With its ruling n. 8719 of March 30, 2021(Cass. n. 8719, 30-3-2021) the Italian Supreme Court ruled that no Italian gift tax applies when the trust assets are distributed back to the settlor, upon termination of the trust following the trust beneficiaries’ disclaimer of their beneficial interests under the trust.
The case involved a trust governed by the Laws of Jersey (“Trust (Jersey) Law 1984”), whereby the beneficiaries disclaimed all of their interests under the trust, pursuant to Article 10A of the governing law of the Trust, which provides as follows:
“10A Disclaimer of interest
(1) Despite the terms of the trust, a beneficiary may disclaim, either permanently or for such period as he or she may specify, the whole or any part of his or her interest under a trust if he or she does so in writing.
(2) Paragraph (1) applies whether or not the beneficiary has received any benefit from the interest.
(3) Subject to the terms of the trust, if the disclaimer so provides it may be revoked in accordance with its terms”.
Upon the trust beneficiaries’ disclaimer of their interests under the trust, there were no other beneficiaries or persons who could become beneficiaries under the terms of the trust.
As a result, the trust property was to be held in trust by trustee to the benefit of the settlor, pursuant to article 43 of the governing law of the trust, which provided as follows:
“42 Failure or lapse of interest
(1) Subject to the terms of a trust and subject to any order of the court, where –
(a) an interest lapses;
(b) a trust terminates;
(c) there is no beneficiary and no person who can become a beneficiary in accordance with the terms of the trust; or
(d) property is vested in a person which is not for his or her sole benefit and the trusts upon which he or she is to hold the property are not declared or communicated to the person,
the interest or property affected by such lapse, termination, lack of beneficiary or lack of declaration or communication of trusts shall be held by the trustee or the person referred to in sub-paragraph (d), as the case may be, in trust for the settlor absolutely or if he or she is dead for his or her personal representative”.
According to the taxpayer, under the circumstances described here above, the trust was actually terminated and the trust property was to be returned to the settlor, in accordance with article 43 of the governing law of the trust, which provides as follows:
43 Termination of a Jersey trust.
(1) On the termination of a trust the trust property shall be distributed by the trustee within a reasonable time in accordance with the terms of the trust to the persons entitled thereto.
The trust property was actually returned to the settlor, and the Italian tax agency assessed the transfer taxes of Article 2, paragraph 49 of Law Decree n. 262 of 2006 upon the transfer, on the theory that:
(a) the original transfer of property from the settlor to the trust, was a definitive transfer, for no consideration, which resulted in the property exiting the settlor’s estate and becoming part of the principal of the trust, and it was subject to Italian gift and transfer taxes accordingly;
(b) the subsequent transfer of trust property to the settlor, following the beneficiaries’ disclaimer of their interests in the trust, was a discrete transfer, for no consideration, pursuant to which the property exited the trust and became part of the estate of the settlor, thereby falling, as such, within the scope of the transfer taxes.
The Supreme Court rules against the tax agency, and in favor of the taxpayer, following the theory accordingly to which:
(a) the transfer of property to a trust is just a provisional, transitory step towards the eventual distribution of the property to the trust beneficiaries, which does not, in itself, fall within the scope of Italy’d gift or transfer taxes,
(b) the Italian gift and transfer taxes apply solely upon the final distribution of the trust property from the trust to the beneficiaries,
(c) the return of the trust property to the settlor simply eliminates the legal effect of the initial transfer of the property to the trust, preventing the possibility of a final distribution of the property to the trust beneficiaries, and, with it, any possible application of gift or transfer taxes.
The ruling’s rational is consistent with the Supreme Court’s most recent case-law – which is referred to therein – according to which the Italian gift tax applies solely to the final distribution of the trust property to the trust beneficiaries, when the gift is complete, while the initial transfer of the property from the settlor to the trust is just the first, transitory or intermediate step of the gift, which is insufficient, as such, to trigger the application of the gift tax.
Indeed, according to the Italian Supreme Court, the Italian gift tax applies to a transfer with no consideration, pursuant to which the recipient of the property has direct dominion and control and full enjoyment of the property for his or her own benefit.
To the contrary, the Italian tax agency is still pursuing the position according to which the gift and transfer taxes apply to the transfer of a property to the trust, while no other taxes apply at the time of the distribution of property from the trust to the beneficiary.
The Court’s theory poses significant challenges in a cross-border setting, where the settlor’s and trust’s tax residence may be located in different countries, or the settlor’s tax residence has changed, between the time of the transfer of property to the trust and the time of the distribution of property from the trust to a beneficiary.
For example, we can refer to a case in which the settlor was a nonresident at the time of the transfer of foreign-located property to the trust, but moved to and has become an Italian tax resident, at the time of the distribution of that property to the trust beneficiaries, or to a case in which the settlor is an Italian tax resident, but the trust is a nonresident entity, for Italian gift tax purposes, at the time of the distribution of the property to the trust beneficiaries.
The question, in those cases, is whether the Italian gift tax – which supposedly applies solely upon the distribution of the trust property to the trust beneficiaries, – should apply based on the trust’s foreign tax residence, or the settlor’s foreign tax residence at the time of the initial transfer of the property to the trust (as opposed to the settlor’s Italian tax residence, at the time of the distribution of the property to the beneficiaries). In both cases, if the answer to our question is yes, there would be no Italian gift tax. The opposite of course would true in the event we take the alternative approach on the same issues.
The uncertainty arising from the Italian Supreme Court’s approach is significant. As a result, foreign (non-Italian) nationals who moved to Italy with their legacy trust planning in place, should review their trust arrangements to make sure that they fall outside the scope of Italy’s gift tax as per their original intention and reasonable expectations.