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.


Italy is a civil law system and does not operate a law on trusts. Trusts organized under foreign law can be recognized and enforced in Italy pursuant to the Hague Convention of July 1, 1985 ratified in Italy with law n. 364 of October 16, 1989 ("Trust Convention"). However, for a trust to be recognized and respected for Italian legal and tax purposes certain minimum requirements (as referred to in the Trust Convention) must be satisfied, namely:

– a real separation must exist between the trust assets and the assets of the settlor, the trustee and the beneficiaries of the trust;            

– the trust assets must be under the name of the trustee;

– the trustee must have the real power and duty to effectively and fully administer, manage and dispose of the assets of the trust according to the trust agreement and the applicable law of the trust.

When the trustee is not in a position to fully exercise his power to manage and dispose of the trust assets, and is under the direct or indirect control or instructions of the settlor (or the beneficiaries), the trust is considered as a mere interposition with no legal effect. As a consequence, in such a situation the trust is ignored and the trust assets and income are treated as assets and income of the settlor (or the beneficiaries).

Circular 61/E provides some examples or situations in which a trust is ignored for tax purposes.  Compared to the analysis in the previous Circular 48/E of August 6, 2007, the list has been expanded and includes situations which are borderline and do not seem so straightforward, like the following:

– the trustee must take into account the advice of the settlor for the purposes of the management of the assets and income of the trust;

– the settlor can change the designation of beneficiaries during the life of the trust;

– the settlor can assign assets or income of the trust to beneficiaries that he can designate;

– any other case in which the administration and management power of the trustee is limited or even just conditioned by the will of the settlor or the beneficiaries of the trust.

Clearly, the tax administration’s intent is to show the willingness to contrast the use of trusts for tax avoidance purposes. However, some of the situations pointed out in Circular 61/E do not necessarily indicate a tax abuse and it seems that the tax administration has been stretching the boundaries of its power to interpret the law. This is an area in constant flux that requires constant attention by taxpayers.