“Accidental Italians” and the U.S.-Italy Estate Tax Treaty Exemption
By Fabio Giallanza*
As known, the U.S. gross estate of a nonresident is normally afforded an exemption of only $60,000. In the absence of planning, this small exemption can create a significant tax liability even when a U.S. gross estate has a fairly limited value. In many cases, we encounter that nonresidents, particularly from Latin America, acquire assets in South Florida, very often real estate, as a means to protect their capital from geopolitical and economic risk in their home country. South Florida practitioners know of several planning techniques that, when timely adopted, can result in eliminating altogether the application of the estate tax to a nonresidents’ U.S. situs. But when no such planning is done, the U.S.-Italy Estate Tax Treaty may offer an unexpected relief. Article IV of the 1955 “Convention Between the United States of America and the Italian Republic for The Avoidance of Double Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Estates and Inheritances” (the “Treaty”) provides a reciprocal specific exemption from the estate tax of one contracting state to decedents who, at the time of their death, were nationals of or domiciled in the other contracting state. The availability of an exemption on the basis of nationality translates into an extra possibility to escape, or at least reduce, the harsh effects of the U.S. estate tax as it is applied to nonresidents. Because of the historical Italian immigration to Latin America and Italy’s laws on nationality, this possibility, albeit narrow in scope, should be one that tax practitioners, particularly in South Florida should be mindful of.
The Exemption Allowed Under the Treaty
The Treaty is one of the older treaties among the 16 entered into by the United States. In addition to the situs rules set forth at Article III, the Treaty provides in Article IV that each contracting state shall allow a specific exemption in the case of death of a decedent who was not a national or domiciliary of such state, but was a national of or domiciliary in the other contracting state. Further, in calculating the rate and amount of tax the contracting state of which the decedent was not a national or domiciliary shall not take into account the decedent’s property situated outside such state.
The specific exemption allowed under Article IV shall be allowable under the laws of the contracting state in an amount “not less than the proportion thereof which the value of the property subjected to its tax bears to the value of the property which would have been subjected to its tax if the decedent had been domiciled in that State” . Courts and later the legislator have clarified that the specific exemption referenced in the Treaty is the “unified tax credit” applicable to decedents who were domiciliary of the United States and set forth in IRC § 2010(c). Thus, the estate of an Italian citizen decedent leaving a worldwide estate valued below the unified credit would essentially incur no U.S. estate tax liability by virtue of a claim of Treaty benefits. If instead, the value of worldwide estate of the Italian decedent exceeds the unified credit, the U.S. estate tax liability would be reduced by allowing an exemption calculated through the following formula:
Treaty Exemption = U.S. Estate / Worldwide Estate * Unified Credit.
It is important to note that Article IV does not require that the estate pay tax in the country of nationality of domicile as a condition for the higher Treaty exemption. Thus, the estate of a decedent who was a national, but not a domiciliary, of Italy can still make a valid claim for benefits under the Treaty even if no estate tax was ever remitted to Italy. The Treaty exemption is therefore a much broader form of relief than, for example, a credit allowed under an income tax treaty.
Nationality as a Gateway to Treaty Benefits
The Treaty premises the application of benefits on both domicile or nationality. This trait is common to other U.S. Estate Tax treaties of the 1950s, see for example, the treaties with Australia, Greece and Switzerland. This approach seems to have been abandoned in more modern treaties, including the 1979 treaty with the United Kingdom and the 1980 treaty with France. When faced with an “unplanned” estate, tax practitioners accustomed to analyzing estate tax issues through the lens of domicile may overlook the possibility of relief provided under the U.S. Treaty if the decedent, while domiciled elsewhere, held Italian nationality.
The Treaty indicates that whether a decedent was at the time of death a national of a contracting state is to be determined according to the laws of such contracting state. The Italian citizenship law (legge n. 91, 5 febbraio 1992, Nuove Norme sulla Cittadinanza, the “Citizenship Law”) establishes citizenship by descent (jure sanguinis) as a key principle.
The Citizenship Law establishes that it is a citizen by birth “the child of a father or mother [who are] citizens”. Italian citizenship can also be granted by decree of the President of the Italian Republic “to foreign individuals whose father or mother, or whose direct ancestors up to the second degree [i.e. grandparents] were citizens by birth”. Further, the Citizenship Law expressly allows dual citizenship, i.e. acquiring citizenship of another country will not result in relinquishing Italian citizenship. In the case of decedents who were children of Italian citizens, citizenship by birth is an automatic result. Thus, the estate of a decedent who has never obtained an Italian passport or exercised his Italian civil rights, such as voting, can potentially make a claim for relief under the Treaty.
Aside from the considerations above, the Citizenship Law and its regulations establish a somewhat intricate framework to determine whether an individual has actually acquired, or retained, his or her Italian citizenship and the assistance of competent Italian counsel will be required in most cases to properly corroborate a Treaty claim. Sometimes, however, the determination may be more straightforward, such as if the decedent was in possession of a valid Italian passport and a copy can be provided by the decedent’s family members.
Florida is home to approximately 38,000 Italian citizens. Further, the mass emigration of Italians to such countries as Argentina, Brazil, Chile and Venezuela resulted in conspicuous numbers of Italian citizens throughout Latin America. To put things into perspective, in 2019 there were 977,417 Italian citizens registered with the Italian consulates in Argentina, totaling more than the inhabitants of Turin, Italy’s fourth largest city. Florida-based real estate, small businesses, trading and bank accounts are very popular holdings among wealthy or upper middle-class individuals seeking refuge from the economic uncertainties of Latin American countries. Therefore, when confronted with the estate of a nonresident decedent, South Florida tax practitioners should verify, as part of their intake, whether the decedent was a citizen of Italy or of any of the other countries which has a similar estate tax treaty in place with the United States. While the Treaty is by no means a substitute for a properly designed estate plan, it can offer a practical tool to reduce the burden of the U.S. Estate Tax as it is applied to the estate of a nonresident decedent.
In addition to domicile, the Treaty allows a specific exemption on the basis of nationality, in addition to the traditional domicile standard. This can provide a second chance to reduce the burden of the U.S. estate tax as it is applied to the estates of nonresident decedents who held property in the United States, with potentially very favorable results for decedents whose U.S. gross estate is below the amount of the unified credit. The jure sanguinis principle of granting citizenship under Italian Law may create unexpected relief opportunities even when the decedent had not obtained an Italian passport or exercised his civil rights as an Italian citizen. When intaking an estate, questions aimed at establishing citizenship of the decedent should focus also on the citizenship of the decedent’s parents, and the collaboration of Italian counsel may be necessary, to avoid missing out on potential tax savings offered by the “nationality gateway” to Treaty benefits.
*Fabio Giallanza is an attorney at Salcedo Attorneys at Law P.A. in Miami, Florida. A graduate of the Shepard Broad College of Law at Nova Southeastern University, he also holds a law degree from Università degli Studi di Roma Tre in Rome, Italy and he has recently completed the LLM Program in Taxation at the University of Miami. His focus includes assisting international clients in corporate and commercial transactions, along with personal investments in the U.S.
This article was originally published in the Fall 2020 issue of the Tax Bulletin, a publication by the Tax Section of The Florida Bar.