Italy's New Flat Tax For First-Time Residents

With the Budget Law for fiscal year 2017, Italy enacted a new flat tax for Italian first-time residents. The flat tax amounts to euro 100,000 regardless of the amount of taxable income. Foreign source income is completely exempt from tax, while domestic source income is taxed under the normal rules (graduated tax rates on income brackets generally applying to all resident taxpayers). First-time residents will also be exempt from the duty to report their non-Italian financial assets, and will not be subject to Italy's estate and gift tax. Special rules for residence permits and visas will also apply to facilitate the establishment of Italian tax residency in connection with the application of the new tax. The new flat tax is aimed at attracting high net worth individuals to Italy.  This who have solely non Italian source income will pay euro 100,000 and will be cleared from any other tax filing and payment obligations.


Individuals who have not been resident in Italy for Italian tax purposes for at least nine of the previous ten years, at the time they establish their tax residency in Italy, will qualify for the flat tax. An individual is Italian treated as an Italian tax resident if she registers as an Italian resident individual at the local municipal office in the place where an individual has her home, or by maintains in Italy her place of habitual abode or the main center of interests, for more than half of a tax year.

Scope of the flat tax.  

The flat tax is elective and applies in lieu of the ordinary income tax on foreign source income. Italian source income will always be subject to the regular income tax (charged at graduated rates by brackets of income). The flat tax applies for a maximum period of 15 years. Foreign source capital gains (that is, capital gains realized from the sale of stock or other ownership interests in foreign entities), are subject to the the ordinary income tax (at the marginal rate of 43% charged on 49.72% of the amount of the gain under Italy's participation exemption rules), if realized within five years from the beginning of Italy's tax residency. Taxpayers must elect to pay the flat tax in lieu of the ordinary income tax. Taxpayers can terminate their Italian tax residency at any time, even before the expiration of the fifteen year period of application of the flat tax.

Individuals who qualify and elect for the new flat tax will be exempt from the obligation to report their non Italian investment and real estate assets, which is usually carried out by filling out a special section of Italian personal income tax return.  They will also be exempt from Italy's estate and gift tax on non-Italian assets.  

Possible constitutional challenges.

The new flat tax may be challenged under the provision of the Italian Constitution, which requires income that taxes are charged in proportion to an individual's "contributive capacity", that is, in a way that they are commensurate to an individual's income or wealth.


Individual taxpayers having solely non-Italian source income from financial or real estate investments located and managed outside of Italy, or from closely held foreign companies, would benefit from a very generous tax regime that would limit their tax liability to the flat amount fo euro 100,000 regardless of the actual amount of income they actually earn. The exemption from the duty to disclose foreign financial and real estate assets and investments will also result in much reduced administrative burden in filing an Italian income tax return.  

Hight net worth U.S. citizens or resident alien individuals who have relinquished or plan to relinquish their U.S. citizenship or terminate their U.S. tax residency should consider Italy as a new "tax haven", allowing for a a low flat tax on their non Italian source income with no reporting or disclosure of their non Italian assets wherever located in the world.   




Italy Institutes New Register for Trusts

Under new anti money laundering legislation due to become effective in Italy in 2017, all foreign trusts with tax effects in Italy shall have to be filed and registered on the Italian Register of Enterprises. They include trusts with Italian settlor, Italian beneficiaries, Italian assets, Italian source income or treated as Italian resident trust under Italian tax law.

The tax effects of a trust in Italy and the consequent obligation to disclose it on the Italian Register of Enterprises is determined under Italian tax laws.  The way in which a trust, its income or its beneficiaries are treated under foreign tax law is not determinative for that purpose.   

Trustees of trusts subject to the new disclosure and filing rules shall have to collect, conserve and disclose adequate information about trust's ultimate beneficial owners, which are meant to include the settlor, the trustee, the guardian, the beneficiaries, and any other person having any type of control or authority over the trust.

The scope of the new disclosure and reporting rules for trusts is very wide. All trusts with any apparent or potential point of contact with Italy should be revised to determine whether they fall within the application of the new rules.   

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Italian Government Approved Final Draft Decree Enacting New EU Anti Money Laundering Directive

On February 23, 2017 the Italian Government approved the final draft of the legislative decree (the "Decree") that is going to implement the provisions of the Directive (EU) 2015/49 of May 20, 2015 (the so called "IV Anti Money Laundering Directive"). The decree was sent to the Parliament for its review and with the consent of the Parliament it will become law.

One of the key concepts of the new anti money laundering legislation is the definition of "beneficial owner", meaning, the natural person who must be properly identified by the persons or entities obliged to carry out the  customer due diligence and report a transaction or legal arrangement whenever required under the anti money laundering law.   

Whenever the customer is an entity, as opposed to a natural person, article 20, paragraph 1 of the Decree provides a general definition of beneficial owner, as follows:

The beneficial owner of customers different from natural persons is identified with the natural person or natural persons to whom, ultimately, the direct or indirect ownership or control of the entity is attributable.

The definition of beneficial owner of an entity revolves around two concepts: ownership, or control, of the entity. Also, the ownership or control can be direct or indirect.  

The first test to apply is the ownership test. 

Article 20, paragraph 2 provides on direct or indirect ownership as follows:

When the customer is company:

a) it is an indicia of direct ownership, the ownership of an interest exceeding 25% of the capital of the customer, owned by a natural person;
b) it is an indicia of indirect ownership, the ownership of an interest exceeding 25% of the capital of the customer, owned through controlled entities, fiduciaries or intermediaries.
Beneficial ownership through indirect ownership in another entity requires that the tested natural person directly owns an ownership interest in another entity, which in turn holds ad ownership interest in the customer, ultimately making that natural person the indirect owner of the customer under the "more than 25 percent" test. 
The percentage of ownership owned in the intermediate entity, by the tested natural person, which should be required to qualify that entity as a controlled entity for the purposes of ultimately determine the existence of an indirect ownership interest in the customer, is not determined, and no attribution rules are set forth in the legislative decree for the purpose of applying the indirect ownership rule.
It would seem reasonable to assume that a direct ownership of more than 25 percent of the capital of the intermediate entity, could be sufficient to qualify that entity as a controlled entity, for the purpose of the indirect ownership testThe controlled entity, in turn, should directly own a sufficient percentage of the capital of the customer, as required so that, once percentage of direct ownership in the capital of the intermediate entity, owned by the natural person, is multiplied by the percentage of direct ownership in the capital of the customer, owned by the intermediate entity, the result would meet the "more than 25 percent" test for the indicia of beneficial ownership required for anti money laundering purposes.
Under that approach, when a natural person owns 50 percent of the capital of a company, which owns 51 percent  of the capital of another company, there would indication of beneficial ownership, because the natural person would indirectly own 25.5 percent of the capital of the customer.
Instead, if a natural person owns 20 percent of the capital of a company, which owns 100 percent of the capital of another company, there would be no indicia of beneficial ownership, because the intermediate ownership would be less than 25 percent. The same should be true when a natural person ones 100% of the capital of a company, which owns 24 percent of the capital of the customer.
Conversely, if a natural person owns 25.1 percent of the capital of two companies, each one of which owns 50 percent of the capital of the customer, there would indicia of beneficial ownership.
The control test applies whenever the beneficial owner cannot be identified through the application of the ownership test.       
Article 20, paragraph 3 defines the control test (that applies whenever the ownership test is insufficient to identify the beneficial owner of the customer) as follows: 
In the event that the ownership structure of the customer does not allow to identify in an unequivocal manner the direct or indirect ownership of the customer, the beneficial owner coincides with the natural person or persons to whom, ultimately, the control of the customer is attributable due to:
a) the control of the majority of the votes that can be exercised in the general meeting of shareholders, 
b) the control of a sufficient number of votes to exercise a dominant influence in the general meeting of shareholders
c) the existence of particular contractual constraints which allow a person to exercise a dominant influence (on the customer).
The control requirement is defined as control of the majority of the votes exercisable in the general meeting of shareholders, or dominant influence over the general meeting of the shareholders through voting power of contractual arrangements.  
When neither the ownership nor the control test are sufficient to identify the beneficial owner, article 20, paragraph 5 provides that the beneficial owner is the person who holds powers over the administration and direction of the entity. 
Article 20, at paragraph 5 provides that in case of private associations and foundations or other entities governed by Presidential Decree n. 361 of February 10, 2000 the definition of beneficial owner includes all of the following:
- the founder, when living;
- the beneficiaries, when they are identified or can be easily identified;
- the individuals with powers or authority over the administration or direction of the entity.  
No specific provision applies to trusts, which are not entities governed by Presidential Decree n. 361 of 2000, but are typically created under foreign law and recognized and made effective in Italy pursuant to the Hague Convention of July 1 1985 on Trusts. 

