Italian Taxation of Individuals

The EU Directive n. 2015/849 (the “IV Directive”) on anti money laundering sets forth new provisions requiring financial institutions and professional individuals to verify their customers or clients by identifying the ultimate “beneficial owner” of an entity, legal arrangement or financial transaction; obtaining and conserving information about their customers and the ultimate beneficial owners, as defined in the Directive, and reporting an extensive amount of information about trusts, foundations and other similar arrangements in a central register held by each Member State. EU Member States have time until June 26, 2017 to traspose the provisions of the Directive into their national laws.

Unlike EU Regulations that are enacted by the EU Council of Ministers, which have automatically the full force and effect of EU prevail over any non conforming national law regulating the same area, EU Directives proposed by the EU Commission are not self executing. EU Members States are left with some leeway to decide which provisions are to be adopted. EU Directives are usually adopted through a number of legislative procedures depending on the different subject matters. As a result, while the deadline to implement the Directive is still pending, and until a country enacts domestic legislation actually implementing the Directive, the Directive has no immediate effect and cannot be directly applied. 

In Italy, the Italian Parliament by way of Act n. 170 of August 12, 2016 granted legislative authority to the Italian Government to implement the provisions of the IV Directive. Now the Government is working at adopting one or more legislative decrees containing the specific provisions that will traspose the IV Directive into Italy’s national law. The legislative decrees to be issued pursuant to the grant of authority provided by the Parliament need not be approved by the Parliament. Rather, they become law as soon as they are adopted by the Government. 

In light of the above, we can safely say that Italy is well on track to implement the Directive within the June 26, 2017 deadline. If that should not be the case, at that point the Directive would become self executing and could still be applied, for those provisions that are sufficiently detailed and need not be specified or modified by way of national implementing legislation.     

Law n. 170 refers to the definition of beneficial owner that is set forth in the IV Directive. 

The definition of “beneficial owner” in the IV Directive, for corporate entities, is the following (article 3, paragraph 6, letter a)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least:

(a) in the case of corporate entities:

(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownershipA shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3);

(ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point.  

Under the definition set forth here above, the beneficial owner is the natural person who ultimately owns or control the tested corporate entity (defined as “customer” in the Directive). 

For the purpose of identifying the natural person who ultimately owns or controls the tested corporate entity, the Directive adopts the “more than 25% shareholding or ownership interest” test, as an indication or presumption of beneficial ownership, and uses both a direct and indirect ownership test. 

Under the direct ownership test, if a natural person directly owns more than 25% of a shareholding or ownership interest in the “tested” corporate entity, that person is presumed to be the beneficial owners of that entity. In case of direct ownership, the analysis stops at the natural person who owns the relevant shareholding interest in the tested corporate entity. Under the indirect ownership rule, a shareholding or ownership interest (of any size) in the “tested” corporate entity, owned by another legal entity (such as another corporate entity, trust, foundation, etc.), is attributed to the beneficial owner(s) of such other legal entity, to determine the ultimate beneficial owner of the “tested” corporate entity.

In case of trust or other similar legal arrangements, “beneficial owner” is defined as follows (article 3, paragraph 6, letter b)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least:

(b) in the case of trusts:

(i) the settlor;

(ii) the trustee(s);

(iii) the protector, if any;

(iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;

(v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.  

If interpreted literally, the definition of “beneficial owner” in case of trusts, foundations and other similar fiduciary arrangements is extremely broad, and would automatically require to verify and disclose each one of the settlor, trustees, beneficiaries or protectors of a trust, regardless of whether any one of them  actually owns an interest in the trust’s income or property or has any meaningful power with respect to the administration of the trust. Also, the literal definition of “beneficial owner” used in the IV Directive in case of trusts does not make any distinction between an interest in the income of the trust, as opposed to an interest in the corpus of the trust, and does not refer to any minimum ownership requirement such as the 25 percent ownership threshold that applies in case of corporate entities.  

An over broad interpretation of the term “beneficial owner” in case of trusts would put banks, financial institutions, professional individuals and their customers under extreme pressure, potentially dramatically extending the amount of information to collect and creating a friction between the need of a thorough verification of the customer for anti money laundering purposes, and the right to privacy for all individuals involved who do not own any ownership interest of power of administration with respect to the trust.

It would seem more reasonable to limit the definition of “beneficial owner” of a trust, to those individuals or entities, among the settlor, trustee(s) or beneficiaries, who actually have a meaningful interest in corpus of the trust or real powers with respect to the administration of the trust.   

