On October 20, 2022 the Italian Tax Administration issued Circular n. 34/E (Circolare Trust n. 34 del 20 ottobre 2022) providing final guidance on Italian taxation of trusts. One issue addressed in Circular 34 deals with the application of the Italian gift tax with respect to a transfer of property into a foreign trust or distributions of property from a foreign trust to Italian resident beneficiaries. The Tax Administration conceded that the transfer of a property into a trust is a non-taxable transaction for Italian gift tax purposes. That view is consistent with the Italian Supreme Court’s ruling n. 8082 of 2020 according to which the gift tax applies only when there is a final and definitive transfer of property to a named individual, who acquires full ownership, direction, and enjoyment of the property and derives a direct economic benefit from it. According to the Supreme Court, the transfer of property into a trust and the appointment of a trustee with the power to administer, manage, and (possibly) dispose of the property and ultimately distribute the trust’s principal and income to a beneficiary, an “indirect gift” is set in motion, whereby the transfer of the property to the trustee is the first step, the holding, management or administration of the property by the trustee is the intermediate step, and the final distribution of the trust’s property out of the trust to the beneficiary is the final step. During the first two steps, the gift is still in progress and incomplete. At the time of step three, the gift is complete, and the gift tax becomes due. The gift tax, if due, is assessed on the fair market value of the trust’s property which is distributed to the beneficiary. If, according to the terms of the trust, a beneficiary has the right to receive distributions out of the trust’s principal that are not subject to the discretion of the trustee, that distribution, when carried out, is treated as a taxable gift. Under the Supreme Court’s “gift in progress” theory, which is now upheld by the Tax Administration, the original settlor is the donor, the trustee is the intermediary carrying out the transaction in accordance with the settlor’s intent as reflected under the terms of the trust agreeement, and the beneficiary who receives a final and definitive distribution of the trust’s property is the donee. According to the Tax Administration, the establishment of a trust is a complex but unitary transaction, which must be considered as a whole, namely, as comprising various steps that start with the transfer of property to the trustee (to be administered in the ultimate interest of the trust’s beneficiaries) and finishes with the distribution of the trust’ property to a trust’s beneficiary. In a cross-border context, the issue is how the Italian gift tax applies, considering that the Italian gift tax is due on a worldwide basis – namely, on any gifted property located either in Italy or abroad -, when the donor is an Italian resident individual, or on a territorial basis – meaning, solely on property located in Italy -, when the donor is a nonresident individual. In this respect, the Tax Administration in its Circular 34 clarifies that when the settlor of a trust is a resident individual, the gift tax applies to any distribution of property from the trust, wherever the property is located in the world, while, when the settlor is a nonresident individual, the gift tax applies solely to the distribution of a trust’s property located in Italy. Under the Supreme Court’s gift-in-progress (or indirect gift) theory (according to which the gift begins at the time of the initial transfer of a property into the trust), and the Tax Administration’s unitary transaction theory, the residence of the settlor with reference to which the potential application of the Italian gift tax is determined should be the residence of the settlor at the time of the (initial) transfer of property into the trust. In a simple situation, in which the transfer of property to the trust occurred entirely at a time in which the settlor was a nonresident individual, and the distribution of trust’s property to a beneficiary takes place after the settlor has become an Italian resident individual, it would seem reasonable to believe that, whenever the distributed property is located outside of Italy, no Italian gift tax should apply. In more complex situations, in which there have been multiple transfers of properties into a trust at different times, both before and after the settlor has become an Italian resident individual, and there are distributions of trust’s property after the settlor has become an Italian resident individual, tracking the various distributions to property trasferred before or after the starting of the settlor’s Italian tax residency may prove more complex. In conclusion, even after the issues of the final guidance of Circular 34, material issues remain that require taxpayer’s attention. Also, proper planning and careful review should be considered, with respect to foreign trusts created before or already in place after establishing Italian tax residency.