No Gift Tax On Transfer of Property To Trusts, Italy's Supreme Court Ruled

In its ruling n. 21614 of October 26, 2016 Italy's Supreme Court considered the issue of the application of the gift tax upon the transfer of property to a trust. The issue arises under the provisions of Law n.  262 of October 3, 2006, which reinstated the gift tax. Article 2 of Law 262, at paragraph 45 and 49, while providing on the scope of the newly reinstated gift tax, refers to "legal arrangements having the effect of creating constraints or limitation on the use, enjoyment and disposition of property", for the final benefit of a person of for a specified purpose.

One interpretation of the statute is that the language of article 2 of Law 262 clarifies, but does not extend, the scope of the gift tax, which continues to apply solely to straight gifts, namely, transfers of property from a person, the grantor, to another person, the beneficiary, for no consideration, whereby the beneficiary obtains immediately legal title and economic ownership of the transferred property. According to that interpretation, no gift tax applies at the time of the transfer of a property to a trust, when the ultimate beneficiary of the property still does not acquire the direct legal ownership and full right of use, enjoyment and disposition of the transferred property. Instead, the gift tax will apply at the time of the ultimate and final distribution of the property, from the trust to the beneficiary.           

Another interpretation of the statute is that the language of article 2 of Law 262 actually intended to extent the scope of the gift tax, from straightforward gifts to any legal arrangement by means of which a person places some of his or her assets in a separate fund, not part of his or her estate, to be used and disposed of for the benefit of another person of for a specified purposed. Under that interpretation, the gift tax would apply on the transfer of property to a trust (while no gift tax would apply at the time of the actual distribution of the property from the trust to the beneficiary). 

The 5th department of the Court refused to construe the new statute as if it instituted a new tax; looked at the legislative history and intent, which was that of reinstating the "old" gift tax, and affirmed its previous rulings (issued under the previous law) according to which the gift tax applies solely to a direct transfer of property to the beneficiary, as a result of which the beneficiary is enriched and has a direct and full right to the use, enjoyment and disposition of the property. The Court held that  Law 262 just reinstated the old gift tax, rather than extending its scope or instituting a new tax, and that the reference to "legal arrangements creating limits or constraints to the use, enjoyment or disposition of property" is just aimed at preventing the possible avoidance of the gift tax in cases in which certain legal schemes may be used to deviate from a straightforward gift of property to the intended beneficiary while reaching the same result.    

The Supreme Court is split on this issue, and ruling n. 21614 of the 5th Department of the Court is in direct contrast with other recent rulings from the 5th (tax) department of the Supreme Court. Lower courts have constantly ruled against the application of the  gift tax, and the tax agency has filed appeals to the Supreme Court against those rulings, as a result of which more decisions from the Supreme Court are expected in the near future.   

If the interpretation of the 5th department ultimately prevails, it would have extensive and potentially disrupting effects on cross border estate and trust planning arrangements with connections to Italy.

For instance, Americans with assets located in Italy and held in U.S. trusts, would face the application of the Italian gift tax, at the time those assets are distributed to the beneficiaries of the trust, while no tax would apply in the U.S. at that time, whenever the original transfer of the assets to the trust was a full and final gift under U.S. tax law.

Similarly, for American who are domiciled in Italy at the time of their death, the distribution of their assets from their U.S. trusts to the beneficiaries of the trusts would be subject to the Italian gifts tax, regardless of the fact that those assets are located in the U.S. and held in U.S. trusts, while no tax would apply in the U.S. at that time, whenever the original transfer of the assets to the trusts was a full and final transfer under U.S. tax law.          

We will continue monitoring the situation and report on the developments on our blog while trust plans with pint of contact with Italy should be carefully revisited in the light of the continuing developments in this area of Italian tax law.  





Current Status of Anti Money Laundering Legislation and Practice In Italy

The EU Directive n. 2015/849 (the "IV Directive") on anti money laundering sets forth new provisions requiring financial institutions and professional individuals to verify their customers or clients by identifying the ultimate "beneficial owner" of an entity, legal arrangement or financial transaction; obtaining and conserving information about their customers and the ultimate beneficial owners, as defined in the Directive, and reporting an extensive amount of information about trusts, foundations and other similar arrangements in a central register held by each Member State. EU Member States have time until June 26, 2017 to traspose the provisions of the Directive into their national laws. 

Unlike EU Regulations that are enacted by the EU Council of Ministers, which have automatically the full force and effect of EU prevail over any non conforming national law regulating the same area, EU Directives proposed by the EU Commission are not self executing. EU Members States are left with some leeway to decide which provisions are to be adopted. EU Directives are usually adopted through a number of legislative procedures depending on the different subject matters. As a result, while the deadline to implement the Directive is still pending, and until a country enacts domestic legislation actually implementing the Directive, the Directive has no immediate effect and cannot be directly applied. 

In Italy, the Italian Parliament by way of Act n. 170 of August 12, 2016 granted legislative authority to the Italian Government to implement the provisions of the IV Directive. Now the Government is working at adopting one or more legislative decrees containing the specific provisions that will traspose the IV Directive into Italy’s national law. The legislative decrees to be issued pursuant to the grant of authority provided by the Parliament need not be approved by the Parliament. Rather, they become law as soon as they are adopted by the Government. 

In light of the above, we can safely say that Italy is well on track to implement the Directive within the June 26, 2017 deadline. If that should not be the case, at that point the Directive would become self executing and could still be applied, for those provisions that are sufficiently detailed and need not be specified or modified by way of national implementing legislation.     

