Article 4 of the Protocol is — U.S. Income Tax Treaty

prior Convention. It provides special relief for U.S. citizens resident in Italy from an otherwise discriminatory feature of Italian law concerning the taxation of income from foreign partnerships. Under Italian law, the partners (whether or not residents of Italy) of an Italian partnership are taxed on their share of the partnership income under the individual income tax (IRPF). The national corporation income tax (IRPG) is not imposed. In the case of a non-Italian partnership, the partnership as such is subject to IRPG on the profits of its Italian operations and the partners are taxed individually on their share of the profits. A partnership is considered Italian under Italian law if it has its legal seat or principal place of business activity in Italy.

Resident partners are taxable on their share of partnership income from all sources while nonresident partners (e.g., those resident in the United States) would be taxed on their share of the after-tax profits of the Italian office.

Under the Convention, Italy will continue to tax the income of a U.S. partnership attributable to its Italian permanent establishment. It will not subject to individual income tax the partners’ shares of that partnership income. And under this Article, Italy agrees to avoid double taxation of the share of such partnership income of U.S. citizens who are residents of Italy by allowing them to credit against their liability for Italian income tax their pro rata portion of the corporation income tax imposed in that year on the income of the Italian office. If the corporation tax credit exceeds the applicable individual income tax, the excess is refundable. A U.S. partnership for this purpose is a U.S. national, defined (in Article 3 (General Definitions) of the Convention) as a partnership deriving its status as such under the laws in force in the United States.