Amended Return Not Sufficient To Avoid Penalties For Failure To Report Foreign Assets On Form RW

The Regional Tax Court for the Region Lombardia with ruling n. 3778/67/15 held that the amended income tax return, which an Italian taxpayer may file to integrate a previous incomplete file return after the filing deadline has expired, does not remedy the penalties connected to the failure to file a timely RW form. The information disclosed in the RW form is required to allow the tax administration to know about an Italian resident  taxpayer’s foreign assets even though they do not generate taxable income. Failure to disclose foreign investments and assets constitutes a substantial violation that is not subject to review. 

The case involved a German taxpayer residing in Italy, who did not file an income tax return regarding the purchase of some shares from a Swiss corporation that occurred in 2005. After the tax administration invited the taxpayer to explain the omission regarding the shares, the taxpayer filed a supplementary tax return for 2006, which included the RW form previously omitted. Nevertheless, the tax administration notified the taxpayer of a violation of his disclosure obligations and assessed the statutory penalties.

The taxpayer then filed a complaint in the tax court. The taxpayer argued that the statute of limitation  had run, and that the supplementary income tax return had, in any event, remedied the previous omission. The administration replied that, given the undisclosed investments involved blacklist countries (tax havens or tax-privileged areas), the extension of the ordinary statute of limitations should apply. Furthermore, for the administration, the supplementary tax return could not constitute a remedy to the previous omission, sufficient to eliminate the applicable penalties for to the initial nondisclosure.

The appellate court reversed the tax court's decision. First, the appellate court held that the extension of the statute of limitations for assessment related to investments in blacklist countries is procedural in nature, such that it applies also retroactively to previous tax years. The court further held that the failure to file an RW form constitutes a substantial violation. The supplementary income tax return allows the taxpayer to adjust the erroneous or omitted report of income, but it does not eliminate the penalties for the late or omitted filing of the return. According to the court, the taxpayer could only have avoided the full penalties by refraining from going to court and settling the matter with the payment of the reduced penalties equal to 1/4 of the minimum.

As reported in our previous article of November 2014 (that you can find here:, an RW form is an annual income tax return that Italian resident individuals are required to file pursuant to art. 4, D.L. nr. 167/90. The form allows individuals to report their foreign financial investments and assets, which are capable of generating foreign-source income, regardless of an actual income produced. This means that, as pointed out by the appellate court, even though the foreign investments reported in the form do not automatically generate taxable income, they nevertheless constitute a red flag for the tax administration. This assertion is even more compelling, considering the tax administration would not otherwise easily know about these investments and assets.

In case of errors or omission in the original return, a taxpayer may file a supplementary tax return, and obtain a reduction of the applicable penalties. If filed within 90 days from the filing deadline, the supplementary return has the same value of a valid and correct tax return originally filedPassed the 90 days, the return is deemed to be omitted, although the administration may still impose taxes based on them. At this point, the supplementary tax return must be filed within the filing deadline of the return concerning the following tax period. Passed 90 days from the original deadline, the sanctions range from 3% to 15% of the unreported income detained in white list countries, or from 6% to 30% of that detained in blacklist countries. In both cases, however, the penalties remain and cannot be remedied.

In conclusion, the opinion of the regional tax appellate court clarifies that the failure to file an RW form disclosing foreign assets and investments constitutes a substantial violation, which triggers automatic penalties. On the other hand, the extension of the statute of limitations for the administration’s assessment power applies retroactively to previous tax years, given its procedural nature.

Although the holding has a limited authority, considering it comes from a regional appellate court, it is indicative of the importance of filing an accurate and timely RW form disclosing foreign assets and investments. The taxpayer should especially pay close attention to the RW form in case assets are held in foreign countries that are part of the black list.


Foreign Trusts Subject to Disclosure in Italy

Every time a trust has connections with Italy and is given legal effects or enforced in Italy, the trustee will need to collect, keep and disclose (if required) information on beneficial ownership of the trust and, potentially, report such information in a special Trust section of the Italian Business Register. These new trust disclosure rules derive from the Italian bill  transposing into national law the EU Fourth Anti-Money Laundering Directive (2015/849).

