Examination of the tax treatment of the Trust in Italy between opportunities and new guidelines from the Internal Revenue Service

The article published by the international journal European Taxation of IBFD written by Alberto Trainotti and Saverio Fabbiano analyzes the tax treatment of trusts in Italy in relation to the growing use and interest of it. Indeed, the Trust combines the protection of particular property interests with a high degree of flexibility and efficiency.

The publication in August 2021 by the Internal Revenue Service of a draft Circular on the tax treatment of the Trust was an opportunity to dispel the main application doubts related to this institution, pending the publication of the final Circular.

Recent innovations

The tax regime applicable to Trusts has recently been the subject of innovations:

  • by the Italian legislature concerning the direct taxation of Trusts located in tax havens
  • in several rulings on indirect taxation at the time of the contribution of assets to the Trust
  • concerning tax monitoring obligations and the application of wealth taxes.

About opaque foreign trusts located in privileged taxation states, as confirmed by the draft Circular under comment in the context of direct taxation, allocations of income by the trust are subject to taxation in the hands of the resident beneficiaries as capital income. There is no recognized possibility of demonstrating an “effective economic placement” (i.e., genuineness of location in those countries through an organized structure) through the Institute of interpellate. In addition, the draft clarifies that if it is impossible to distinguish between assets and income, the presumption operates that the entire amount received by the Italian resident beneficiary qualifies as capital income.

For indirect tax purposes, after years of conflicting guidance from case law, the draft Circular states that gift tax does not apply when assets are “attributed” to the Italian Trust by the settlor but only when they are devolved to the beneficiaries.

Concerning the Trust Deed and subsequent deeds of asset allocation to the Trust, it is reiterated that the inheritance/donation tax is due in a fixed amount of Euro 200.

On the subject of tax monitoring obligations, the transparent Trust resident in Italy will have to indicate the value of foreign assets and the percentage of assets not attributable to resident beneficial owners. Beneficial owners are “identified or readily identifiable” by the deed of incorporation or other documents, even indirectly. One of the aspects on which a change of direction by the tax authorities is expected concerns the obligation imposed on resident beneficiaries-even if they are not identified-to disclose the assets attributed to them by the Trust in the RW panel of the tax return.

Individuals tax residents in Italy subject to tax monitoring obligations have to pay wealth taxes (i.e., IVIE and IVAFE) about investments and financial assets held abroad.

The article concludes with the hope for a more defined regulation of the Trust – given the uncertainty related to some not insignificant legal/fiscal aspects – to encourage the further development of the instrument in terms of inheritance and beyond.