With its private letter ruling n. 506 of October 30, 2020 (Ruling 506_2020), the Italian Tax Agency ruled that the Italian protector of a foreign trust which holds foreign financial assets and accounts to the benefit of an Italian resident individual does not qualify as beneficial owner of the trust. As a consequence, according to the Tax Agency – which upheld the taxpayer’s position as stated in the ruling request – the Italian protector was not obliged to disclose either the value of the trust, or the trust’s underlying financials assets, on his Italian income tax return pursuant to Italy’s international tax reporting rules. The Italian beneficiary of the trust treated himself as the beneficial owner of the trust and reported his interest in the trust on his own income tax return.
The issue addressed in the ruling concerns the relationship between the “beneficial interest” rule of international tax reporting statute and the “beneficial owner” rule of anti money laundering legislation.
Italian international tax reporting rules, as set forth in the law decree n. 167 of 1990, require that an Italian resident individual who holds the legal title to, or a beneficial ownership interest in, foreign assets, which can generate foreign-source taxable income, report those assets on his or her income tax return. For this purpose, beneficial ownership requires a direct economic interest on and the actual power to dispose of the assets for one own’s interest.
Conversely, the legislative decree n. 90 of May 25, 2017 which implemented the EU IV anti-money laundering directive and amended the legislative decree n. 231 of November 21, 2007 (the “anti money laundering” decree) adopted a more extensive definition of the concept of beneficial owner, for anti money laundering purposes. In the case of trusts, “beneficial owner” includes the settlor, the protector or guardian, and any beneficiary owning a greater than 20% interest on the income or assets of the trust.
A recent amendment to the legislative decree n. 167 incorporated the concept of beneficial owner as adopted in the anti money laundering decree, into the international income tax reporting statute. The relationship between the old “beneficial ownership interest” rule of legislative decree n. 167, and the new “beneficial owner” definition of the anti money laundering decree, as incorporated by reference into the legislative decree n. 167, has been a source of uncertainty and controversy.
The taxpayer’s position in the ruling request was that legislative decree n. 167 does not expressly extend the obligation to report foreign assets to a trust’s protector or guardian, for income tax purposes; the guardian or protector of a trust has the authority to supervise, control and sometimes direct or approve the actions of the trustee, but he or she does not hold the power to manage the assets of the trust, in his or her own interest or for for benefit of the beneficiaries of the trust, and the beneficial ownership rule of the anti money laundering decree should not supersede the beneficial interest rule of the international tax reporting statute.
The Tax Agency, in ruling in favor of the taxpayer, drew a separating line between the international income tax reporting statute and the anti money laundering legislation, and stated that the beneficial owner definition of the anti money laundering legislation should apply narrowly and consistently with the meaning and purpose of the beneficial ownership interest rule of international tax reporting legislation. The specific purpose of international tax reporting rules is to enable the tax agency to identify foreign-source income taxable in Italy and necessarily revolves around the individual taxpayer who would be teated as the possessor or beneficial owner of that income, and would be liable to any income tax due thereon. As a result, the guardian or protector of a trust, who lacks a direct managerial control or beneficial economic interest on the assets of income of the trust, and any associated income, is not subject to reporting.
The Tax Agency affirmed its previous ruling n. 53 of May 29, 2019 (Ruling 53_2019), in which it stated that the Italian president and administrator of a foreign foundation were not required to report the foundation’s financials assets, because they hold the power to represent and administrate the foundation not for their own interest, but in somebody’s else’s interest, and do not own a direct beneficial interest on the foundation’s assets.
Ruling n. 506 is very important in limiting the international income tax reporting obligations in respect of foreign trusts or similar fiduciary entities or legal arrangements, which may fall upon Italian resident individuals, setting forth an interpretation that can essentially exonerate individuals such a trust’s settlor, protector, contingent or discretion beneficiary, who lack an actual beneficial ownership interest on the trust’s assets or income.