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.