The Directive requires trustees of any express trust governed under the law of a Member State to obtain and hold information on the beneficial ownership of the trust, inclusive of the identity of the settlor, the trustee, the protector (if any), the beneficiaries, and any other natural person holding any authority or exercising effective control over the trust. When the trust generates legal or tax consequences in the legal system of a Member State, such information has to be reported in a central register of that Member State.

The Italian bill implementing the Directive imposes such duties on “trustees of express trusts governed in accordance with Law dated October 16, 1989 n. 364.  Such is the law by which Italy ratified the 1985 Hague Convention on Law applicable to Trusts and their recognition.

Italy does not have a body of national statutory provisions on trusts, but the enforcement of the 1985 Hague Convention by the Law n. 364 of 1989 permits to recognize and give legal effects in Italy to trust created under and governed by foreign law.

As a result, every time a foreign trust is to be legally used in Italy, and is designed to produce legal and tax effects there, it can be considered a trust “governed in accordance with Law n. 364 of 1989”, thereby triggering the know your customer and disclosure obligations set forth in the Directive. Therefore, it will be automatically subject to the new disclosure obligations, including the registration in a special Trust section of the general Business Register. Foreign trustees of a foreign trust that has a connection with Italy, are potentially subject to those rules, and need to pay close attention to the their new reporting obligations under the new rules.

Situations that fall within the scope of the disclosure rules include common cases in which a foreign trust has Italian resident beneficiaries, or owns movable or immovable assets located in Italy. In those cases, the beneficiaries in order to claim the distribution of income or assets from the trust need to put in place the procedure to have the trust recognized and enforced in Italy. The same happens when a foreign beneficiary claims the distribution of the trust’s Italian assets pursuant to the trust.

Even when the settlor of a foreign trust is an Italian individual, the new rules would apply. Indeed, the settlor may need to rely on the trust to separate herself from the assets transferred to the trust, and claim that the trust assets and income belong to somebody else who should bear the responsibility of tax filing, payment and reporting relating to the trust. To the effect, the trust would have legal and tax consequences in Italy, which would put it within the scope of the new disclosure rules.   

The Directive set forth a deadline for its implementation into EU member’ States’ law, currently expiring on June 26, 2017. The Italian bill once enacted into law will need legislative decrees with enforcement provisions to be adopted by the Government pursuant to the legislative authority granted therein.


Italy's Tax Residency for Foreign Investors

Italy's tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the list of Italian resident individuals for administrative purposes. Whenever one of the three tests is met for more than 183 days in any given year, an individual is resident of Italy for Italian tax purposes for that particular year. Italian tax residency triggers worldwide income taxation and obligation to report worldwide financial and non financial assets to Italian tax authorities on taxpayer's Italian income tax return. 

In case of tax residency under the internal laws of Italy and another treaty country, Italy applies the tie breaker provisions of article 4 of the tax treaty to resolve the double residency problem, which assign tax residency based on the location of of permanent home, center of vital interests, habitual abode or nationality. The treaty "center of vital interests" test requires a comparative analysis of the taxpayer's contacts or ties in Italy and the other treaty country. According to one view, personal and family ties should prevail, while another interpretation gives relative weight to economic and business interests.

A recent decision of Italy's Supreme Court, which we comment here, seems to support the second interpretation. Proof of business and economic interests abroad while living or spending significant time in Italy for personal pleasure may help taxpayer demonstrate that that she kept her center of vital interest and tax residency in her own country.

This area of Italian international tax law is in flux and needs attention. Foreign taxpayers who transfer money to Italy to purchase homes, spend regular time there, register their administrative residency in Italy at their Italian address for convenience, open Italian bank accounts to handle the funds needed to manage their Italian house and living expenses are under the radar screen on Italian tax authorities, which check the real estate database, receive automatic information about the cross border transfers of the funds and often send inquiry letters asking for explanations on the taxpayer tax position in Italy in the absence of past filed Italian income tax returns.                

Such inquiries and related audits requires careful consideration, including the provision of carefully selected and explained tax documents and information, to avoid the risk of an Italian tax residency determination that would trigger far reaching and very troubling consequences.  

Italy's Supreme Court Holding That Economic Interests Prevail Over Personal Ties In Determining Italian Tax Residency

Italy’s Supreme Court’s decision n. 6501 of March 31, 2015, dealing with the case of an Italian citizen  who had most of his personal and family connections in Italy but moved to work in another country (Switzerland), where he had most of his economic and financial interests, ruled that the taxpayer’s economic and financial connections should prevail over the taxpayer’s personal and family connections under the center of vital interests test of the Italy-Switzerland treaty, and concluded that the taxpayer’s tax residency had to be allocated to Switzerland under that treaty.

