Trusts and taxation in the light of Circular No. 34/E of 20 October 2022 of the Italian Revenue Agency

On 20 October 2022, the Italian Revenue Agency issued the Circular No. 34/E, on the taxation of trusts, in which it provides clarifications on the direct and indirect taxation of this instrument, in light of the now consolidated case law on the application of Inheritance and Gift Tax (hereinafter “IHT”) and on the regulatory novelties introduced, in the area of direct taxes, by Article 13 of Decree-Law 124/2019.

We provide below a brief summary of some milestones of the Circular letter.

Indirect Taxation

With reference to indirect taxation, the Italian Tax Authorities acknowledges the position, now consolidated, of Italian Supreme Court (cf. judgment no. 8082 of 2020) on the "deferred" application of the IHT on a proportional basis on the asset’s value as at the time of the final attribution to the beneficiary, definitively overcoming the so-called “entry-taxation” positions. It therefore follows that:

• The trust deed by which the settlor expresses the will to set up the trust is subject to registration tax, mortgage and cadastral tax at a fixed rate (currently Euro 200.00), even when the same deed provides for the gift of assets to the trust. In the latter case, where a real estate is transferred into the Trust, the mortgage and cadastral taxes will be due at a fixed rate (currently EUR 200.00 each);
• The deed of gift (i.e. the transfer of assets made by the Settlor to the Trust) is subject to registration tax, mortgage and cadastral taxes at a fixed rate. In line with the position of the Italian Supreme Court, such deed “does not determine any transfer effects because it does not entail its definitive attribution to the same (Trustee), who is only obliged to administer and keep it, in a regime of patrimonial segregation, with a view to its retransfer to the final beneficiaries of the trust”.
• The deeds by which the assets are definitively allocated to the beneficiaries, except in the case where the regulation of the Trust has very particular characteristics, is relevant for the IHT, since only at that moment a stable and effective enrichment of the beneficiary occurs.
• In relation to the assessment of the IHT, the final attribution of assets to the beneficiaries may be subject to proportional tax, calculating the rates and exemptions on the basis of the degree of kinship between the settlor and the beneficiary. The tax base and exemptions should be defined by reference to the time of transfer is made.
• For the application of the IHT, the territoriality criteria identified by Article 2 of Legislative Decree No. 346 of 1990 (i.e. the settlor's residence and the location of the assets in trust), should be verified at the time of the assets segregation, namely at the moment the assets are transferred by the settlor to the trustee,
• As regards the various management operations that the Trustee carries out during the life of the trust, the Revenue Agency specifies that they are subject to autonomous taxation according to their nature and effects. Therefore, for example, if the Trustee acquires a real estate property, the deed will be subject to the normal indirect taxation provided for real estate transfer deeds.

Particular attention should be made on the payment of IHT in relation to final distributions made by existing trusts.

The Italian Tax Authorities, in order to protect taxpayers who relying on its previous position, have already paid IHT at the time of the set up of the trust (or when the assets were transferred to the trust),  acknowledges that the payment made at the time of the asset segregation can be considered conclusive and no further IHT is due if all the following requirements are met:

(a) the beneficiaries are the same as those initially provided in the Trust deed; and

(b) the asset transferred to the beneficiary are the same as those initially transferred to the Trust Fund.

Therefore, it appears not to be relevant for IHT that the tax base, IHT rates or exemptions may have changed during the period between the deed of gift and the deed of distribution to the beneficiary, with a consequent increase or decrease in the tax levy. The Italian Tax Authorities clarify, in fact, that in these cases “as the IHT will not be recalculated, it is not possible to make a refund of the tax already paid at the time the assets were transferred to the trust, even where the IHT base calculated at the time of the distribution to the beneficiaries should be lower than the “entry-taxation””.

On the contrary, where the trust does not met the above two criteria, the IHT already paid will be deducted from those due to the final transfer. For example, if a trust property is sold by the Trustee, who eventually distributes cash to the beneficiaries, the “entry” IHT that have been paid will be deducted from the IHT (if higher) due on the final distribution; of course, if the IHT due on the final distribution were lower, there would be no right to a refund”.

