Law Decree n. 124 of October 26th, 2019 (which is immediately effective, but needs to be converted into law within 60 days to become final) includes, at article 13, new provisions on taxation of certain distributions from foreign trusts to Italian resident beneficiaries (individuals and non-business entities).
By way of background, Italy does not have its on law on trust, but it recognizes and gives effects to trusts established under foreign law, pursuant to the Hague Convention of 1 July 1985 On The Law Applicable To Trusts and Their Recognition, which Italy ratified by Law n. 364 of October 13th, 1989.
Italy classifies a trust as domestic, or resident, for Italian tax purposes, whenever the place of administration of the trust is located in Italy. If the trustee is an Italian resident individual or entity, the trust is presumed to be a domestic or resident trust, unless the taxpayer can prove that the place of actual administration of the trust is located abroad. Conversely, a trust is treated a foreign, or non-resident, for Italian tax purposes, whenever the trust’s place of administration is located outside of Italy. If the trustee is a non resident individual or foreign entity, the trust is presumed to be a foreign (non resident) trust.
For income tax purposes, Italy treats non discretionary trust, which requires that the income be distributed to named beneficiaries, as fiscally transparent, and taxes that income directly upon the beneficiaries, regardless of when it is actually distributed. The rule applies to both domestic and foreign fiscally transparent trusts. The income is classified as income from trusts, regardless of the character of the income when earned by the trust, and as Italian source or foreign source income, depending on the whether the trust is a resident trust or non resident trust, and regardless of the source of income in the hands of the trust.
Instead, discretionary trusts, whose income can be distributed, at trustee’s discretion, but with no named beneficiaries holding a fixed right to receive the distribution of the income from the trust, are treated as fiscally opaque, which means that the income is treated as taxable income of the trust and, when distributed to the beneficiaries, it is not taxed a second time. Italian fiscally opaque trusts are taxed on all of their income, from whatever sources, on a worldwide basis, while foreign opaque trust are taxed solely on their Italian source income.
Article 13 of Law Decree n. 124 provides that income distributed to Italian resident beneficiaries by foreign fiscally opaque trusts established in countries and territories which, with respect to the tax treatment of the income generated through the trust, are considered tax preferential regimes, in accordance with article 47-bis of the Unified Income Tax Code (Presidential Decree n. 917 of December 22, 1986), is taxed in the hands of the Italian resident beneficiaries.
For this purpose, a country or territory should be considered a tax preferential regime whenever the income of the trust is subject to a nominal tax rate that is lower than 50 percent of the Italian applicable tax rate. Italy taxes trust’s beneficiaries on income from trusts at a fixed rate of 26 percent. Opaque trusts are subject to tax at the corporate income tax rate of 24 percent.
Trust distributions are presumed to come from the income of the trust, unless – and to the extent that – the taxpayer is able to prove that they should be allocated to the principal of the trust (in which case they are non-taxable).
It is reasonable to expect additional administrative guidance on the interpretation and application of the new provisions of article 13 of Law Decree n. 124.
In the meantime, however, the new provisions are very important in establishing that:
– income distributions made by foreign fiscally opaque trusts, which are not established in a preferential tax regime country, are not subject to tax, in the hands of the Italian resident beneficiaries,
– income of a foreign fiscally opaque trust, which are established in a preferential tax regime country, is not taxable, unless it is actually distributed to its Italian resident beneficiaries.
Taxpayers should adjust their tax planning, taking into account the new Italian provisions on taxation of distributions from foreign trusts.
In particular, foreign trusts which are established in low tax jurisdictions, should migrate to or be re-established in a non-low tax country, to avoid taxation in italy of income distributions to their Italian beneficiaries.