The above decision is the last of a series of recent Italian tax courts' rulings supporting the conclusion that economic ties to a country are more important than personal or family ties to another country in determining an individual's tax residency.

The Supreme Court’s holding goes against older case law and has very important ramifications.

We refer, in particular, to the frequent cases of American citizens who transfer money from the United States from Italy, purchase and own valuable homes in Italy, and spend significant time there, together with their family. Those people usually pass the test for establishing tax residency in Italy under Italian domestic tax law.

In many cases, the Italian tax administration, who can rely on extensive data base detecting U.S. transfers of money to Italy and purchase and ownership of Italian homes, sends audit letters to inquire about the tax status of those foreign citizens in Italy, considering that they usually are not aware of the problem and have never filed any Italian income tax returns.

The recent case law offers a valuable opportunity to avoid unintended tax consequences arising from inadvertent Italian tax residency, in a sense that taxpayers in those cases can still argue that their tax residency remained in the United States whenever sufficient economic and financial interests are still located there, while physical presence and personal and family connections have shifted to Italy.

Overview of Italy's Tax Reporting Rules

Italian resident taxpayers are required to report all of their assets held outside of Italy,  on form RW of their Italian income tax returns (which include various sections and can be considered the equivalent of the FBAR and other international tax returns that are required to be filed in the United States).

Resident taxpayers subject to reporting include U.S. (or any other foreign) citizens who crossed the line and have become tax residents of Italy under Italian tax residency rules (unless they can claim U.S. tax residency under the tie breaker provisions of article 4 of the U.S.-Italy income tax treaty).

They also include Italian nationals who moved abroad but maintained their tax residency in Italy as a result of keeping their domicile there.   

Reporting requirements extend to any foreign asset, not just bank or financial accounts, which is capable of generating (currently or at any time in the future) foreign source income taxable in Italy (such as houses, boats, jewelry, artworks, etc.). 

Recently, the scope of reporting has been dramatically extended as a result of the enactment of the "beneficial owner" rule, which requires to report assets that are not immediately or directly owned by the taxpayer, but are owned indirectly as a result of owning shares of stock or similar interests in foreign entities, or that will be received in the future as distributions out of trusts of which the taxpayer is a beneficiary.

The new reporting rules adopt a "look through" approach pursuant to which the taxpayer is required to report her pro rata share of the underlying assets owned by an entity in which she is owns stock or other similar interests.

Reporting can be very daunting, in case of multiple entities and levels of ownership, and assets owned foreign in trusts that need to be properly classified and interpreted under Italian tax rules to understand exactly who and how (among the various settlors and beneficiaries) is required to report the assets held in trust.

In this article we provide a general overview of the new Italy's international tax reporting rules referred to here above. We hope it proves to be useful as an initial orientation guidance in a very complex area of Italian international tax law.                



Italian Perspective on Beneficial Ownership

In recent years the concept of 'beneficial ownership' has emerged as a major anti abuse rule applicable in the context of tax treaties and other important areas of international tax law. This article provides an overview of the recent interpretation and applications of the beneficial ownership rule as clarified by the OECD, pursued by tax administrations and courts in various countries, and carried out in Italy.

Italy's Tax Provisions on Trusts - Updated

Italy operates specific provisions on tax treatment of trusts. Trusts formed under foreign law are recognized and enforced in Italy pursuant to the Hague Convention on Trusts dated July 1, 1985. To the extent they have Italian assets, or Italian grantor, trustees or beneficiaries or Italian source income, foreign trusts may be subject to Italy's trust tax provisions. Under certain circumstances, trusts are disregarded and trust assets are treated as owned by the grantor or beneficiaries. This is the case when the grantor has an unconditional power to terminate or revoke the trust or when the beneficiaries have an unconditional right to claim an anticipated distribution of all or part of the trust assets at any time during the life of the trust, or when the trustee lacks actual independent power to administer the trust and is under the directions or instructions of either the grantor or the beneficiaries of the trust. When respected for tax purposes, the trust is taxed on a fiscally transparent basis or as a separate entity, depending on whether and to what extent the income of the trust is attributed to identified beneficiaries specifically mentioned in the trust agreement or separately by the grantor during the life of the trust. When a trust is taxed on a fiscally transparent basis, income of the trust is allocated to and taxed directly upon the beneficiaries. When a trust is taxed as a separate entity, the trust itself pays the corporate income tax on its own income. A trust administered in Italy or by an Italian resident trustee is treated a a resident trust and subject to tax on its world wide income. A trust administered abroad or by a foreign resident trustee is treated as a foreign trust and taxed only upon Italian source income. For more details about Italian tax treatment of trusts as it applies to trusts formed under the laws of any State of the United States or any other foreign country, we refer you to this article which was recently published on Tax Notes International.             

