The Italian tax administration, in its Circular n. 34 of October 20, 2022, provided some new guidance on the international tax reporting obligations for assets held in foreign trusts. Domestic trusts report foreign assets held under the name of the trust on their own income tax return. In the case of foreign trusts, the reporting duty falls upon the beneficial owner of the trust. The term “beneficial owner” is defined in the anti-money laundering statute and includes the trust’s settlor, trustee, and beneficiaries. Still, it must be adapted when used in the income tax reporting context, considering the underlying purpose of the international reporting rules, which is that of disclosing the beneficiary of the income deriving from the assets of the trust that might be subject to income tax in Italy.
Therefore, by way of background, Circular 34 clarifies that the beneficial owner liable for the reporting must be identified by considering the following:
- the provisions contained in article 1, paragraph 2, letter pp), in article 20, and in art. 22, paragraph 5, of Legislative Decree no. 231 of 2007 (anti-money laundering legislation);
- the provisions adopted internationally within the Common Reporting Standard, according to which the information relating to the beneficiaries is subject to communication in all the periods in which the trust exists, regardless of whether it is a mandatory beneficiary or a discretionary beneficiary (for the former, the value of the proceeds received in the tax period and the total value of the account held by the trust are reported, while for the latter only the first data is disclosed);
- the clarifications already provided in circular no. 38/E of 2013, according to which only those with the right to claim the assignment of income or assets from the trustee are considered beneficial owners of a trust and, therefore, required to fulfill the tax reporting obligations.
Then, Circular 34 draws a distinction between mandatory beneficiaries and discretionary beneficiaries.
Circular no. 38/E of 2013 limited the reporting obligation to mandatory beneficiaries, defined as those individuals who hold the right to claim the distribution of the trust’s income from the trustee. Under Circular 34, mandatory beneficiaries report “the value of the investments held abroad by the entity and of the foreign assets of a financial nature in its name, as well as the percentage of interest in the entity itself”.
With respect to discretionary beneficiaries, Circular 34 clarifies that “The beneficiaries of discretionary trusts, on the basis of the information available, such as, for example, the case in which the trustee communicates his decision to assign him the income and/or capital of the trust fund, are required to indicate in the RW part [of the return] the value of the related credit owed by the trustee, together with the investments and financial assets held abroad.” Therefore, the information required to be reported is two folds: the value of the discretionary distributions made to the beneficiary during the year (which is reported as a credit or receivable from the trustee) and the beneficiary’s interest in the investments and assets owned by the trust. Reporting the second piece of information, however, is problematic, considering that a discretionary beneficiary does not hax any right to any fixed percentage of the income or principal of the trust. The reference to the rules on the automatic exchange of information under the Common Reporting Standards, which for discretionary beneficiaries requires solely the information about the proceeds received during the tax year, and to Circular n. 38/E of 2013 limiting the tax reporting to mandatory beneficiaries supports an approach under which discretionary beneficiaries of a trust only report the distributions received from the trust during the year.
Finally, Circular 34 deals with the case of secondary beneficiaries or “subsequent interest holders” with respect to whom it clarifies the following: “With reference to ‘subsequent interest holders’, i.e., those who would become beneficiaries only when the first beneficiaries cease to exist, taking over from the latter, it is believed that they cannot be classified as ‘beneficial owners’ for the purposes of tax monitoring, provided that there are no statutory provisions or other clauses in the instruments of the trust such that they may be recipients of income or patrimonial attributions despite the presence of ‘antecedent interest holders’. With respect to these persons, any attribution arranged in their favor at the trustee’s discretion takes on relevance in the above terms”. Therefore, secondary beneficiaries only report the value of discretionary distributions that were made to them during the year as allowed under the governing law or instrument of the trust.