Investing as a US citizen living abroad presents unique challenges, particularly for those residing in Italy. In this article, we dig into these challenges and explore effective solutions tailored to the Italian context.
Investing with Italian banks
While investing through Italian banks or brokers might seem like a logical choice, it often proves unfeasible due to several reasons:
- FATCA compliance: Italian brokers may hesitate to open accounts for US citizens due to the intricate requirements of the Foreign Account Tax Compliance Act (FATCA). Compliance with these regulations can be burdensome for financial institutions.
- PFIC reporting: Holding foreign passive investment vehicles like ETF or mutual funds makes you subject of PFIC reporting in the US tax return. This kind of reporting is complicated to do and usually does not make it worth it.
Investing with US Brokers
Turning to US brokers for investment opportunities presents a slightly better option, but it still poses challenges:
- US address requirement: Most US brokers require a US address to open an account, which may be a barrier for expats. Some may allow you to keep the account if you already have one.
- Tax implications: Investing in US ETFs leads to unfavorable taxation in Italy, because they are considered “fondi non armonizzati” and are subject to income taxation for both dividends and, more importantly, capital gains. Capital gain taxes in Italy are 26% flat rate, income taxes vary with a highest bracket of 43% for income above 50.000 EUR.
Potential solutions
It’s an unfortunate situation but there are a couple of ways to overcome these problems, most notably:
- Establish a US Trust recognized in Italy: The US trust will pay taxes only in the US and distributions won’t be taxed in Italy. This strategy usually suits more wealthy people because there are high setup costs. It also means that you will have to give away your wealth to someone else, which not everyone may want to.
- Investing in Individual Stocks and Bonds: Consider building a diversified portfolio by investing in individual stocks and bonds through an US Broker1. While a financial advisor could assist with this, their services typically cater to high net-worth individuals. However, in recent times, the emergence of robo-advisor products has provided a cost-effective alternative. These automated platforms can efficiently handle the complexities of portfolio construction and management, making them accessible to a broader range of investors.
References
Below you can find further material on the topic, in Italian.
- https://www.fatcacittadiniamericani.com/2022/10/tra-lincudine-ed-il-martello-13-il.html#more
- https://www.fatcacittadiniamericani.com/2022/12/tra-lincudine-ed-il-martello-23-la.html
- https://www.fatcacittadiniamericani.com/2023/01/tra-lincudine-ed-il-martello-33-creare.html
- https://fiscomania.com/tassazione-etf/
- A strategy to do this while still holding a diversified portfolio is using direct indexing ↩︎
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