Arguably, sub paragraphs 6(a) and 6(b) of article 3 should apply separately, depending on whether the “customer” to be tested is a corporate entity (in which case, the test of sub paragraph a) should apply) or a trust or other similar arrangement (in which case the test of sub paragraph b) should apply).

However, there is a potential argument for a concurrent application of the two sets of rules, whenever a shareholding or ownership interests in a corporate entity is held through a trust, foundation or other similar legal arrangement. In that case, under the “indirect ownership” rule requiring to find the natural person that ultimately owns the corporate entity, it may be reasonably be argued that the “beneficial owner” of the trust should be verified under the separate rules of sub paragraph b), and he or she would be deemed to indirectly and ultimately own the shareholding or ownership interest which the trust owns in the tested corporate entity.

Under a different interpretation, in the event that a shareholding or ownership interest in a corporate entity is owned through a trust, the analysis should stop at the person or persons who control the entity, under the rules of sub paragraph a), thereby limiting the know your customer verification to the person or persons who act as trustee or trustees for the trust.

In light of all the potential interpretative challenges, briefly mentioned above, it is important to see how the provisions of the IV Directive are going to be incorporated into the national legislation that will be enacted to transpose the Directive into Italy’s internal law. 

As for the scope of the disclosure mandated by the Directive, it is carried out at two levels. At one level, a bank, financial institution or professional individual that does business with an Italian entity or trust is required to conduct proper customer due diligence, which under article 13, paragraph 1, letter (b) of the Directive, including the following:

(b) identifying the beneficial owner and taking reasonable measures to verify that person’s identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer;

At another level, under article 30, paragraph 1 of the Directive, the companies themselves are required to obtain and hold  adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held.

Article 30, paragraph 2 requires that the information of the companies’ beneficial ownership and beneficial interests be held in a way that it is accessible in a timely manner to the tax and financial authorities. 

In addition to the above, article 30, paragraph 4 of the Directive provides that the information on the companies’ beneficial ownership and beneficial interests shall also be held in a central register accessible in all cases to the tax and financial authorities, banks and financial institutions and any other person or organization that can demonstrate a legitimate interest to 

Finally, under the Directive, a separate and independent disclosure regime may apply to trusts. Indeed, article 31, paragraph 1 provides that:

1.Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust. That information shall include the identity of: (a) the settlor; (b) the trustee(s); (c) the protector (if any); (d) the beneficiaries or class of beneficiaries; and (e) any other natural person exercising effective control over the trust.    

Italy does not have any law governing trusts (except that it applies its owns tax rules for the taxation of trusts both for income and gist and estate tax purposes). Trusts are usually established under foreign law, and recognized and enforced in Italy, if necessary, under the Hague Convention on Trusts which has been ratified in Italy by way of Law n. 364 of 1989. Law n. 171 refers is to “trusts governed under law n. 364 of October 16, 1089”, which includes any trust established under foreign law, which is recognized and enforced in Italy pursuant to the Trust Convention.

Furthermore, article 31, paragraph 4 of the Directive provides that

4.Member States shall require that the information referred to in paragraph 1 is held in a central register when the trust generates tax consequences. The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. It may also allow timely access by obliged entities, within the framework of customer due diligence in accordance with Chapter II. Member States shall notify to the Commission the characteristics of those national mechanisms.

The separate disclosure for trusts seems to be triggered whenever a trust is recognized and made effective in Italy pursuant Law n. 389 and the Hague Convention, and when the trust generates tax consequences in Italy.

Finally, it should be noted that on July 5, 2016, the European Commission adopted a proposal to amend the IV Directive on anti money laundering, which would reduce the shareholding test from 25% to 10%. 

Until the IV Directive is actually transposed into Italian law,  the provisions of legislative decree n. 231 of November 21, 2007 still apply.  

Legislative Decree n. 231 treats as “beneficial owner” the natural person or persons who ultimately own or control an entity, by directly or indirectly owing or controlling an adequate shareholding, voting or ownership interest in the entity, with the understanding that a (direct or indirect) shareholding or ownership interest of more than 25% of the entity is sufficient to satisfy the definition of beneficial owner. 

In case of trusts, beneficial owner is any identified beneficiary of the trust, who owns a qualified interest in more than 25% of the trust’s assets. 

