Taxation of Trusts

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Italy’s Tax Agency Rules on U.S. Trusts: The Risks of Beneficiary Control
In a recent ruling (n. 258, December 16), the Italian Tax Agency examined the tax treatment of three U.S.-based trusts with an Italian-resident beneficiary. The decision reinforces a crucial principle: excessive control by a beneficiary over the trustee can lead to the trust being disregarded for tax purposes (fiscal interposition), exposing the beneficiary to immediate taxation on trust income.

The ruling highlights three critical factors that can trigger unfavorable tax treatment:
✅ The power to revoke and replace the trustee – A beneficiary with this authority is deemed to have control over the trust, making it fiscally interposed.
✅ Trustee reporting obligations to the beneficiary – If the trustee must report directly to the beneficiary, the trust may lack true independence.
✅ Indirect control through family members – Even when the beneficiary does not directly control the trust, the ability of close relatives to appoint trustees or influence major decisions can lead to fiscal interposition.

The implications of this ruling are significant. If a trust is fiscally interposed, all income is taxed as if it belongs directly to the beneficiary, regardless of actual distributions. Even in cases where the trust is considered fiscally transparent, income is taxed annually at the beneficiary’s marginal rates, reducing the deferral benefits of a trust structure.

💡 Key Takeaway: Trusts involving Italian tax residents must be structured carefully to maintain trustee independence and avoid provisions that grant direct or indirect control to beneficiaries. Periodic trust reviews and professional tax guidance are essential to ensuring compliance with Italian tax laws and optimizing tax efficiency.

For individuals with U.S. trusts and Italian residency, proactive planning is crucial to avoid unintended tax consequences. If you’re uncertain about how your trust might be classified, consult with an international tax professional to assess your specific situation.

📩 Need advice on cross-border trust taxation? Contact us to discuss how we can help you navigate these complex rules.…

On October 9, 2023, the last Ministerial Decree required for the final implementation of Italy’s Register of Trusts was published, and the Register of Trusts is now in effect. The initial filing deadline is December 11, 2023. The filing in the Register is required for domestic trusts, private foundations, and similar legal arrangements, defined as…

In its Ruling n. 309 of April 28, 2023 (Risposta-n.-309_2023-1.pdf) the Italian Tax Agency addresses the issue of taxation to Italian beneficiaries with respect to distributions from a U.S. Trust.

Background

Under Italy’s tax law, trusts are classified in one of three ways, with different tax consequences for the trust, the settlor, and…

In its ruling no. 267, dated March 27, 2023 (Risposta-n.-267_2023.pdf), the Italian Tax Agency addressed a case involving a trust where the Settlor reserved the power to revoke and replace the Guardian and retained certain powers related to the shares of a company he transferred to the trust, including the power to appoint…

The Italian Tax Agency recently issued Ruling n. 237 of March 2, 2023 (Risposta-n.-237_2023.pdf), which clarifies foreign trusts’ tax treatment concerning Italian tax resident beneficiaries.

Under the ruling, when the trustee of a foreign trust is required to make an annual distribution to beneficiaries based on a predetermined percentage of the fair market…

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…

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…

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…

In its Ruling n. 359 of July 4, 2022 (Risposta n._359 of 04.07.2022), the Italian Tax Agency ruled that a trust which is disregarded for income tax purposes under the standards of Circular n. 61/E of December 27, 2010, is still respected as a complete and effective trust for Italian gift and estate tax…