the problems above. Foreign-source income — US dividends, capital gains, pension distributions, Roth withdrawals — falls outside Italian taxation. RW reporting and IVAFE do not apply. Foreign assets are excluded from Italian inheritance tax.
What it does not do is reduce US tax, which continues in full. And because Italian tax on foreign income is replaced by a fixed payment rather than computed on the income, the foreign tax credit position on the US side requires care: a substitute tax is not straightforwardly creditable in the way an income tax is. This is a question for the client's US accountant, and it should be asked before the election rather than after.
US citizens remain subject to US federal estate tax on worldwide assets, with the lifetime exemption currently high but scheduled to change. Italy applies inheritance tax at rates between 4% and 8% depending on the relationship, with generous allowances — among the lowest in Europe. The estate treaty between the two countries provides relief, but wills drafted in the United States frequently do not function as intended under Italian forced heirship rules, which reserve fixed shares to spouse and children regardless of testamentary intent.
A client holding Italian real estate with a US will should have the position reviewed by counsel qualified in both systems. This is routinely deferred and routinely expensive to fix afterwards.
It depends entirely on the firm. Many restrict foreign-resident accounts to liquidation-only or close them; some maintain international divisions that accommodate expatriates. Establish the policy before the client changes address, because replacing a US custodian while resident in Europe is difficult and FATCA makes European institutions cautious about US persons.
They can, but any non-US pooled investment is a PFIC and attracts punitive US treatment plus per-holding reporting on Form 8621. The usual solution is a portfolio of directly held securities, which avoids PFIC exposure and also avoids the Italian non-harmonised penalty. Where the flat tax regime applies, the Italian side of the problem disappears but the US side does not.
Not necessarily. The US exemption comes from domestic law, not from the treaty, and Italy has no obligation to recognise it. A distribution that is tax-free in the US may be taxable in Italy, with no US tax paid to credit against it. The position is unsettled in Italian practice. Under the flat tax regime the issue largely resolves, which is one reason the regime suits Americans with substantial retirement assets.
No. US citizens are taxed on worldwide income regardless of residence. The regime removes Italian taxation on foreign income only. Whether the fixed substitute payment is creditable against US tax requires specific analysis by the client's US accountant, and the answer is not obviously favourable — this should be settled before the election is made.
Disclaimer: General information as of September 2026, not legal, tax or regulatory advice. US–Italy cross-border taxation is technical and fact-specific. The Italian Gateway does not provide investment, tax or legal services; we coordinate qualified Italian professionals and act as a single point of contact for advisers. US positions must be confirmed with US-qualified counsel.