Italy and Trusts: A Contractual Fiduciary Relationship, Characterized as an Entity for Tax Purposes

While Italy does not have its own domestic trust law, it recognizes trusts that are validly established under the law of a jurisdiction that is a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, which Italy ratified in 1989.

Recognition, however, is not automatic. The trust must meet the essential characteristics outlined in Article 2 of the Convention, which are:

• The assets constitute a separate fund and are not part of the trustee’s own estate;
• Title to the trust assets is held by the trustee or by another person on behalf of the trustee;
• The trustee has the power and duty—in respect of which he is accountable—to manage, employ, or dispose of the trust assets in accordance with the terms of the trust and the duties imposed on him by law.

Notably, the reservation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as a beneficiary are not necessarily inconsistent with the existence of a trust.

Provided these conditions are satisfied, Italy will recognize the trust for legal and tax purposes, even though it does not provide a domestic legal framework for creating one.

Classification Between Fiscally Opaque and Fiscally Transparent Trusts

For tax purposes, trusts are characterized as taxable entities and fall within the scope of corporate income tax (IRES).

There are two main tax classifications of trusts under Italian law:

• fiscally opaque trusts (trust opaco), whereby the income of the trust can be distributed entirely at the discretion of the trustee,.

• fiscally transparent trusts, whereby all or part of the income of the rust must be distributed to certain identified beneficiaries, who have a foxed right to the income of the trust.

In the case of a fiscally opaque trust, the trust is liable for the tax, which is charged at the trust level, with the corporate tax rate of 24 percent.

A fiscally transparent trust computes its income at the trust level, but the tax is paid by the income beneficiaries, in proportion to their rights to the income of he trust, even if no distribution is made.

Italy’s New Rules on Tax Residency of Trusts (Effective 2024)

Starting in 2024, Italy has adopted a new framework for determining the residency of entities, including trusts. Legislative Decree No. 209/2023 rewrote Article 73(3) of the TUIR, eliminating outdated or ambiguous concepts (like the object of activity and administrative seat) and replacing them with three alternative criteria:

A trust (or any other entity) is considered tax-resident in Italy if, for the majority of the tax year, it has in Italy:

1. Its legal seat (sede legale), or  
2. Its place of effective management (sede di direzione effettiva), or  
3. Its principal ordinary management location (gestione ordinaria in via principale).

The place of effective management refers to where strategic decisions about the trust as a whole are made.

The place of ordinary management refers to where day-to-day administrative decisions and activities are carried out.

Though the legal seat is often irrelevant in the case of trusts, the other two criteria are highly practical and substance-based—and they generally align with the location of the trustee. In this way, the 2024 reform brings much-needed clarity and harmonization with international standards.

A U.S. Comparison: The “Court and Control” Test

In contrast, the United States classifies trusts for federal income tax purposes as either domestic or foreign under IRC §7701(a)(30)(E) and the accompanying regulations. A trust is domestic only if it satisfies both of the following:

1. Court test – A U.S. court must have primary supervision over the administration of the trust.
2. Control test – One or more U.S. persons must have the authority to control all substantial decisions of the trust.

Failing either test means the trust is classified as foreign, with far-reaching tax and reporting consequences for U.S. taxpayers.

Why Residency Classification Matters

Whether a trust is resident or non-resident in Italy determines the scope of taxation:

1. A resident fiscally opaque trust is subject to Italian tax on its worldwide income, regardless of where the income arises,
2. A non-resident fiscally opaque trust is subject to tax in Italy only on Italian-source income,
3. The beneficiaries of a resident fiscally transparent trust are taxed on their share of all of the income of the trust, which is recharacterized as Italian source based on the residence of the trust,
4. The beneficiaries of a non-resident fiscally transparent trust are taxed in Italy only on their share of the trust’s income from Italian sources.

Thus, determining a trust’s residency status is a critical threshold issue in cross-border tax planning and compliance.

Planning Considerations

For cross-border families and advisors, understanding how a trust is treated in both jurisdictions is essential to avoid mismatches and unwanted tax outcomes.

• A trust with an Italian trustee will generally be resident and taxable in Italy on worldwide income.
• If the trustee is abroad, but day-to-day administration or key decisions happen in Italy, the trust could still be considered Italian resident under the substance-over-form approach.
• In the U.S., having any foreign person control a substantial trust decision is enough to make the trust foreign, even if it’s governed by U.S. law or administered in the U.S.

In both systems, the substance of decision-making and administration carries more weight than formalities like the place of formation.

Final Thoughts

The 2024 Italian reform helps bring clarity and predictability to the classification of trusts as tax-resident or non-resident. It also brings the Italian approach closer to international norms, focusing on where the trust is managed rather than on the nature of the assets or the situs of legal formation.

Cross-border families and advisors should review trustee arrangements and administrative practices to ensure that tax residence aligns with planning goals—and to avoid unintended dual residency or source taxation.

If your trust involves Italian beneficiaries, assets, or trustees, and you’re unsure of its residency or tax treatment under the new rules, we’d be happy to review your structure and assist with a cross-border analysis.