With its resolution n. 53/E issued on May 29, 2019 the Italian tax agency issued some important clarifications on the exact scope of the Italian international tax reporting rules in case of foreign assets held through trusts, foundations or similar entities.
In particular, the ruling focuses upon the interpretation of the term “beneficial owner”, which applies and is used to identify the individuals subject to the duty to report.
Under Italian law (article 4, paragraph 1 of Law Decree n. 167 of 6/28/1990), resident individual taxpayers and non-commercial entities such as foundations and trusts have the duty to report, on a specific section of their Italian income tax return (so called section RW), any assets that they own outside of Italy, which are capable of producing foreign-source income taxable to Italian taxpayers in Italy.
The duty to report falls upon those individuals who are the legal owners of the foreign reportable assets, as well those individuals who indirectly own the assets through intermediaries, fiduciaries, conduits or similar legal arrangements, through which they have the dominion and control over those assets and enjoy the economic benefit of the income arising therefrom.
The term beneficial owner has been enacted to properly extend the duty to report beyond the mere holding of the legal title to foreign assets, to the actual control and enjoyment of those assets and associated income.
The tax statute does not uses its own definition of the term beneficial owner, but, rather, it incorporates by reference the definition of the term beneficial owner which is provided in the anti money laundering legislation.
As recently amended by way of Legislative Decree n. 90 of 2017, which transposed into Italian law the provisions of the EU IV Anti Money Laundering Directive (2015/849/EU), Italian anti money laundering law provides (at the new article 20 of legislative decree n. 231 of 2007) that, in case of private foundations, trusts and similar entities, beneficial owners are: the settlor, the trustee, the guardian, the beneficiaries of the trust, if identified, or the class or classes of persons for the ultimate benefit of which the assets are held in trust.
The issue addressed in the ruling was whether an Italian resident trustee of an Italian resident trust with investments outside of Italy, who falls within the definition of beneficial owner of those investments as provided in the anti money laundering statute, had the duty to report the investments on his own income tax return.
The taxpayer took the position that the meaning of the term beneficial owner as set forth in the anti money laundering legislation, and incorporated by reference into the tax statute, must be interpreted in a way that is consistent with the ratio and overall purpose of the income tax reporting rules, namely that of allowing the tax administration to monitor the existence of foreign assets owned or controlled by Italian resident taxpayers potentially generating foreign source income taxable in Italy. In that context, according to the taxpayer, the trustee should have no duty to report, on his own income tax returns, the foreign assets of the trust that he owns and administer not for his own benefit, but on behalf of the trust and in the interest of the settlor and the trust’s ultimate beneficiaries.
The Italian tax agency, in its ruling approving the position of the taxpayer, confirmed that the tax reporting rules apply in case of foreign investments legally or beneficially owned by Italian resident taxpayers, the income arising from which would be taxable to them in Italy. The objective of the tax reporting rules is to allow the tax administration to monitor those assets and associated income and make sure that such income is properly taxed in Italy, to the taxpayers who own it, whenever the income is realized and a tax becomes due. The tax administration acknowledged that the anti money laundering definition of beneficial owner should not apply literally, but should be interpreted – and narrowed down, if required – so that it is consistent with the scope and purpose of the international tax reporting rules, as previously clarified.
The clarification is very important, in principle, and is relevant also in other situations in which the same issue would arise.
One situation concerns trusts classified as fiscally nontransparent (opaque) trusts for Italian tax purposes, which own investments located outside of Italy. Opaque trusts are those trusts which do not have identified beneficiaries with an immediate right to current distributions out of the income or principal of the trust. In that case, the income arising from the investments held in trust is attributed to and treated as income of the trust, for Italian tax purpose, and it is not immediately taxed to the beneficiaries of the trust, in Italy. Following the logic set forth in ruling 53/E, under those circumstances no duty to report the trust’s foreign assets should fall upon the trust’s Italian resident beneficiaries. Indeed, the trust beneficiaries to do not own those assets, and are not taxable on the income of the trust earned out of them.
Similarly, under the same circumstances, the settlor of the trust who does not retain any right to the principal or income of the trust, should not be subject the duty to report.
It is interesting to monitor the future developments in this area of Italian tax law, in which some uncertainty still lingers with particular regard to tax reporting of foreign assets and taxation of foreign source income of foreign trusts with Italian resident settlor and beneficiaries.
We attach below a link to resolution n. 53/E of May 29, 2019: