Parliament has already legislated the solution to one of the most damaging structures an American can carry into Italian residency: the S-corporation. The principle is on the books. The rule that would make it operative is not. Until the implementing measure arrives, the old treatment governs, and for an S-corp owner that treatment is a genuine, unrelieved double tax.
This matters most at the moment of a distribution or a sale, when the exposure crystallizes and there is no longer room to restructure. Anyone holding a US pass-through into Italian residency should plan against the law in force, not the law on paper.
The mismatch, and why the credit does not save you
The problem starts with a classification gap. Italy's tax code currently treats every foreign entity as opaque, meaning it is regarded as a company that pays its own tax and whose owners are taxed only on what is distributed to them.1 The United States does the opposite with an S-corporation: it disregards the entity as a taxpayer and taxes the shareholder directly on the company's net income in the year it is earned.
So the same economic income is taxed twice, on two different bases, in two different years. The United States taxes the net when earned. Italy taxes the distribution when it goes out, as a foreign dividend subject to the 26% substitute tax.2
The instinct is to assume the foreign tax credit reconciles the two. It does not. The credit mechanism requires the same income to be taxed in both states, and here the amounts, the character, and the timing all diverge. The provision that attributes foreign taxes to the individual owner reaches only Italian transparent companies and Italian entities that have opted into transparency. It does not extend to a foreign entity that Italy classifies as opaque.3 Separately, where foreign income is taxed in Italy only on a partial or reduced basis, as dividends are, the creditable foreign tax is cut down proportionally.4 The 26% substitute tax on the distribution is a flat levy that does not admit an ordinary credit against it in the first place.
The result compounds. Foreign tax that cannot be credited under these rules is also not deductible, and is not otherwise recoverable in Italy.5 The US tax the shareholder already paid on the net simply sits there. The 26% on the distribution is charged on top of it. That is the shape of the trap, and it is why an S-corp is not a structure to leave running once residency attaches.
What the reform would change
The 2023 tax reform delegation directs the Government to abandon the blanket "opaque" rule and instead classify foreign entities according to how their home jurisdiction classifies them.6 Under that principle, an entity treated as fiscally transparent in its state of establishment would be transparent for Italian purposes too.
For an S-corp, that is the whole ballgame. Italy would tax the shareholder on the flow-through income, the same income the United States taxes, in a form the credit machinery can actually align. The double tax would collapse into a single, creditable layer.
Why you cannot rely on it yet
The principle lives in an enabling law, which sets the direction but requires a separate implementing decree to take effect. When the Government issued the decree overhauling international taxation, this specific rule was left out and expressly deferred to a later, dedicated measure.7 That measure has not been adopted. The blanket "opaque" classification therefore remains the operative law, and foreign pass-throughs continue to be taxed as opaque companies.
Two risks follow. First, timing: there is no published date for the implementing decree, and a delegated principle that has already been skipped once cannot be treated as imminent. Second, transition: even once the rule is enacted, how it treats structures already in place, and which year it first bites, is unknown. Neither risk is one a client should absorb on the strength of a distribution or sale that is coming this year or next.
Practical implications
Do not carry an active S-corp into Italian residency on the assumption the fix will arrive in time. Restructure before residency-year income accrues, while options are still open and cheap. In practice that means one of the following:
- Convert to a C-corporation. Italy recognizes it as an ordinary company paying its own tax, which produces clean, predictable treatment. The owner draws salary and dividends, and the classification mismatch disappears.
- Dissolve or render the entity dormant and move the activity onto an Italian partita IVA. With no activity, Italy disregards the entity.
- Where the numbers justify the complexity, reposition the holding through a corporate structure Italy will respect.
Before any liquidity event, quantify the exposure directly. The 26% on distributions is never creditable, so a sale of shares or assets inside an S-corp can produce an Italian charge stacked on top of the US tax with no offset. On a large gain that is a decisive number, and it should be modeled before the transaction, not after.
The one tolerable case is the genuinely short stay: an owner who will exit before crossing the residency threshold and keeps the entity inactive in the interim. Absent that, the structure needs to be dealt with early.