Italian Supreme Court Rules on Individual Tax Residency

The Italian Supreme Court in its Ruling 20285 dated September 4, 2013 held that an individual taxpayer claiming to have his tax residency outside of Italy had properly discharged his burden of proof and correctly established his tax residency abroad by producing copy of his residential lease, regular payments of rent and utility bills and use of personal bank account for day to day expenses, thereby proving that his actual and real residence and domicile was located in the foreign country. 

Under Italian tax law, individual tax residency is determined pursuant to highly factual tests and can be established even when there are relatively minor contacts with Italy, such as a house, frequent visits to the country, or business interests located there. Once determined, it subjects the taxpayer to worldwide taxation in Italy both for income and estate tax purposes including the obligation to report all of taxpayer's assets wherever located in the world under a form that is the equivalent of the american foreign bank account report, except that it requires reporting of non financial assets (such as cars, houses, planes, artworks, etc.) as well as financial assets and accounts. Foreign persons with interests in Italy must pay particular attention to those rules to avoid to be trapped into unintended Italian tax residency. 

Under the facts of the case decided by the Supreme Court,  the taxpayer - a tennis player originally resident in Italy - claimed to have moved his tax residency to Monaco, while still traveling to Italy and other countries in connection with his business interests and professional activity.

Under Italian law, Monaco is a tax haven, black listed jurisdiction and Italian taxpayers who register as residents there are presumed to be still resident in Italy for Italian tax purpose, unless they prove that their actual residence and domicile is located in that country. For this purpose, residence identifies the taxpayer's habitual and regular place of living, while domicile identifies the taxpayer's main center of personal, financial and business interests.  


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Italy Amends Its Rules On Tax Disclosure of Foreign Assets

Italy enacted a new law that significantly amends its rules requiring Italian resident individual taxpayers to report their foreign financial investment and accounts and other assets capable of generating foreign source taxable income.


The fist significant change reduces the scope of the reporting. it eliminates the duty to report intra year transfers relating to reportable foreign assets, previously reported through sections III and I of form RW part of Italian tax returns. As a result, any transfers of money out of Italy for the purchase of foreign reportable assets, or into Italy as a result of a liquidation or sale of a reportable foreign assets, or foreign to foreign transfers relating to changes to the portfolio of foreign reportable assets, which occurred during a tax year, need not be reported.      


The second significant change reduces the amount of applicable penalties. Under the old law, penalties could be assessed from a minimum of 10 percent up to a maximum of 50 percent of the value of unreported  foreign assets. Under the new rules, the penalties are reduced to 3 percent minimum and 15 percent maximum respectively. Furthermore, taxpayers can settle any audit out of court by paying a penalty equal to 1/3 of the minimum (that is to say, 1 percent of the value of unreported assets).


The new rules have retroactive effect and apply to any situation in which penalties have not been assessed and paid yet.  Therefore, past violations that are no longer sanctioned under the new rules have become moot. 


The duty to report extends to taxpayers who are the "beneficial owners" of the reportable foreign assets, regardless of the fact that they may not be the owner of record or hold the legal title to those assets. The new law does not define the term "beneficial owner", but refers to the definition of the term that is provided by anti money laundering legislation. Accordingly, in case of companies, any shareholder, member or partner owning more than 25 percent of the company (by vote or value) is deemed to be a beneficial owner of the underlying investments or assets owned by the company. For other entities, such as foundations and trusts, beneficial owners are deemed to be the individuals who are the final beneficiaries or recipients of the entities' assets.


The elimination of the duty to report intra year transfers and the reduction of penalties for failure to report is surely good news.  