Law n. 170 refers to the definition of beneficial owner that is set forth in the IV Directive. 

The definition of “beneficial owner” in the IV Directive, for corporate entities, is the following (article 3, paragraph 6, letter a)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 

(a) in the case of corporate entities: 

(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownershipA shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3); 

(ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point.  

Under the definition set forth here above, the beneficial owner is the natural person who ultimately owns or control the tested corporate entity (defined as "customer" in the Directive). 

For the purpose of identifying the natural person who ultimately owns or controls the tested corporate entity, the Directive adopts the “more than 25% shareholding or ownership interest” test, as an indication or presumption of beneficial ownership, and uses both a direct and indirect ownership test. 

Under the direct ownership test, if a natural person directly owns more than 25% of a shareholding or ownership interest in the “tested" corporate entity, that person is presumed to be the beneficial owners of that entity. In case of direct ownership, the analysis stops at the natural person who owns the relevant shareholding interest in the tested corporate entity. Under the indirect ownership rule, a shareholding or ownership interest (of any size) in the “tested" corporate entity, owned by another legal entity (such as another corporate entity, trust, foundation, etc.), is attributed to the beneficial owner(s) of such other legal entity, to determine the ultimate beneficial owner of the “tested” corporate entity.

In case of trust or other similar legal arrangements, "beneficial owner" is defined as follows (article 3, paragraph 6, letter b)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 


(b) in the case of trusts: 

(i) the settlor; 

(ii) the trustee(s); 

(iii) the protector, if any; 

(iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;

(v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.  

If interpreted literally, the definition of “beneficial owner” in case of trusts, foundations and other similar fiduciary arrangements is extremely broad, and would automatically require to verify and disclose each one of the settlor, trustees, beneficiaries or protectors of a trust, regardless of whether any one of them  actually owns an interest in the trust’s income or property or has any meaningful power with respect to the administration of the trust. Also, the literal definition of "beneficial owner" used in the IV Directive in case of trusts does not make any distinction between an interest in the income of the trust, as opposed to an interest in the corpus of the trust, and does not refer to any minimum ownership requirement such as the 25 percent ownership threshold that applies in case of corporate entities.  

An over broad interpretation of the term "beneficial owner" in case of trusts would put banks, financial institutions, professional individuals and their customers under extreme pressure, potentially dramatically extending the amount of information to collect and creating a friction between the need of a thorough verification of the customer for anti money laundering purposes, and the right to privacy for all individuals involved who do not own any ownership interest of power of administration with respect to the trust.

It would seem more reasonable to limit the definition of "beneficial owner" of a trust, to those individuals or entities, among the settlor, trustee(s) or beneficiaries, who actually have a meaningful interest in corpus of the trust or real powers with respect to the administration of the trust.   

Arguably, sub paragraphs 6(a) and 6(b) of article 3 should apply separately, depending on whether the "customer" to be tested is a corporate entity (in which case, the test of sub paragraph a) should apply) or a trust or other similar arrangement (in which case the test of sub paragraph b) should apply).

However, there is a potential argument for a concurrent application of the two sets of rules, whenever a shareholding or ownership interests in a corporate entity is held through a trust, foundation or other similar legal arrangement. In that case, under the "indirect ownership" rule requiring to find the natural person that ultimately owns the corporate entity, it may be reasonably be argued that the “beneficial owner” of the trust should be verified under the separate rules of sub paragraph b), and he or she would be deemed to indirectly and ultimately own the shareholding or ownership interest which the trust owns in the tested corporate entity.

Under a different interpretation, in the event that a shareholding or ownership interest in a corporate entity is owned through a trust, the analysis should stop at the person or persons who control the entity, under the rules of sub paragraph a), thereby limiting the know your customer verification to the person or persons who act as trustee or trustees for the trust.  

In light of all the potential interpretative challenges, briefly mentioned above, it is important to see how the provisions of the IV Directive are going to be incorporated into the national legislation that will be enacted to transpose the Directive into Italy’s internal law. 

As for the scope of the disclosure mandated by the Directive, it is carried out at two levels. At one level, a bank, financial institution or professional individual that does business with an Italian entity or trust is required to conduct proper customer due diligence, which under article 13, paragraph 1, letter (b) of the Directive, including the following:

(b) identifying the beneficial owner and taking reasonable measures to verify that person's identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer

At another level, under article 30, paragraph 1 of the Directive, the companies themselves are required to obtain and hold  adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. 

Article 30, paragraph 2 requires that the information of the companies’ beneficial ownership and beneficial interests be held in a way that it is accessible in a timely manner to the tax and financial authorities. 

In addition to the above, article 30, paragraph 4 of the Directive provides that the information on the companies’ beneficial ownership and beneficial interests shall also be held in a central register accessible in all cases to the tax and financial authorities, banks and financial institutions and any other person or organization that can demonstrate a legitimate interest to 

Finally, under the Directive, a separate and independent disclosure regime may apply to trusts. Indeed, article 31, paragraph 1 provides that:

1.Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust. That information shall include the identity of: (a) the settlor; (b) the trustee(s); (c) the protector (if any); (d) the beneficiaries or class of beneficiaries; and (e) any other natural person exercising effective control over the trust.    

Italy does not have any law governing trusts (except that it applies its owns tax rules for the taxation of trusts both for income and gist and estate tax purposes). Trusts are usually established under foreign law, and recognized and enforced in Italy, if necessary, under the Hague Convention on Trusts which has been ratified in Italy by way of Law n. 364 of 1989. Law n. 171 refers is to “trusts governed under law n. 364 of October 16, 1089”, which includes any trust established under foreign law, which is recognized and enforced in Italy pursuant to the Trust Convention.

Furthermore, article 31, paragraph 4 of the Directive provides that

4.Member States shall require that the information referred to in paragraph 1 is held in a central register when the trust generates tax consequences. The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. It may also allow timely access by obliged entities, within the framework of customer due diligence in accordance with Chapter II. Member States shall notify to the Commission the characteristics of those national mechanisms. 

The separate disclosure for trusts seems to be triggered whenever a trust is recognized and made effective in Italy pursuant Law n. 389 and the Hague Convention, and when the trust generates tax consequences in Italy.

Finally, it should be noted that on July 5, 2016, the European Commission adopted a proposal to amend the IV Directive on anti money laundering, which would reduce the shareholding test from 25% to 10%. 

Until the IV Directive is actually transposed into Italian law,  the provisions of legislative decree n. 231 of November 21, 2007 still apply.  

Legislative Decree n. 231 treats as “beneficial owner” the natural person or persons who ultimately own or control an entity, by directly or indirectly owing or controlling an adequate shareholding, voting or ownership interest in the entity, with the understanding that a (direct or indirect) shareholding or ownership interest of more than 25% of the entity is sufficient to satisfy the definition of beneficial owner. 

In case of trusts, beneficial owner is any identified beneficiary of the trust, who owns a qualified interest in more than 25% of the trust’s assets. 