The disclosure under Legislative Decree n. 231 is much more limited and restricted, given the narrower definition of beneficial owner that applies when a corporate entity is owned indirectly through a trust. Unlike the IV Directive, which mentions each of the trust’s settler, trustees and beneficiaries as beneficial owners of the trust, and as owning indirectly indirectly any shareholding or ownership interest that the trust holds in the tested entry, the legislative decree n. 231 refers solely to the trust’s identified beneficiaries owning an interest in at least 25% of the trust’s assets. 

In the course of our practice, we have been involved in situations in which banks and other financial  institutions or professional firms adopt a stricter and more balanced approach, by referring to the 25 percent ownership test and, for trusts, by limiting their investigations to beneficiaries holding an interest on more than 25 percent of trust’s assets and trustees holding effective power of administration of the trust. In other situations, however, we noted that other banks may want to anticipate the application for the new provisions of the IV Directive, even before its entry into force, and conduct a 360 degree investigation on trusts, requesting information about all of the trust’s settlor, trustees and beneficiaries (both actual and contingent) of wither income or corpus of the trust, regardless of the existence of an actual interest in, or power of administration with respect to, the assets of the trust.
In those cases, we have experienced that clients are willing to discuss the matter with their banks to make sure that their legitimate privacy rights are respected, and that anti money laundering, know your client verifications do not go beyond their legitimate, reasonable needs and become unmanageable or drain excessive resources.
In anticipation of the implementation of the IV Directive, clients should make the effort to review their structures, and put together a standard package that should be used with all of the banks, financial intermediaries and professional firms with whom they do business, and who will require information pursuant to anti money laundering legislation, to achieve efficiency and stay in compliance in such a challenging area clearly destined to draw more scrutiny and attention.

The Regional Tax Commission of Lombardy Region (an appellate level tax court including the city and province of Milan in Northern Italy) with its ruling n. 2846/2016 issued on May 13, 2016 held that a gratuitous transfer of property to a trust is not subject to the gift tax. The court’s theory is that the asset transferred to a trust is not immediately available to the beneficiary, who is only entitled to receive it when all the conditions for the final distribution of the trust’s property have occurred, and as a result, no enrichment of the beneficiary takes place at the time of the transfer of the property to the trust, which is required for the application of the gift tax.

The decision is in contrast with the Supreme Court’s case law, according to which the gift tax applies to any transfer for no consideration, regardless of the fact that the property transferred is immediately available to the recipient, who has an immediate right to enjoy and use it, or is held in trust for a distribution to the recipient at a later stage, with the recipient holding solely a future interest to the property. The most recent decisions of the Supreme Court on the taxation of a gift of property to a trust include rulings n. 3735 and 3737 of February 24, 2015 and n. 5322 of March 18, 2015.        

The different rule applied by the Regional Tax Commission of Lombardy is not necessarily favorable to the taxpayer. Indeed, while the immediate advantage is that no gift tax applies at the time of the transfer of the property to the trust, the flip side is that the gift tax will apply at the time of the transfer of the property from the trust to the beneficiary, and it will be charged upon the entire fair market value of the property at that time, including any market appreciation of the property occurred between the time of the transfer of the property to the trust, and the time of the distribution of the property to the beneficiary.

Italy applies a gift tax at tax rates that vary from 4 percent to 10 percent, depending on the relation between the transferor and the transferee, with an exemption up to 1 million euro for transfer to close family members (spouse, parents, children) and up to 100,000 euro for transfer to siblings.

The Regional Tax Court for the Region Lombardia with ruling n. 3778/67/15 held that the amended income tax return, which an Italian taxpayer may file to integrate a previous incomplete file return after the filing deadline has expired, does not remedy the penalties connected to the failure to file a timely RW form. The information disclosed in the RW form is required to allow the tax administration to know about an Italian resident  taxpayer’s foreign assets even though they do not generate taxable income. Failure to disclose foreign investments and assets constitutes a substantial violation that is not subject to review.

The case involved a German taxpayer residing in Italy, who did not file an income tax return regarding the purchase of some shares from a Swiss corporation that occurred in 2005. After the tax administration invited the taxpayer to explain the omission regarding the shares, the taxpayer filed a supplementary tax return for 2006, which included the RW form previously omitted. Nevertheless, the tax administration notified the taxpayer of a violation of his disclosure obligations and assessed the statutory penalties.