On the other side, the extension of the duty to report to the beneficial owners of a reportable foreign assets is very concerning. How taxpayers will handle their reporting obligations under the new rules is not easy to predict and will likely require further clarifications and guidance from the tax administration.

Indeed, the term beneficial owner in the context of the anti money laundering rules is very wide in scope, and its automatic use also for foreign assets reporting purposes might have unintended consequences. If applied literally, it would require any shareholder  owning more than 25 percent of the stock of a company to report his or her pro rata share of all of the company's underlying assets held outside of Italy. While this might make sense in case of closely held companies or conduits that are set up for the sole purpose of holding and managing foreign financial investments and accounts, it may be completely impossible to handle in practice in case of straightforward commercial companies and other business entities engaged in trade or business.        

Further guidance on this issue is absolutely necessary 




Overview of Italy's Tax Provisions on Trust - Updated

I. Introduction

Italy does not have domestic rules on trust.

However, trusts created under foreign law are recognized and enforceable in Italy pursuant to the provisions of the 1985 Hague Convention on the Law Applicable to Trusts and Their Recognition, which has been ratified and implemented and is fully effective in Italy as part of Italian legal system.


The Hague Convention was signed on July 1, 1985 and ratified in Italy with law n. 364 of October 16, 1989 and entered into force on January 1, 1992. It is aimed at harmonizing the private international laws of the contracting states relating to trusts; provides that each contracting state recognizes the existence and validity of trusts created by a written trust instrument; sets out the general characteristics of a trust and establishes rules for determining the governing law of trusts with cross-border elements.


According to the Convention, as implemented in Italy, a trust created pursuant to and governed by the law of a country that has provisions governing trusts is recognized and valid in Italy, subject only to the overarching limitation of Italian public order principles.


Purely internal trusts, with Italian grantors, Italian beneficiaries and assets located in Italy are also recognized.


With the Finance Bill for 2007 Italy enacted, for the first time, specific provisions dictating the tax treatment of trusts for Italian tax purposes[1]. They establish general principles on tax classification and treatment of trusts in Italy for income and indirect tax purposes and have significant cross-border implications


On August 6, 2007 Italy’s tax administration issued Circular n. 48/E that provides administrative guidance on the interpretation and application of the new tax provisions on trust. Circular 48/E clarifies the tax treatment of trusts both for income tax and transfer (indirect) tax purposes. 


Subsequently, Italy’s tax administration issued additional interpretative guidance by way of Circular n. 61/E issued on December 27, 2010.


Generally, for a trust to exist as a legal and tax entity separate from the grantor, the trustee and its beneficiaries, there must be a real and effective legal separation of the trust’s assets from both the estate of the grantor and the beneficiaries of the trust and the trustee must be granted with real powers of administration of the trust, acting independently from and not being under the direct or indirect control of the grantor or beneficiaries of the trust.


Once it is positively established that a trust actually exists, as a general rule, for income tax purposes trusts are classified as separate taxable entities and taxed as corporations.


However, trusts with income beneficiaries that are identified and named in the trust agreement are treated as fiscally transparent entities - that is, income is attributed to the beneficiaries as provided for in the trust agreement, regardless of whether and how the trust distributes its funds, and the beneficiaries are taxed directly on their share of trust’s income. This fiscally transparent treatment applies also in the event that after the initial creation of the trust, the trustee determines the income beneficiaries of the trust pursuant to the authority granted in the trust agreement.


A trust is resident in Italy for tax purposes if its place of management or place of activity is located in Italy. Trusts formed in jurisdictions that do not allow exchange of information with Italy are treated as residents and subject to worldwide taxation in Italy, if certain connections with Italy exist (for example, if any grantor or beneficiary is Italian), unless taxpayers provide sufficient evidence that they are resident (that is, effectively managed) outside of Italy.


Trusts must keep tax books to compute their taxable income (taxed upon the trust in case of fiscally non transparent trusts, or passed through to and taxed upon the beneficiaries in case of fiscally transparent trusts).


A gratuitous transfer of assets to a trust is subject to gift or estate tax. The tax is charged at reduced rates (4 and 6 per cent) if beneficiaries named in the trust agreement or determined by the trustee at any time thereafter are close family members. Otherwise, the regular rate for trusts with no identified beneficiaries or beneficiaries that are not close family members or charitable trust is 8 per cent. 


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