Direct Taxation

 For the purposes of determining the income produced by the trust (either opaque trust or transparent trust), the nature of  activity carried out by the trust ('commercial' or 'non-commercial' actiivity) should be analised . In particular:

• in case of a trust (either opaque or transparent) resident in Italy for tax purposes, whose exclusive or main purpose is to carry on a commercial activity ("commercial entities"), the worldwide income generated is determined according to the rules provided for the companies subject to IRES (corporation tax).
• in case of a trust (opaque or transparent) resident in Italy for tax purposes, which does not have as its exclusive or principal purpose the carrying on of commercial activities ("non-commercial entities"), the worldwide income generated is determined in accordance with the rules provided for non-commercial entities pursuant to Article 143 of TUIR.
•  in case of a non-Italian resident trust (opaque or transparent) whose exclusive or principal object is the carrying on of a commercial activity, the income generated in Italy is determined in accordance with Article 151 of Tuir.
• in the case of a non-Italian resident (opaque or transparent) trust that does not have as its exclusive or principal purpose the carrying on of a commercial activity, the income generated in Italy is determined in accordance with Article 153 of the TUIR.

However, as an exception to the territoriality criterion set forth in Article 23 of the Tuir, some exceptions exist:

• In case of a transparent non-Italian resident trust, the worldwide income produced (including foreign source income) is subject to taxation by transparency in the hands of the Italian tax resident beneficiary as capital income pursuant to Article 44(1)(g-sexies) of the Tuir.
• In case of a non-Italian resident opaque trust ‘established’ in low-tax jurisdictions (whether it carries out commercial or non-commercial activities), the worldwide income produced (including foreign source income) is subject to taxation in the hands of the Italian tax  resident beneficiary (even if not “vested”) as capital income pursuant to Article 44, paragraph 1, letter g-sexies), of the Consolidated Income Tax Act (D.P.R. n. 917/1986),

For the purposes of identifying the tax regime applicable to the income, a distinction is also made between two types of trusts:

• a “transparent” trust: a trust with ‘identified’ beneficiaries who are entitled to receive the trust income. In such a case, the trust income is directly attributed to beneficiaries on an accrual basis, regardless of its effective distribution, and they will be taxed applying their progressive IRPEF rates.
• a “opaque'” trust: a trust with ‘not identified’ beneficiaries and they have no right to claim vis-à-vis the trust income (e.g. pure discretionary trusts). In such a case, the trust income is subject to taxation in the hands of the trust, which is treated as a separate taxable entity (IRES).

(a) Transparent trust (resident and non-resident)

The income generated by the 'transparent' trust is attributed to the Italian tax resident 'identified' beneficiary irrespective of its actual receipt, and, consequently, is subject to taxation in the hands of the beneficiary at a progressive IRPEF rate.

It is important to note that if the income earned by the trust benefits from a non-taxable or exempt regime, the actual attribution thereof to the beneficiary does not give rise to taxation in the hands of the latter (e.g., capital gain arising from the sale of a property held for a period of more than 5 years).

(b) Resident opaque trust (non-commercial entity)

In the event that the opaque trust qualifies as a resident "non-commercial" entity, the taxable income, to which the IRES rate of 24% will be applied, will be determined by virtue of the application of Article 143 of the TUIR, i.e., with the same income categories and in application of the same rules provided for individuals.

It follows that any further distribution of income in favour of a "not-vested" beneficiary will not give rise to further taxation in respect thereof.

(c) Resident opaque trust (commercial entity)

In the event the opaque trust qualifies as a 'commercial' entity, the income is to be determined by applying the rules provided for in Articles 81 et seq. of the Income Tax Code (TUIR) on business income, including the rules on exempt capital gains (Article 87) and dividends (Article 89).

It follows that, in the event the income is attributed to a "not-vested" beneficiary, Article 44(1)(e) of the Tuir is applicable, which provides for a further taxation as capital income of the profits deriving from the trust.

(d) Non-resident opaque trust

As a general rule, we may state that a foreign opaque trust is taxable in Italy only with respect to income generated in the territory of the State, pursuant to Articles 151 (commercial entities) and 153 (non-commercial entities) of the TUIR, and that the relevant distribution of income to the beneficiary does not give rise to taxation in the hands of the beneficiary.

However, as expressly provided for by Article 44, paragraph 1, letter g-sexies) of the TUIR, in the case of an opaque trust ‘established’ in low-tax jurisdictions, the distributions to Italian tax resident beneficiaries (both “vested” and “non-vested”), will be qualified as capital income and subject to progressive taxation in their hands.

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