On 20 October 2022, the Italian tax authorities released a long-awaited update to the general guidelines concerning the Italian tax regime of trusts (the “New Guidelines”), almost one year after a draft version was issued for public consultation to collect inputs from any interested party.
The New Guidelines are to be welcomed as a critical document which, on one side, updates the last general guidelines issued in 2007 and 2010 and, on the other, aims at consolidating and harmonizing a long list of official (and non-official) rulings issued on trusts over the years to address specific cases raised by taxpayers.
Remarkably, the tax authorities acknowledge some of the key principles upheld by the Italian Supreme Court on the most debated issues of the tax regime of trusts and focus particularly on international cases (since, in late 2019, the rules on taxation of distribution from foreign trusts were substantially revised by Law Decree no. 124/2019).
The New Guidelines recognize the different types of trusts used in wealth planning and endeavor to clarify the key features of their Italian tax regime, namely: (i) income taxation, (ii) indirect taxation, (iii) special purpose trusts (iv) tax reporting and (v) property taxation.
II. Income taxation
The New Guidelines confirm that the settlement of goods and rights into a trust generally does not qualify as a taxable event and that in principle the relevant tax cost (of the settlor) is transferred to the trust accordingly (to avoid cases of double non-taxation). Exceptionally, the settlement into a trust of (a) selected financial assets or (b) goods and rights held by an entrepreneur may trigger taxable income in the hands of the settlor (and VAT, where applicable).
Trusts qualify as “opaque” and “transparent” depending on the rights to distributions of trust’s income granted to the beneficiaries and are subject to a different tax regime accordingly. The New Guidelines analyze separately Italian and non-Italian tax resident trusts.
Being trusts taxable entities for corporate income tax purposes, Italian tax resident trusts are subject to corporate income tax on income determined on a worldwide basis, while non-Italian tax resident trusts are subject to corporate income tax on income sourced within the Italian territory (based on domestic rules).
With regard to Italian tax resident trusts, the New Guidelines confirm that:
With regard to non-Italian tax resident opaque trusts (or entities qualifying as akin to trusts based on a case-by-case analysis), the New Guidelines confirm that distributions to Italian resident beneficiaries do not trigger a taxable income in the hands of the latter. However, if trusts are established in States or territories applying a nominal taxation of their income lower than 50% of the corresponding Italian taxation on the same income, the following regime applies to Italian tax resident beneficiaries:
For both low-taxed opaque and any transparent foreign trusts, the New Guidelines point out that income taxable in the hands of Italian resident beneficiaries is determined on a worldwide basis, but if the same has already been taxed in Italy in the trust’s hands, beneficiaries will not suffer income taxation on the same amount.
Finally, trusts treated as fiscally interposed entities according to the official guidelines issued in the past by the tax authorities are disregarded and income is deemed as directly derived by the settlor or the beneficiaries subject to a case-by-case analysis. The New Guidelines clarify that distributions from fiscally interposed trusts to Italian resident beneficiaries never qualify as taxable events unless they concern income that has not already been taxed in Italy.
III. Indirect taxation
The New Guidelines emphasize the tax aspects of all the key stages of the lifespan of a trust, notably: trust set-up, settlement of goods and rights into the trust, trust management, attributions to beneficiaries and replacement of trustee (or protector). The focus is on inheritance and gift tax, registration tax, mortgage and cadastral taxes.
Remarkably, the tax authorities have radically changed their long-established approach to indirect taxation of trust and conform to the latest principles upheld by the Italian Supreme Court which, in a nutshell, consider a taxable event only the effective capital increase (“effettivo incremento patrimoniale”) of the trusts’ beneficiaries.
Accordingly, while the settlement of goods and rights into a trust does not entail an immediate and actual transfer of the ownership of such asset, the final transfer of the same to the beneficiaries shall trigger the application of the inheritance and gift tax (as well as mortgage and cadastral taxes if Italian properties are involved). In this respect, the New Guidelines point out the following:
In the tax authorities’ view, if Italian properties are involved, mortgage and cadastral taxes would apply at the standard rates in the same cases mentioned above regarding inheritance and gift tax.
Moreover, similar principles generally apply also to special purpose trusts, depending on the circumstances. Notably, the New Guidelines clarify that in case of (i) a trust set up to secure settlor’s debts, registration tax applies upon the trust formation at the proportional rate of 0.5% of the secured obligations and (ii) a trust set up to repay the settlor’s debts, no taxation arises from the final attribution of the trust’s outstanding assets to the settlor.
Finally, contrary to the conclusions reached by the tax authorities in a ruling recently published, trusts treated as fiscally interposed entities are disregarded also for indirect tax purposes in case of demise of the settlor.
IV. Tax reporting and property tax on foreign investments
The New Guidelines confirm that the obligation to report annually assets and investments held abroad generally arises in the hands of Italian resident trusts (regardless of their status as “opaque” or “transparent”) and the Italian resident ultimate beneficial owners of trusts, as identified by the relevant Italian anti money laundering legislation (as well as in the OECD Common Reporting Standard). In this respect, it is also clarified that:
The tax authorities interpret the law to exclude from these reporting obligations (i) holders of subsequent interests into the trust (e.g. the heirs of living beneficiaries), unless a case-by-case analysis demonstrates the opposite; and (ii) settlor, trustee and protector.
The reportable information varies depending on the trust’s nature:
Finally, the New Guidelines confirm that Italian resident “opaque” trusts qualify as entities subject to the property taxes on foreign real estate (so called “IVIE”) and financial investments (so called “IVAFE”), rather than their Italian resident beneficiaries.
It is not clear whether (i) the same principle applies apply to Italian resident “transparent” trusts and (ii) Italian resident commercial trusts are exempted from such obligation (such as Italian commercial entities). Both cases should be confirmed based on a grounded interpretation of the law and the contents of the New Guidelines.
V. Going forward
The New Guidelines clarify several aspects of the general tax regime of Italian and non-Italian trusts and, at the same time, require all the parties involved a detailed review of their position and level of compliance with the Italian laws.
In this context, it is the tight time to start re-examining existing trust structures having connections with Italy for being fully compliant with Italian laws or becoming more efficient from an Italian wealth planning angle.