The disclosure under Legislative Decree n. 231 is much more limited and restricted, given the narrower definition of beneficial owner that applies when a corporate entity is owned indirectly through a trust. Unlike the IV Directive, which mentions each of the trust’s settler, trustees and beneficiaries as beneficial owners of the trust, and as owning indirectly indirectly any shareholding or ownership interest that the trust holds in the tested entry, the legislative decree n. 231 refers solely to the trust’s identified beneficiaries owning an interest in at least 25% of the trust’s assets. 

In the course of our practice, we have been involved in situations in which banks and other financial  institutions or professional firms adopt a stricter and more balanced approach, by referring to the 25 percent ownership test and, for trusts, by limiting their investigations to beneficiaries holding an interest on more than 25 percent of trust's assets and trustees holding effective power of administration of the trust. In other situations, however, we noted that other banks may want to anticipate the application for the new provisions of the IV Directive, even before its entry into force, and conduct a 360 degree investigation on trusts, requesting information about all of the trust's settlor, trustees and beneficiaries (both actual and contingent) of wither income or corpus of the trust, regardless of the existence of an actual interest in, or power of administration with respect to, the assets of the trust.
In those cases, we have experienced that clients are willing to discuss the matter with their banks to make sure that their legitimate privacy rights are respected, and that anti money laundering, know your client verifications do not go beyond their legitimate, reasonable needs and become unmanageable or drain excessive resources.
In anticipation of the implementation of the IV Directive, clients should make the effort to review their structures, and put together a standard package that should be used with all of the banks, financial intermediaries and professional firms with whom they do business, and who will require information pursuant to anti money laundering legislation, to achieve efficiency and stay in compliance in such a challenging area clearly destined to draw more scrutiny and attention.            

No Gift Tax Upon Gratuitous Transfers of Assets To a Trust

The Regional Tax Commission of Lombardy Region (an appellate level tax court including the city and province of Milan in Northern Italy) with its ruling n. 2846/2016 issued on May 13, 2016 held that a gratuitous transfer of property to a trust is not subject to the gift tax. The court's theory is that the asset transferred to a trust is not immediately available to the beneficiary, who is only entitled to receive it when all the conditions for the final distribution of the trust's property have occurred, and as a result, no enrichment of the beneficiary takes place at the time of the transfer of the property to the trust, which is required for the application of the gift tax.

The decision is in contrast with the Supreme Court's case law, according to which the gift tax applies to any transfer for no consideration, regardless of the fact that the property transferred is immediately available to the recipient, who has an immediate right to enjoy and use it, or is held in trust for a distribution to the recipient at a later stage, with the recipient holding solely a future interest to the property. The most recent decisions of the Supreme Court on the taxation of a gift of property to a trust include rulings n. 3735 and 3737 of February 24, 2015 and n. 5322 of March 18, 2015.        

The different rule applied by the Regional Tax Commission of Lombardy is not necessarily favorable to the taxpayer. Indeed, while the immediate advantage is that no gift tax applies at the time of the transfer of the property to the trust, the flip side is that the gift tax will apply at the time of the transfer of the property from the trust to the beneficiary, and it will be charged upon the entire fair market value of the property at that time, including any market appreciation of the property occurred between the time of the transfer of the property to the trust, and the time of the distribution of the property to the beneficiary.

Italy applies a gift tax at tax rates that vary from 4 percent to 10 percent, depending on the relation between the transferor and the transferee, with an exemption up to 1 million euro for transfer to close family members (spouse, parents, children) and up to 100,000 euro for transfer to siblings.

New Disclosure Rules for Trusts

On November 25, 2015 we reported on new disclosure rules on trusts, which are part of a bill currently discussed by the Italian Parliament. The bill would implement in Italy the new European Union anti money laundering directive.

We reported further on those rules in the article attached.



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 there, 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. The 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".   With law n. 364 Italy ratified the Hague Convention of July 1, 1985 on the Law applicable to Trusts and their Recognition. The reference to trust governed by law n. 364 has the effect to attract all foreign trusts recognized and enforced in Italy to the new disclosure rules.

Italy does not have a body of national statutory provisions on trusts, but the enforcement of the 1985 Hague Convention with 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.                



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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US Tax Administration Issued Final Regulations on FATCA Implementing International Tax Reporting and Compliance

 On January 17, 2013 the IRS issued final regulations providing rules on information reporting by foreign financial institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities.

Under the Foreign Account Tax Compliance Act of 2009 (FATCA), enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, U.S. withholding agents are required to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents.

The regulations finalize the proposed rules issued last February, making a number of changes in response to comments. As a result, the 389-page proposed regulations have become 544-page final rules, with a lengthy discussion of which comments prompted changes from the proposed regulations.

One area of simplification in the final regulations is the integration of model intergovernmental agreements into the reporting requirements of the regulations. There are two types of intergovernmental agreements: reciprocal agreements and nonreciprocal agreements, which are called Model 1 IGAs and Model 2 IGAs. A jurisdiction signing a Model 1 IGA agrees to adopt rules to identify and report information to the IRS that meets the standards in the Model 1 IGA. FFIs that are in Model 1 IGA jurisdictions report the information about U.S. accounts required by FATCA to their respective governments, which then exchange this information with the IRS. FFIs in Model 2 IGA jurisdictions must comply with the FATCA regulations except to the extent the relevant IGA provides otherwise.

The IRS announced that, to date, seven countries have entered into model agreements with the United States: Norway, Spain, Mexico, the United Kingdom, Ireland, Denmark, and Switzerland. Discussions with more than 50 countries are ongoing, and more agreements are expected to be signed in the near future.

In recognition of the burden that complying with FATCA entails, the final regulations, among many other things:

  • Phase in over an extended transition period the timelines for withholding, due diligence, and reporting and align them with the IGAs.
  • Expand and clarify the types of payments subject to withholding, particularly for certain grandfathered obligations that are not subject to the rules and certain payments made by NFFEs.
  • Expand and clarify the treatment of certain low-risk institutions, such as government entities and retirement funds, provide that certain investment entities may be subject to being reported on by FFIs with which they hold accounts rather than being required to register as FFIs with the IRS, and clarify the type of passive investment entity that financial institutions must identify and report.
  • Streamline the compliance and registration requirements for groups of financial institutions, including commonly managed investment funds.

The regulations have become effective when published in the Federal Register (scheduled for Jan. 28, 2013).



Reciprocal Inter Governmental Agreement Will Introduce Automatic and Reciprocal US-Italy Disclosure and Exchange of Information For Tax Purposes

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States Congress in March 2010 and became effective on January 1, 2013. It is intended to assist US efforts to improve international compliance with US tax laws and will impose certain due diligence and reporting obligations on foreign (non-US) financial institutions which hold financial accounts for US customers. Under the new law, foreign financial institutions will provide to the U.S. tax administration automatic information about their US customers' financial accounts. 

On 26 July 2012, the U.S. Department of the Treasury published a Model Inter Governmental Agreement which will form the basis of bilateral IGAs with jurisdictions that wish to adopt this alternative means for their financial institutions to comply with FATCA while minimizing compliance burdens.

