New Italian Administrative Guidelines on Taxation of Trusts

29 Marzo 2023

On 20th October 2022, the Italian Revenue Agency (“IRA”) issued the Circular Letter No. 34/E setting out new guidelines on the taxation of trusts (the “Circular Letter”).
Income tax
As for trust, Italian tax regime varies accordingly to the nature of the of the trust itself. According to Italian tax law, the following distinction must be made:

  • Disregarded trusts;
  • Discretionary;
  • Non-discretionary trust .
    Disregarded trust
    Disregarded trust are trusts as for which the is a subject that acts de facto as the owner and dominus of the trust (usually settlor or beneficiary). A trust can be disregarded when, among other things, a) the settlor can revoke the trust at any time; b) the beneficiary has a legally enforceable right to ask for the distribution of the patrimony of the trust . c) the beneficiary can exercise any significant influence over the trustee and, therefore, in case the beneficiary is appointed as trustee.
    For tax purposes, disregarded trusts are deemed as pass through entities, both for direct and indirect tax purposes . When a trust is disregarded – typically vis-à-vis its settlor or a beneficiary – the income and gains from the trust assets are treated as income and gains of the settlor or beneficiary and subject to income tax in his/her hands as if the trust did not exist.

Non-discretionary trust
Non-discretionary trust are trusts where the beneficiary is vested. As such, beneficiary has a legally enforceable right to claim for the distribution of the income generated by trust .
Income generated by a non-discretionary trust is taxed directly in the hands of the beneficiaries, regardless of when it is actually distributed (so called “transparent entity”). Such rule applies to both domestic and foreign trusts.
The distributed income is classified as income from trusts, regardless of the character of the income when earned by the trust, and as Italian source or foreign source income, depending on the whether the trust is a resident trust or non-resident trust. Such income is taxed in the hands of the beneficiary by application of the ordinary progressive income tax rate .
Discretionary trust
Discretionary trusts are the trusts whose income can be distributed, at trustee’s discretion only. No named beneficiary holds a legally enforceable right to claim for the distribution of income generated by trust.
They are treated as non-transparent entities, which means that income is taxed in the hands of trust only.
In principle, proceeds distributed by non-discretionary trusts are not taxable in the hands of the latter. The same rule applies as for proceeds distributed by foreign trusts, provided that they are subject to a level of taxation which is similar to the one applied in Italy . If this is not the case (so called “low tax jurisdiction”), proceeds distributed by the non – discretionary trust a fully taxable.
Provides clarifications on the notion of “low tax jurisdiction”. A trust should be considered as established in a “low-tax jurisdiction” if the income of the trust is subject to an income tax in its jurisdiction of establishment that is lower than 50% of the nominal tax rate applicable in Italy (either 26% or 24%, depending on the circumstances). The nominal tax rate of the foreign jurisdiction should be determined taking into account any special tax regime applicable in the foreign jurisdiction. Unfortunately, the Circular Letter does not clarify how this test should be applied if, in the jurisdiction of establishment of the trust, the income of the trust is imputed and taxed in the hands of the settlor and/or beneficiaries as it accrues at trust level.
Inheritance and gift tax (“IGT”)
IGT is due on distributions of capital only. The applicable rate and exempt amount depends on the family relationship, at the time of the distribution, between the settlor and the beneficiary of the distribution. . In the Circular Letter, the IRA withdraws its past approach of applying IGT on trust additions. The new position of ITA will allow for a deferral of the payment of IGT but could expose the trust assets to the application of higher IGT rates in the case of their future increase
The Circular Letter states that the above general principle is not valid if a trust is to be considered as disregarded vis-à-vis its settlor for income tax purposes. In such a case, IGT is not due. If the trust is disregarded vis-à-vis the beneficiary, IGT is due as from the addition.
The territoriality rules of IGT should be applied in relation to trust distributions making reference to the residence of the settlor and to the situs of the assets at the time of settlement of the trust. Under this rule, if the settlor was not resident in Italy at the time of settlement and if he did not settle into the trust any Italian situs asset, no IGT should be due on trust distributions even if, upon distribution, the settlor had relocated to Italy and the distributed assets were to include Italian situs assets.
Income vs capital
According to Circular letter:

  • income consists of income and gains (even if accumulated); income distributed is in principle taxed in the hands of the beneficiaries unless it was previously taxed in the hands of the tax itself;
  • capital consists of the original settlement and subsequent additions; any distribution of income is principle subject to IGT.
    The Circular letter confirm that the trustee may freely decide whether to distribute income or capital from an Italian tax standpoint. However, to this purpose, the trustee must keep adequate supporting evidence on the computation of income and capital and must properly formalise the distribution resolutions.

Foreign assets reporting obligations
The Italian Income tax return contains a form, so called “RW form”, in which foreign assets held abroad are supposed to be reported. The RW form must be filled as for any asset that can potentially generate taxable income in Italy.
In case of disregarded trust, the RW obligation is placed on the subject which acts as the owner/dominus of the trust, if Italian resident. The dominus is supposed to report the assets held by the trust as if the trust didn’t exist . For example, if the disregarded trusts holds an insurance policy, the RW obligation must be fulfilled only for what the insurance policy is concerned.
As for non-discretionary trust, the Italian beneficiary of a trust is always qualified as beneficial owner of the trust . Therefore, the beneficiary is supposed to report in the RW form:

  • the trust itself; and
  • all the underlying assets held by the trust.
    As for discretionary trust the aforementioned obligation arises only provided that IRA can proved that the beneficiary had enough information as for the assets held abroad and the as for the correspondent distributions.