With its Ruling n. 237 of March 2, 2023 (Risposta n. 237-2023), the Italian Tax Agency ruled that when the trustee of a foreign trust is required to make an annual distribution to the beneficiaries of the trust of cash or other property of the trust that represent a predetermined percentage of the fair market value of the trust calculated at a fixed date, that trust must be considered fiscally transparent, and the beneficiaries are taxed in Italy on the income of the trust which is proportional to their interests in the trust, as specified in the trust agreement, on a fiscally transparent basis and regardless of the actual distribution of income to the beneficiaries during the tax year. The case considered in the ruling concerns a trust constituted by a foreign (non-Italian) national in favor of her husband for a share of 25% and her three children in equal shares, for the remaining 75% (or 100% if her husband predeceased her), and upon their death, to their descendants. The children’s or their descendants’ shares will be held in a separate trust to benefit each of them. The trust is governed by the laws of the State of the United States and is administered by an institutional trust organized in the United States. The trust agreement provides that until a beneficiary reaches the age of 35, the trustee is authorized to distribute to that beneficiary all or part of the income of his or her trust as required for the beneficiary’s health, education, maintenance, and support and when a beneficiary reaches the age of 35, the trustee is required to distribute currently to that beneficiary the annual income of his or her trust for life. Upon the grantor’s death, the trust was divided into two trusts to the benefit of the settlor’s children. Upon the death of one of the children, his trust was divided into two equal shares held in trust in favor of the decedent beneficiary’s children. Upon the trustee’s petition, the Court in the U.S. with jurisdiction over the trust issued an order amending the terms of the trust and requiring that the trustee makes an annual distribution of as much income or property of the trust that represents 4.5% of the total fair market value of the trust as of the last day of the third year preceding the year of the distribution. The taxpayer who filed the ruling request took the position that (1) she was not required to file any inheritance income tax return with respect to her share of the assets of the trust she received in trust upon her father’s death, (2) she was not required to report the value of her trust on her Italian income tax return, and (3) the annual distribution she was entitled to should be reported as income from capital, for an amount equal to the value (in cash or other property) that is actually distributed by the trustee to the beneficiary during the year and is taxed by way of the substituted tax at the fixed rate of 26%. On the first issue, the Tax Agency ruled that the assets that were distributed upon the death of the primary beneficiary (the grantor’s child) to the secondary beneficiary (the decedent beneficiary’s children) were not part of the decedent’s estate and were not subject to inheritance tax in Italy. The Tax Agency does not elaborate, but the conclusion on that issue is likely predicated upon the facts that the grantor was not an Italian domiciliary at the time of the creation and initial funding of the trust, and the trust assets were not located in Italy at the time of the primary beneficiary’s death. On the second, the Tax Agency ruled that the petitioner is required to disclose the value of the trust and her interest in the trust in her Italian income tax return, considering that she is a mandatory beneficiary with the right to receive the distribution of at least 4.5% of the value of the trust annually. Tax Agency ruled that the trust should be classified as fiscally transparent on the third issue. Consequently, the taxpayer would be subject to income in Italy on her share of the trust’s income, which is attributed and taxed to the taxpayer on a look-through basis, regardless of its distribution. The trust income is part of the taxpayer’s general taxable income and is taxed at progressive rates. The amount of distribution that the taxpayer receives each year from the trust is ignored for Italian income tax purposes. The ruling on the third issue is questionable and may be affected by how carefully the taxpayer presented her case. Under Italian tax law, a trust is partially fiscally transparent and partially fiscally transparent when the trust agreement does not provide that a beneficiary has the right to the distribution of the trust income as such, but, rather, it provides that a certain percentage of the value of the trust must be distributed to the beneficiary. In that case, the trust is fiscally transparent regarding a portion of the trust income not exceeding the share of the trust value that must be distributed to the beneficiary. The ruling, on its face, seems to conclude that the entire trust is fiscally transparent, and the beneficiary is taxed on her share of 25% of the entire income of the trust. Under the partially fiscally transparent-partially fiscally opaque trust, she would be subject to tax on a share of the income of the trust not exceeding 4.5%.