Bottom line
The remedy exists in principle and is inert in practice. The classification that causes the double tax is still the law that applies, and the substitute tax on distributions remains non-creditable and non-deductible. Plan for the regime that is actually in force. If the implementing measure arrives, it becomes an opportunity to revisit the structure. It is not a reason to wait.
For the underlying analysis of why these structures fail on the US side as well, see our companion article on why Americans in Italy should not own an S-corp or disregarded LLC.
Frequently asked questions
Does the foreign tax credit fix the S-corp double tax in Italy?
No. The credit requires the same income to be taxed in both states, and here the amounts, the character, and the timing all diverge. Italy's provision attributing foreign taxes to the owner reaches only Italian transparent companies, not a foreign entity Italy classifies as opaque, and the 26% substitute tax on the distribution does not admit an ordinary credit in the first place. Worse, the foreign tax that cannot be credited is also not deductible and not otherwise recoverable in Italy.
Italy has legislated a fix — can I just wait for it?
No. The principle lives in an enabling law that requires a separate implementing decree to take effect, and that decree was expressly deferred and has not been adopted. The blanket "opaque" classification therefore remains the operative law. There is no published date, and even once enacted, how it treats structures already in place, and which year it first bites, is unknown.
What should I do with an S-corp before moving to Italy?
Restructure before residency-year income accrues, while the options are still open and cheap. In practice that means one of: convert to a C-corporation, which Italy recognizes as an ordinary company with clean treatment; dissolve or render the entity dormant and move the activity onto an Italian partita IVA; or, where the numbers justify it, reposition the holding through a corporate structure Italy will respect. Before any distribution or sale, quantify the exposure directly, because the 26% is never creditable.
Is there any case where I can keep the S-corp?
The one tolerable case is the genuinely short stay: an owner who will exit before crossing the residency threshold and keeps the entity inactive in the interim. Absent that, the structure needs to be dealt with early.
Carrying an S-corp into Italy?
Book a free consultation. We will quantify your exposure before a distribution or sale and map the cleanest way to restructure while the options are still open.
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- Art. 73, comma 1, lett. d) del TUIR (DPR 917/1986): tutte le società ed enti non residenti sono soggetti passivi IRES, quindi trattati come entità "opache". normattiva.it ↩
- Agenzia delle Entrate (AdE, the Italian revenue agency), Circolare 9/E del 5 marzo 2015: le S-corporation e le LLC statunitensi sono trattate come entità opache; le distribuzioni sono qualificate come dividendi di fonte estera e assoggettate all'imposta sostitutiva del 26%. ↩
- Art. 165, comma 9, del TUIR: la detrazione delle imposte estere spetta ai soci solo per le società trasparenti di cui all'art. 5 e per quelle che hanno optato per la trasparenza ex artt. 115 e 116, non per le partecipazioni in società estere considerate opache ai fini italiani. normattiva.it ↩
- Art. 165, comma 10, del TUIR: se il reddito estero concorre solo parzialmente alla formazione del reddito complessivo, l'imposta estera detraibile è ridotta in misura corrispondente, come avviene per i dividendi. normattiva.it ↩
- Agenzia delle Entrate, Circolare 9/E del 5 marzo 2015, §§ 2.1 e 5: la quota di imposta estera non detraibile per effetto dei limiti dell'art. 165 non è deducibile né altrimenti recuperabile in Italia. ↩
- Art. 6, comma 1, lett. h) della L. 111/2023 (legge delega di riforma fiscale): razionalizzazione della qualificazione fiscale interna delle entità estere, tenendo conto della loro qualificazione come fiscalmente trasparenti o opache operata dalla legislazione dello Stato di costituzione o di residenza. normattiva.it ↩
- DLgs. 209/2023 di riforma della fiscalità internazionale: la qualificazione fiscale delle società estere non ha trovato posto nel decreto ed è stata rinviata a un apposito intervento successivo, a oggi non ancora adottato. normattiva.it ↩
The information in this article is provided for general informational purposes only and does not constitute financial, legal, tax, or accounting advice. Any opinions expressed are solely those of the author and do not necessarily reflect the views of JSBC. You should not act or refrain from acting on the basis of this content without first seeking the advice of a qualified professional regarding your particular circumstances.