The taxpayer then filed a complaint in the tax court. The taxpayer argued that the statute of limitation  had run, and that the supplementary income tax return had, in any event, remedied the previous omission. The administration replied that, given the undisclosed investments involved blacklist countries (tax havens or tax-privileged areas), the extension of the ordinary statute of limitations should apply. Furthermore, for the administration, the supplementary tax return could not constitute a remedy to the previous omission, sufficient to eliminate the applicable penalties for to the initial nondisclosure.

The appellate court reversed the tax court’s decision. First, the appellate court held that the extension of the statute of limitations for assessment related to investments in blacklist countries is procedural in nature, such that it applies also retroactively to previous tax years. The court further held that the failure to file an RW form constitutes a substantial violation. The supplementary income tax return allows the taxpayer to adjust the erroneous or omitted report of income, but it does not eliminate the penalties for the late or omitted filing of the return. According to the court, the taxpayer could only have avoided the full penalties by refraining from going to court and settling the matter with the payment of the reduced penalties equal to 1/4 of the minimum.

As reported in our previous article of November 2014 (that you can find here: https://www.euitalianinternationaltax.com/tags/quadro-rw/), an RW form is an annual income tax return that Italian resident individuals are required to file pursuant to art. 4, D.L. nr. 167/90. The form allows individuals to report their foreign financial investments and assets, which are capable of generating foreign-source income, regardless of an actual income produced. This means that, as pointed out by the appellate court, even though the foreign investments reported in the form do not automatically generate taxable income, they nevertheless constitute a red flag for the tax administration. This assertion is even more compelling, considering the tax administration would not otherwise easily know about these investments and assets.

In case of errors or omission in the original return, a taxpayer may file a supplementary tax return, and obtain a reduction of the applicable penalties. If filed within 90 days from the filing deadline, the supplementary return has the same value of a valid and correct tax return originally filed.  Passed the 90 days, the return is deemed to be omitted, although the administration may still impose taxes based on them. At this point, the supplementary tax return must be filed within the filing deadline of the return concerning the following tax period. Passed 90 days from the original deadline, the sanctions range from 3% to 15% of the unreported income detained in white list countries, or from 6% to 30% of that detained in blacklist countries. In both cases, however, the penalties remain and cannot be remedied.

In conclusion, the opinion of the regional tax appellate court clarifies that the failure to file an RW form disclosing foreign assets and investments constitutes a substantial violation, which triggers automatic penalties. On the other hand, the extension of the statute of limitations for the administration’s assessment power applies retroactively to previous tax years, given its procedural nature.

Although the holding has a limited authority, considering it comes from a regional appellate court, it is indicative of the importance of filing an accurate and timely RW form disclosing foreign assets and investments. The taxpayer should especially pay close attention to the RW form in case assets are held in foreign countries that are part of the black list.

 

Every time a trust has connections with Italy and is given legal effects or enforced there, the trustee will need to collect, keep and disclose (if required) information on beneficial ownership of the trust and, potentially, report such information in a special Trust section of the Italian Business Register. The new trust disclosure rules derive from the Italian bill  transposing into national law the EU Fourth Anti-Money Laundering Directive (2015/849).

The Directive requires trustees of any express trust governed under the law of a Member State to obtain and hold information on the beneficial ownership of the trust, inclusive of the identity of the settlor, the trustee, the protector (if any), the beneficiaries, and any other natural person holding any authority or exercising effective control over the trust. When the trust generates legal or tax consequences in the legal system of a Member State, such information has to be reported in a central register of that Member State.

The Italian bill implementing the Directive imposes such duties on “trustees of express trusts governed in accordance with Law dated October 16, 1989 n. 364″.   With law n. 364 Italy ratified the Hague Convention of July 1, 1985 on the Law applicable to Trusts and their Recognition. The reference to trust governed by law n. 364 has the effect to attract all foreign trusts recognized and enforced in Italy to the new disclosure rules.

Italy does not have a body of national statutory provisions on trusts, but the enforcement of the 1985 Hague Convention with the Law n. 364 of 1989 permits to recognize and give legal effects in Italy to trust created under and governed by foreign law.

As a result, every time a foreign trust is to be legally used in Italy, and is designed to produce legal and tax effects there, it can be considered a trust “governed in accordance with Law n. 364 of 1989”, thereby triggering the know your customer and disclosure obligations set forth in the Directive. Therefore, it will be automatically subject to the new disclosure obligations, including the registration in a special Trust section of the general Business Register. Foreign trustees of a foreign trust that has a connection with Italy, are potentially subject to those rules, and need to pay close attention to the their new reporting obligations under the new rules.