Italy joined the U.S. with a groups of other countries in a Joint Statement announcing that Italy will enter into and use the reciprocal agreement with the United States to implement FATCA and enact a system of reciprocal automatic exchange of information pursuant to which:

- Italian banks and financial institutions will provide the US tax administration with information about Italian banking and financial accounts held by U.S. customers with Italian banks in Italy,

- U.S. banks and financial institutions will provide Italy's tax authorities with information about US banking and financial accounts and investments held by Italian customers with US banks in the United States.        

The Model IGA follows the U.S. Department of the Treasury and Internal Revenue Service's release of proposed FATCA regulations, and the simultaneous announcement of an intergovernmental alternative to FATCA implementation, on 8 February 2012.

On January 17, 2013 the Treasury Department and the Internal Revenue Services issued the set of Final Regulations implementing the information reporting and back up withholding tax provisions of FATCA, with far reaching implications for U.S. taxpayers with Italian bank and financial accounts, as well as Italian taxpayers with US bank and financial accounts,  in addition to foreign financial institutions as well as US banks as explained above.   




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Italian International Tax Reporting Rules Through Part RW of Italian Tax Return

Italian resident taxpayers are required to report to the Italian tax administration their foreign financial investments and assets, which can generate foreign-source income subject to tax in Italy. They report their foreign investments by filling out a special part of their annual income tax return referred to as form RW. Taxpayers who are not otherwise required to file an income tax return  (e.g., those who earn only salary income reported on form 730 equivalent to form W-2 in the United States) must file a full return just for the purpose of reporting their foreign investments on Part RW.

Italian international tax reporting through form RW is very extensive in scope and accompanied by very harsh penalties with very limited opportunities to rectify past mistakes or failures. It includes personal assets other than financial investments (e.g. personal residences, boats, jewelry, artworks). One section of form RW is used to report the value of the reportable assets at the end of the taxable year. Two separate sections are used to report outbound, inbound and foreign transfers of money or other assets relating to foreign assets subject to reporting (i.e. additional investments and disinvestments through purchases, sales or transfers of reportable assets).    

Reporting may be particularly complicated when foreign investments and assets are held through trusts or other foreign entities. Depending on the tax classification and treatment of the entity or trust the taxpayer may be exempt from reporting, required to report his or her own interest in the trust or entity itself, or required to report his or her own undivided ownership interest in the underlying assets held through the entity, with totally different results.

The duty to report revolves around several fundamental tax concepts: tax residency of the taxpayer, ownership of the asset, and tax nature of the asset and associated income.

Italian tax residency rules are far reaching and often based on technical and heavily factual tests. As a result, many non-Italian nationals who spend significant time in Italy for personal or business purposes or have personal, investments or business interests in Italy should act very carefully, especially now that the Italian tax agency is stepping up its enforcement actions in the effort of collecting additional revenue.

Indeed, if it turns out that they should be treated as resident of Italy for Italian tax purposes, they would automatically face the issue of not having reported their non-Italian assets, with all potential penalties associated with it, in addition to the main issue of having failed to file and their tax returns and to pay any taxes due.

International tax reporting rules are very technical and complex to administer. Italy’s tax administration issued a general guidance on international tax reporting of foreign assets and investments with Circular n. 45 of September 13, 2010. 

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Presentazione Università Roma Tre 17 Maggio 2012

In data 17 Maggio 2012 presso l'Università degli Studi di Roma Tre, nel contesto del master per Giuristi e Consulenti di Impresa gestito dal Prof. Tinelli, lo studio MQR&A ha riferito sul tema "Aspetti internazionali della fiscalità americana di interesse per gli investitori esteri".

La relazione, sia pure sintetica, ha inteso offire un breve excursus sui principi fondamentali di diritto fiscale internazionale americano applicabili agli investimenti e alle attività estere negli Stati uniti.

Gli Stati Uniti costituiscono tuttora il maggiore mercato del mondo di destinazione di attività e investimenti internazionali e attraggono costantemente imprenditori, professionisti, personale d'azienda e investitori esteri. La conoscenza del regime fiscale applicabile a questa categoria di soggetti ed attività è cruciale, in un contesto sempre più difficile e complesso di crescente globalizzazione e maggiore attenzione da parte delle amministrazioni fiscali.          

Italy's New Tax on Foreign Real Estate Property

Recent legislation enacted by the Italian government to improve Italy's budget and stem the sovereign debt crisis introduced a new tax on real estate properties located outside of Italy. The tax is charged at the rate of 0.76%, calculated on the purchase price of the property as appearing from the purchase documents or alternatively on the fair market value of the property. A tax credit is granted, reducing or offsetting the Italian tax due, for any property taxes paid to the country in which the property is located. Individual taxpayers residing in Italy for tax purposes are liable for the tax. This include foreign nationals who work and live in Italy and file Italian individual tax returns as Italian residents. Based on the language of the statute, properties owned or managed through offshore or foreign entities are not subject to the tax. Taxpayers who directly own rental or investment properties outside of Italy are encouraged to restructure their investment and own and actively manage those properties through a foreign owing or managing entity to avoid the application of the tax. 

Trust and family and succession planning

Trusts are very important tools for family and succession planning. Italy enacted specific provisions on the tax treatment of trusts for income tax and indirect (transfer) tax purposes. However, Italy does not have specific legislation on trusts, and trusts for Italian clients or Italian assets must be formed and operated in accordance with the legislation of a foreign country that contemplates rules on trusts. Among the most reliable and sophisticated legislations on trusts are those of the States of the United States, including Delaware and New York. Every time the settler, beneficiaries and trust assets sit in different countries (Italy and abroad) the coordination of the tax treatment in Italy and in the foreign country poses daunting issues but also offers interesting planning opportunities. Below we refer you to a recent article appeared on Italia-Oggi in which we provide our perspective on our experience in forming and managing trusts for Italian clients:

Trust e pianificazione familiare e successoria

Il trust è uno strumento molto importante per un'efficace pianificazione familiare e successoria. L'Italia ha adottato una specifica normativa fiscale sul trust ai fini delle imposte dirette ed indirette, ma non ha una legislazione civilistica in materia e i trust per clienti italiani devono necessariamente essere costituiti in base alla  normativa di uno stato estero che contempli questo istituto. Tra le varie legislazioni si segnalano, per affidabilità e grado di elaborazione, quelle degli stati degli USA, tra cui Delaware e New York. Ogni qualvolta costituente, beneficiari e beni del trust si trovano in stati diversi (in Italia e all'estero), il coordinamento tra il trattamento fiscale del trust in Italia e quello applicabile nel paese estero richiede particolare attenzione nella messa a punto di questo strumento, ma nel contempo offre formidabili opportunità di pianificazione. Segnaliamo di seguito un recente interessante articolo in materia apparso su Italia-Oggi, con un nostro contributo e punto di vista relativo alla nostra esperienza in materia di costituzione e gestione di trust USA per nostri clienti:


Interview with MQR&A on Italian financial newspaper Italia Oggi

Obblighi di Reporting per Investimenti Esteri: La Saga Continua

Secondo quanto riportato di recente su Bloomberg, diverse banche svizzere sarebbero in procinto di siglare un accordo con il fisco americano a chiusura di un contenzioso in materia di evasione fiscale. In forza dell'accordo le banche si disporrebbero a pagare una somma in via transattiva e fornire al fisco americano le informazioni sui propri clienti cittadini o residenti americani. L'accordo chiuderebbe una procedura civile avviata nei confronti di 11 banche svizzere responsabili, a detta del fisco americano, di avere aiutato i contribuenti americani a evadere le imposte. In base alla normativa fiscale USA, coloro che sono soggetti ad imposta sui redditi negli USA - tra cui cittadini americani residenti in Italia, tassati in base alla cittadinanza, e cittadini italiani residenti negli Stati Uniti, tassati in base alla residenza - sono tenuti a dichiarare conti e investimenti detenuti al di fuori degli USA mediante un apposito modulo (Foreign Bank Account Report, in acronimo FBAR) equivalente in sostanza al modulo RW del Modello Unico italiano, e a dichiarare i redditi derivanti dai predetti conti ed investimenti. Eventuali imposte estere danno diritto ad un credito di imposta ad eliminazione della doppia imposizione. Negli ultimi tre anni gli Stati Uniti hanno adottato due programmi di incentivazione a riportare conti e depositi esteri con somme non dichiarate beneficiando di sconti sulle sanzioni dovute. Anche a prescindere da questi programmi, il sistema fiscale USA consente in generale di presentare dichiarazioni tardive che correggono errori o mancanze pregresse e in caso di buona fede è possibile evitare sanzioni. L'attenzione dell'amministrazione fiscale e la pressione sulle banche estere sono molto forti e si sta registrando un trend sempre più marcato verso forme di trasparenza e rilascio di informazioni a fini fiscali che stanno inducendo molti contribuenti a mettersi in regola con il fisco.

New Bill Aimed At Introducing Flat Tax on Italian Real Estate Income

Article 2 of the bill on tax federalism under discussion in Parliament would introduce new provisions on taxation of Italian real estate income for individual taxpayers. Under current law, real estate income (both foreign and domestic) is reported on individual taxpayer's annual income tax return and is taxed as ordinary income at graduated rates. Under the new provisions, domestic real estate income would be subject to withholding tax at the flat rate of 20 per cent. The withholding tax would be a final tax. As the bill is currently drafted, the new flat tax would not apply to foreign source real estate income, which would still be part of total income subject to tax on a net basis. To the extent that the different taxation system leads to a harsher taxation of foreign real estate income compared to domestic real estate income, the new provisions could be challenged as invalid under the non discrimination and freedom of movement of capital principles of EU tax law. For foreign investors in Italian real estate, the new provisions would be beneficial because they would grant a lower tax rate under domestic law - the new flat 20 percent tax - than the tax rate currently commonly granted under tax treaties - 30 per cent.       

Anche la nuda proprietà nel modulo RW

Con la Risoluzione n. 142/E del 30 dicembre 2010 l'Agenzia delle Entrate ha chiarito che anche il diritto di nuda proprietà, relativo ad attività estere di natura finanziaria ed altri ed investimenti esteri  attraverso cui possono essere conseguiti redditi di fonte estera imponibili in Italia, va riportato nel modulo RW della dichiarazione dei redditi.

A sostegno del proprio chiarimento, l'Agenzia ha richiamato la Circolare 45/E del 13 Settembre 2010 in cui, con interpretazione innovativa rispetto al regime precedente, si è ritenuto che le attività estere di natura finanziaria e gli altri investimenti esteri suscettibili di produrre redditi di fonte estera imponibili in Italia debbano essere riportati sul modulo RW, non soltanto quando essi effettivamente producono redditi imponibili in Italia, ma anche nell'ipotesi in cui la produzione dei predetti redditi sia soltanto astratta o potenziale. Questo è il caso, evidentemente, del diritto di nuda proprietà, che potrebbe essere ceduto a terzi separatamente dal diritto di usufrutto, e generare in questo modo una plusvalenza imponibile, oppure espandersi al momento dell'estinzione del diritto di usufrutto con possibilità di cessione o locazione dell'intero bene a terzi.

Il diritto di nuda proprietà va dichiarato in base al costo storico ad esso attribuito nell'atto costitutivo del medesimo, senza necessità di aggiornamento annuale. La risoluzione non precisa ma in caso di acquisto del diritto per successione per causa di morte, è ragionevole ritenere che si debba guardare al costo di acquisto del bene nella sua totalità, in capo al de cuius, ed attribuirne una quota proporzionale al diritto di nuda proprietà in ipotesi trasferito separatamente al diritto di usufrutto.

Il titolare del diritto di usufrutto per parte sua deve riportare sul modulo RW il valore del proprio diritto sussistente sul medesimo bene.  

La Tassazione delle Pensioni Transazionali nella Nuova Convenzione Italia-USA

I dirigenti ed il personale d'impresa assegnati a filiali USA di imprese italiane sono esposti a rilevanti problematiche di fiscalita' internazionale. Una di queste riguarda il trattamento fiscale di prestazioni di natura previdenziale o pensionistica privata, erogate in forma periodica o in un'unica soluzione (quali liquidazione e trattamento di fine rapporto), ricevute dal lavoratore dopo il rientro in Italia a fronte della cessazione del rapporto di lavoro presso la filiale americana. A questo riguardo la nuova convenzione Italia-USA contro le doppie imposizioni, entrata in vigore il 1 gennaio 2010, innovando rispetto alla precedente convenzione del 1984 stabilisce (all'articolo 18, paragrafo 3) che nel caso in cui il beneficiario del trattamento pensionistico abbia trasferito la sua residenza in Italia dopo l'esaurimento del rapporto di lavoro presso la filiale negli USA, le erogazioni ricevute dopo il rientro in Italia ma maturate in relazione al rapporto di lavoro con la filiale negli USA sono imponibili esclusivamentre negli USA. Secondo la normativa fiscale interna americana, tuttavia, parte di tali erogazioni potrebbero essere esenti da imposta, nel caso in cui si riferiscano a prestazioni lavorative svolte al di fuori del territorio degli Stati Uniti, sebbene relativamente ad un rapporto di lavoro condotto alle dipendenze di una societa' americana. In Italia, il diritto al percepimento di tali somme potrebbe dovere essere dichiarato sul modulo RW. In generale, in situazioni simili, prima del rientro in Italia e' opportuno verificare quali saranno i flussi di reddito che avranno luogo successivamente al cambio di residenza, al fine di determinarne in anticipo il relativo regime fiscale con obiettivo quello della ottimizzazione dell'imposizione ed eventualmente del massimo risparmio di imposta e di assicurare l'adempimento di tutti gli obblighi dichiarativi dovuti.               

Italy's Tax Administration Issued Additional Clarifications on Italian Taxation of Trusts

On December 27, 2010 Italy's Tax Administration issued Circular n. 61/E which provides additional clarifications on Italian tax treatment of trusts.

