Payments from U.S. pension funds to Italian residents by reason of succession: classification and treatment according to the Italian Tax Authority

Ruling No. 290/2025 of the Italian Tax Authority, while maintaining substantial continuity with previous administrative practice concerning the income classification and conventional treatment of foreign pension payments, risks being incomplete with respect to the relevant international interpretative sources.

The case

The Applicant, who is tax resident in Italy, was the sole heir of an Italian-American citizen who was resident in the United States at the time of his death (2021).
Among other assets, the deceased held an individual pension account (“Pension Fund”), funded exclusively through voluntary contributions and fully managed by a U.S. company.

In 2024, a payment was made to the Applicant as settlement of the Pension Fund, on which the U.S. manager applied a 10% withholding tax, classifying the amount as a “pension”.

The Applicant asked whether the payment received should be classified as financial income (alias capital income) or as the disbursement of a pension (i.e., employment-related income).

The response
The Tax Authority focuses primarily on domestic legislation and, by referring to certain prior rulings [1], classifies the payment as a pension and, consequently, as employment income.

Specifically, employment income includes, among others, “pensions of any kind”[2]; in the Agency’s opinion, this notion is sufficiently broad to include all lump-sum payments made in return for the payment of contributions.

The Agency further specifies that such amounts cannot be classified as income assimilated to employment income deriving from pension funds governed by Legislative Decree No. 252/2005[3].

Lastly, according to the Agency, the income corresponding to the amounts paid by the Pension Fund to the Applicant must be subject to separate taxation.

Indeed, income received by heirs must be taxed in the same manner that would have applied if it had been received by the deceased[4].

The Agency goes on to examine the provisions of the Double Taxation Agreement in force between Italy and the USA (the “Treaty”).

According to the Agency’s reconstruction, pension payments may fall, depending on the circumstances, either under Article 18(1) or under Article 22(1) of the Treaty (respectively “Pensions” or “other income”).

Although in both cases the State of residence has exclusive taxing rights, Article 18 concerns only pension payments connected with past employment.

Since, on the contrary, the payments made to the Applicant derive from a voluntary contribution retirement fund established by the deceased, they fall within the scope of Article 22(1) of the Treaty.

Some considerations

The position taken by the Tax Authority is certainly not new, neither with respect to domestic tax treatment nor with regard to conventional treatment[5].

What is less convincing in the ruling under comment is the use of international sources. In fact, in reaching its conclusion on the Treaty provisions applicable to the case, the Agency limits itself to referring solely to their literal content.

As is well known, the United States, several decades ago, adopted its own model bilateral treaty for the avoidance of double taxation which, although largely based on the OECD Model, is characterized by certain peculiar features.

Therefore, treaties signed by the US with countries that adopt the OECD Model, given the need to take account of the specificities of both models, are accompanied by a document known as the Technical Explanation. This document constitutes a treaty-specific commentary that summarises the interpretative positions on each individual provision, as agreed during negotiations between the US and the other contracting state.

This aspect is confirmed in the preamble to the Technical Explanation to the Treaty, which states: “The Technical Explanation is an official guide to the Convention and Protocol. It reflects the policies behind particular Convention and Protocol provisions, as well as understandings reached with respect to the application and interpretation of the Convention and Protocol”.

Given the complete absence of references to the Technical Explanation, it is not possible to determine whether the Agency rendered its ruling considering its contents. If it did not, the ruling would appear at the very least incomplete.