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US Partnership Profits Taxed in Italy: Foreign Tax Credit Available Despite the Mandatory 26% Substitute Tax
Can an Italian tax resident claim relief for US federal taxes paid on partnership income subsequently distributed and taxed in Italy?
The Milan Tax Court says yes.
In Judgment No. 2393/2026, the Court upheld the refund claims of an Italian tax resident who had paid US federal income tax on profits allocated by a US partnership and subsequently received distributions subject to Italy’s mandatory 26% substitute tax.
The case highlights a key tax classification mismatch: US partnerships are generally treated as tax-transparent, while Italy treats the foreign entity as opaque, taxing distributions upon receipt.
Following Italian Supreme Court precedents (Nos. 25698/2022 and 10204/2024), the Court confirmed that the Italy–US Double Taxation Convention prevails over domestic tax rules.
Under Article 23(3) of the Convention, foreign tax relief may be denied where final withholding taxation applies at the taxpayer’s request, but not where such taxation is mandatory.
The Court therefore recognised the taxpayer’s entitlement to a refund, plus statutory interest.
A significant ruling on treaty-based foreign tax relief and the taxation of cross-border partnership income.