In one of its paragraphs Circular 61/E purports to clarify when a trust can be respected as such or should be disregarded for (legal and) tax purposes. In particular, it expanded the examples of situations in which a trust can be considered abusive and is disregarded as a mere conduit or fictitious intermediary between the person of the settlor and the trust assets. That shows the administration's willingness to contrast the use of trusts in abusive situations or for tax avoidance purposes.

The minimum requirements for a trust to be respected for tax purposes are the real transfer of the assets to the trust and the real power of the trustee to administer, manage and dispose of the assets of the trust in accordance with the trust agreement and the applicable law.

Any provisions of the trust agreement that limit such power, or the  mere circumstance that the trustee is under the influence or control of the settlor when it comes to the administration of the trust, may jeopardize the trust with the consequence that the settlor is still considered as the real owner of the assets and income of the trust.

Both the drafting of the provisions of the trust and the way in which the trust is actually administered are pivotal and needs proper attention and care.


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L'Agenzia delle Entrate Fornisce Chiarimenti sul Modulo RW

Il giorno 30 Settembre scade il termine per la presentazione della dichiarazione annuale dei redditi delle persone fisiche per l'anno 2009. Contestualmente alla presentazione della dichiarazione annuale dei redditi i contribuenti residenti in Italia che detengono investimenti all'estero devono compilare il modulo RW. Inoltre, nello stesso termine è possibile presentare la dichiarazione integrativa relativa all'anno 2008 e sanare eventuali violazioni degli obblighi di compilazione del modulo RW per il 2008 secondo il meccanismo del ravvedimento operoso con il beneficio della riduzione della sanzione ad 1/10 del minino pari all'1% degli importi non dichiarati.       

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Italy Removed Malta and Cyprus from Black List

By way of a ministerial decree issued on July 27, 2010 Italy removed Malta and Cyprus from the black list for the purposes of the application of Italian controlled foreign companies rules and provisions on tax residency of individuals. As a result of the removal, Italian owned foreign companies established in Malta and Cyprus are no longer subject to Italian CFC rules, and  Italian individuals who move to Malta or Cyprus are no longer presumed to be resident in Italy for tax purposes unless they prove the contrary (the burden to prove that the move is fictitious and tax residency remained in Italy is upon the tax administration). Finally, Cyprus has been inserted in the white list for the purposes of the application of the portfolio income exemption exempting foreign source portfolio investment income from Italian 12.5 percent withholding or substituted tax.        

Italy's Supreme Court Rules Against Fictitious Foreign Tax Residency

Italy's Supreme Court in ruling n. 12295 of May 19, 2010 rules in favor of the tax administration in a case in which the tax administration challenged the foreign tax residency of an Italian taxpayer and assessed taxes and penalties of about 6 billion lire on a total amount of 4 billion lire of unreported income. The taxpayer maintained the position that he had established his tax residency in Monaco and received several payments through a Dutch holding company to which he had assigned his right to use his professional image for advertising and sponsoring contracts. The tax administration argued that the taxpayer while transfering his registered address in Monaco had maintained his actual domicile in Italy, where he had most of his personal, professional and economic ties (including a house, bank accounts, memberships in local clubs). The Supreme Court accepted the tax administration's position, holding that when Italy remains the taxpayer's center of main interests, Italy is taxpayer's tax residency despite the registered address has been move abroad. Italy now applies a provision according to which, when a taxpayer establishes his or her registered residency in a low tax jurisdiction, the taxpayer bears the burden to prove that the foreign residency is also the place in which the taxpayer regularly lives and maintains the main center of his or her interest.        

Italian Prosecutors Obtain the HSBC List

The list of customers of the Swiss branch of the UK bank HSBC, prepared by former HSBC employee Mr. Hervé Falciani and offered to governments engaged in investigations on unreported foreign bank accounts and tax evasion conducts, has been delivered by the French prosecutor to the Italian prosecutors and tax officials for investigation on Italian bank account holders.

The list is said to contain 120,000 names, out of which 7,000 names are Italian customers of the bank with potentially unreported bank accounts.

Under Italian law, failing to report foreign investments carries a penalty of 10 to 50 percent of the value of the unreported investments. Furthermore, the assets on the account are presumed to constitute unreported taxable income, and penalties for failure to report foreign taxable income from unreported foreign accounts range from 240 to 480 percent of the tax due. 

Italy enacted an amnesty for the repatriation of undeclared foreign assets which elapsed on April 30, 2010. Under the tax amnesty program taxpayers had the opportunity to declared their foreign assets and repatriate them into Italy without any tax or penalty by paying a substituted tax of 5 to 7 percent.      


Italy's Tax Administration Announces More Controls on Nonresidents' Tax Refunds

Various foreign banks with branches in Italy that act as intermediaries for the purposes of tax refund applications filed on behalf of nonresident persons received a notice from the Italian tax agency in charge with the refund procedure announcing the application of stricter controls in the processing of the tax refunds. The tax office will require specific information about the beneficial owners of the refund in order to avoid abuses and treaty shopping. The banks shall have to provide the complete personal information about the final beneficiaries of the refunds, including their foreign and Italian taxpayer identifications numbers. In case of trusts or funds, the tax agency will require the taxpayer identification number issued in the residence state as well as in Italy both to entity and its legal representative. As a consequence, if the trust or fund is a fiscally transparent entity that does not have a taxpayer identification number in its own country, the bank may need to provide the information about the final investors or the grantors or  beneficiaries of the trust. The new approach follows recent audits that resulted in the denial of the refund of dividend tax credits to various banks that engaged in dividend washing transaction (for a total amount of about 4.2 billion euro).   

Marco Rossi of MQR&A spoke at the 3rd Annual STEP Pacific Rim Conference

Marco Rossi of Marco Q. Rossi & Associati spoke at the 3rd Annual Pacific Rim Conference of STEP - Society of Trust and Estate Practitioners ( that took place in Santa Monica, CA on May 6 & 7.

The Conference focused on planning for United States citizens or United States resident individuals with assets located abroad, development of structures for individuals to hold personal residences abroad, investments in United States real estate held by foreign persons, international enforcement initiatives and planning for multinational families and their businesses (Early Bird - Preliminary Program.pdf).

Marco Rossi illustrated the latest Italian tax amnesty program (Italy's offshore tax amnesty and tax enforcement.pdf), spoke about international tax enforcement in Italy and focused on inbound and outbound planning opportunities through the use of trusts in the light of the new Italian provisions on taxation of trusts in a cross border context (Italian taxation of trusts.pdf).


Italy Reinforces its Foreign Assets Reporting Rules

In connection with the enactment and operation of its (third) tax shield (a special program of voluntary disclosure of foreign investments and earnings), due to elapse on April 30, 2010, Italy is reinforcing its rules on reporting foreign assets on Italian tax returns.

With Circular n. 43/E of October 10, 2009, Italy's tax administration adopted a new guideline according to which all foreign assets must be reported on the special R-W section of the Italian tax return, including those assets which currently do not generate any foreign source earnings taxable in Italy, but are potentially able to generate such earnings in the future.

On February 1, the Italian tax administration approved the new income tax return forms for 2010 (for individuals and unincorporated business) and issued instructions for the preparation of the return that confirm the above guideline.

