On October 20, 2022, Italy’s Tax Administration issued Circular 34/E providing final guidance on the Italian taxation of trusts. One section of the guidance discusses the new anti-abuse rule on the taxation of income distributions from foreign trusts to Italian resident beneficiaries. Article 44, paragraph 1, letter g-sexies of the Italian Income Tax Code, as amended by article 13 of law decree n. 124 of October 26, 2019 (effective from the year 2020) provides that income distributed to Italian resident beneficiaries from foreign trusts and other similar legal arrangements established in countries or territories which are considered fiscally privileged jurisdictions, with respect to the income of the trust, are subject to Italian income tax in the hands of the beneficiaries when distributed, even when they are distributed from fiscally opaque trusts. The general rule provides that foreign fiscally opaque trusts are treated as separate taxable entities, for Italian income tax purposes, and can distribute their income to Italian resident beneficiaries free from additional income tax upon the beneficiaries in Italy upon the receipt of the income from the trust. The provision of article 44, paragraph 1, g) sexies is designed to operate as an anti-abuse rule aimed at allowing the assessment of an Italian final income tax upon beneficiaries who receive trust income that has not been subject to a sufficient level of taxation in the foreign jurisdiction of the trust. The rule applies a nominal tax rate test pursuant to which a foreign country qualifies as fiscally-privileged jurisdiction, for the purpose of the anti-abuse rule, whenever the nominal rate of tax on the income of the trust in the foreign jurisdiction where the trust is established is not at least 50 percent of the tax rate that would apply in Italy to an Italian trust. The Italian-referenced tax rates are the 24 percent rate applicable to the general income of the trust or the 26 percent rate applicable to financial investment income (dividends, interest, and capital gains). The test focuses on the nominal tax rate applicable in the foreign jurisdiction of the trust and requires taking into account special tax regimes which are not structurally applicable to the generality of taxpayers but apply solely to specific classes of taxpayers selected in consideration of taxpayer’s specific subjective characteristics or for limited periods of time and which, without providing for a reduction of the nominal tax rate, grant exemptions or a reduction of the taxable base resulting in a total tax falling below the 50 percent threshold, and also provided that, when a special tax regime applies solely to specific items of income arising from specific activities included in those generally carried out by the trust, the activities eligible for the special tax regime must be predominant, as measured with reference to the income arising from those activities compared to the total revenue or income of the trust. In its final guidance, the Tax Administration clarifies that the term “established” must be interpreted as “resident”, for the purposes of the foreign jurisdiction’s income tax or, for trusts that are not taxed as “resident” in the foreign jurisdiction, even though they are established under that jurisdiction’s trust laws and administered there, the foreign jurisdiction where the trust is set up administered under local trust laws. Therefore, when a foreign jurisdiction does not tax a trust established and administered within its territory, the test is automatically failed. By way of an example, the Italian Tax Administration in its final guidance specifically refers to UK trusts (i.e,., trusts created and administered under UK laws), which are administered by two or more co-trustees, at least one of which is a non-UK resident or domiciliary, and have a non-UK resident or domiciliary settlor, and, as such, are treated as offshore trusts totally exempt from income tax in the UK either upon the trust os its beneficiaries. According to the guidance, under those circumstances, the UK trust fails the test and Italian resident beneficiaries are taxable upon receipt of income distributions from the trust in Italy. Consequently, Italian trust structures based on the use of UK offshore trust should be reconsidered in light of the Tax Administration’s stand as clarified in the guidance. A similar fate is reserved also for trusts established in traditional low or zero-tax jurisdictions. The UK example seems to differentiate from or stand in contrast with that of US foreign trusts, which are subject to a nominal 30 percent tax rate on their income and may qualify from a generally applicable tax exemption for income earned in the form of capital gains or interest which are not attributable to an office or a fixed place of business located in the United States. More generally, Italian taxpayers’ trust planning strategies should be reviewed in light of the guidance and the potential application of the anti-abuse rule as clarified therein.