As a result, from tax year 2010 all assets held abroad must be declared on the Italian tax return, including personal assets which do not produce any income such as foreign vacation homes, yachts, jewelery, art collectibles. Previously, only foreign assets which actually generated foreign source income taxable in Italy (such as foreign bank accounts and financial instruments) had to be reported.




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Italy Extends Statute of Limitation for Foreign investments and CFCs

Italian parliament passed a new law which extends the statute of limitation for assessment of taxes due on income arising from foreign investments and controlled foreign companies.

The general statute of limitation period is five years from the year in which the return is filed. The special statute of limitation for income from foreign assets and controlled foreign companies is extended to nine years.

The new measure is part of the package of measures which includes and extension of deadlines for the tax amnesty and voluntary disclosure of undeclared foreign assets to February 28, 2010 (with tax of six percent) and April 30, 2010 (with the tax increased to seven percent).

Italy Extends Deadline for Voluntary Compliance Program

On December 17, 2009 the Italian Government passed a decree which extends the deadlines for the Italian voluntary disclosure program.

The new deadlines are February 28, 2010 and April 30, 2010. Taxpayers who repatriate or regularize their undeclared foreign assets within February 28, 2010 pay a 6 percent flat tax on the fair market value of the repatriated or regularized assets. Taxpayers who repatriate or regularize their undeclared foreign assets within March 31, 2010 pay a flat 7 percent tax.

According to the latest statistics, foreign assets in excess of E 100 billion have been declared pursuant to the current voluntary disclosure program enacted in September this year.

In connection with the unreported foreign assets disclosure program, new penalties have been enacted for failure to report foreign investments. The new penalties are equal to minimum of 200 to a maximum of 400 percent of the unpaid tax on unreported foreign investments and 50 percent of the fair market value of the unreported foreign assets.

Also, any foreign asset which has not be reported is deemed to be unreported income subject to tax.





Italy Cracks Down on Tax Havens

In connection with the enactment of its own tax amnesty (which permits the repatriation or regularization of undeclared foreign investments with the payment of a very generous 5% flat tax on the fair market value of the undeclared assets), Italy is cracking down on tax havens, especially those across the border such as Switzerland, Liechtenstein and San Marino. Current estimates of the Italian tax administration suggest that more than 35 percent of Italian investments in Switzerland are being repatriated under the amnesty, and more are expected to come and sit permanently in Italy after the repatriation procedure (for which the deadline is set at December 15).

Recently, it has been reported that Italian tax agents under cover visited several Swiss banks taking pictures of clients coming in and out the banks, and have increased the controls at the border for Italians moving in and out of Switzerland.

As a result of Italy's strong action, Switzerland is now working on a revised proposal to the EU for the enactment of a new back withholding in exchange for Swiss banks customers privacy. Under the new proposal, Switzerland would negotiate with each EU member state a new back up withholding tax, that could be as high as 30 percent and would apply on savings from Swiss accounts of residents of other EU Member States. The proceeds from the withholding tax would go to the resident state of the Swiss bank account holder. In exchange for the back-up withholding, Swiss banks would not be forced to give up the bank secrecy and reveal the names of their customers.

Italy's reaction to the proposal has been rather skeptical so far. The approach of the Italian government is that first the tax amnesty procedure is completed, and then the due consideration will be given to any possible solution to the problem of those Italian individual investors who have decided to keep their undeclared funds offshore. A new provision in the Italian tax code now presumes that any money kept offshore comes from undeclared income for which Italian taxes are due, and the penalty has been increased to up to 400 percent of the amount of unpaid taxes.

Liechtenstein, on the other side, is negotiating a new exchange of tax information treaty with Italy, after several other similar treaties have been signed with a number of other EU Member States.  



New Tax Amnesty Takes Effect on September 15

The new tax amnesty recently enacted by the Italian parliament took effect on Sept. 15. Taxpayers have time until April 15, 2010 to apply.

The amnesty applies to individuals and pass through entities which held undeclared foreign accounts and investments outside of Italy as of December 31, 2008.

Taxpayers can declare (and leave abroad) or repatriate the foreign accounts and investments and avoid any applicable tax and civil penalties by paying a tax at a flat rate of 5% on the amount of the reported foreign accounts or investments.

To apply for the amnesty, taxpayers shall file a form with a bank or other Italian qualified financial intermediary, on which they will report the assets that they want to declare or repatriate. The bank or financial intermediary, in turn, will file the form with the payment of the tax with the tax administration. The form does not contain any personal information on the filing taxpayer. Therefore, the amnesty is completely anonymous. 

Any future audits on the amounts that are reported on the form is not allowed and administrative penalties for the violation of the rules on reporting cross-border transfer of assets and foreign investments are permanently forgiven.   

Similar amnesties enacted in 2001 and 2003 generated a repatriation of 59.8 and 14.9 billion euros, with a tax revenue of 1,4 and 0.6 billion euro (at 2.5 and 4% tax rate), with 56 and 51% of the declared money coming from Switzerland. The estimated amount of declared or repatriated foreign assets that is expected from the new amnesty is 60-90 billion euro with a tax revenue of 3-45 billion euros.           

Italian Government Is Preparing a New Tax Amnesty

The Italian government is working at a bill which would enact a new tax amnesty. The bill should be introduced to the Parliament as early as next week.

Based on certain anticipations on the contents of the new bill, undeclared foreign earnings that are reported and repatriated would be subject to 10% flat tax. Unreported foreign earnings that are reported but reinvested or kept abroad would be subject to a higher tax. In either case, the tax would apply in lieu of any other taxes due on the undeclared earnings and would definitely settle the taxpayer's position.

A similar amnesty was enacted in 2001-2022, together with tougher rules on failure to report foreign bank accounts and other foreign investments that can generate foreign income taxable in Italy. That tax amnesty had a limited success and in general foreign earnings remained significantly unreported.

Italy's Tax Administration Rules on Change of Tax Residency During a Tax Year

On December 4, 2008 Italy's tax administration issued resolution n. 471/E of December 4, 2008, in which it ruled on the change of tax residency of individuals during a tax year.

According to the ruling, if a foreign individual who is resident in Italy for tax purposes returns to his or her home country and terminates his or her residency in Italy during the second half of a year, his or her Italian tax residency continues through the end of that year and he or she continues to be taxable in Italy as resident on his or her worldwide income until the end of that year.

The ruling clarifies that the potential double taxation that arises in the above circumstances cannot be resolved under the tie breaker rules of a tax treaty between Italy and the taxpayer's home country, pursuant to which the tax residency of the taxpayer for that year is allocated between Italy and the taxpayer's home country and taxpayer is treated as partly resident in Italy and partly non resident in Italy (for the second part of the year, in which he left Italy and moved back to his or her home country) unless that tax treaty contains specific provisions that provide for the part time residency.

As a consequence, the only remedy to double taxation might be to claim the foreign tax credit granted in Italy for the taxes charges in the home country on income from sources within that country.

Ruling 471/E highlights the need of a careful planning before moving away from Italy to a foreign country during a tax year, in order to avoid a potential extended exposure to Italian taxation. 

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