Situations that fall within the scope of the disclosure rules include common cases in which a foreign trust has Italian resident beneficiaries, or owns movable or immovable assets located in Italy. In those cases, the beneficiaries in order to claim the distribution of income or assets from the trust need to put in place the procedure to have the trust recognized and enforced in Italy. The same happens when a foreign beneficiary claims the distribution of the trust’s Italian assets pursuant to the trust.

Even when the settlor of a foreign trust is an Italian individual, the new rules would apply. Indeed, the settlor may need to rely on the trust to separate herself from the assets transferred to the trust, and claim that the trust assets and income belong to somebody else who should bear the responsibility of tax filing, payment and reporting relating to the trust. To the effect, the trust would have legal and tax consequences in Italy, which would put it within the scope of the new disclosure rules.

The Directive set forth a deadline for its implementation into EU member’ States’ law, currently expiring on June 26, 2017. The Italian bill once enacted into law will need legislative decrees with enforcement provisions to be adopted by the Government pursuant to the legislative authority granted therein.

 

Italy’s tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the list of Italian resident individuals for administrative purposes. Whenever one of the three tests is met for more than 183 days in any given year, an individual is resident of Italy for Italian tax purposes for that particular year. Italian tax residency triggers worldwide income taxation and obligation to report worldwide financial and non financial assets to Italian tax authorities on taxpayer’s Italian income tax return. 

In case of tax residency under the internal laws of Italy and another treaty country, Italy applies the tie breaker provisions of article 4 of the tax treaty to resolve the double residency problem, which assign tax residency based on the location of of permanent home, center of vital interests, habitual abode or nationality. The treaty "center of vital interests" test requires a comparative analysis of the taxpayer’s contacts or ties in Italy and the other treaty country. According to one view, personal and family ties should prevail, while another interpretation gives relative weight to economic and business interests.

A recent decision of Italy’s Supreme Court, which we comment here, seems to support the second interpretation. Proof of business and economic interests abroad while living or spending significant time in Italy for personal pleasure may help taxpayer demonstrate that that she kept her center of vital interest and tax residency in her own country.

This area of Italian international tax law is in flux and needs attention. Foreign taxpayers who transfer money to Italy to purchase homes, spend regular time there, register their administrative residency in Italy at their Italian address for convenience, open Italian bank accounts to handle the funds needed to manage their Italian house and living expenses are under the radar screen on Italian tax authorities, which check the real estate database, receive automatic information about the cross border transfers of the funds and often send inquiry letters asking for explanations on the taxpayer tax position in Italy in the absence of past filed Italian income tax returns.                

Such inquiries and related audits requires careful consideration, including the provision of carefully selected and explained tax documents and information, to avoid the risk of an Italian tax residency determination that would trigger far reaching and very troubling consequences.  
       

Italy’s Supreme Court’s decision n. 6501 of March 31, 2015, dealing with the case of an Italian citizen  who had most of his personal and family connections in Italy but moved to work in another country (Switzerland), where he had most of his economic and financial interests, ruled that the taxpayer’s economic and financial connections should prevail over the taxpayer’s personal and family connections under the center of vital interests test of the Italy-Switzerland treaty, and concluded that the taxpayer’s tax residency had to be allocated to Switzerland under that treaty.

The above decision is the last of a series of recent Italian tax courts’ rulings supporting the conclusion that economic ties to a country are more important than personal or family ties to another country in determining an individual’s tax residency.

The Supreme Court’s holding goes against older case law and has very important ramifications.

We refer, in particular, to the frequent cases of American citizens who transfer money from the United States from Italy, purchase and own valuable homes in Italy, and spend significant time there, together with their family. Those people usually pass the test for establishing tax residency in Italy under Italian domestic tax law.

In many cases, the Italian tax administration, who can rely on extensive data base detecting U.S. transfers of money to Italy and purchase and ownership of Italian homes, sends audit letters to inquire about the tax status of those foreign citizens in Italy, considering that they usually are not aware of the problem and have never filed any Italian income tax returns.

The recent case law offers a valuable opportunity to avoid unintended tax consequences arising from inadvertent Italian tax residency, in a sense that taxpayers in those cases can still argue that their tax residency remained in the United States whenever sufficient economic and financial interests are still located there, while physical presence and personal and family connections have shifted to Italy.

Italian resident taxpayers are required to report all of their assets held outside of Italy,  on form RW of their Italian income tax returns (which include various sections and can be considered the equivalent of the FBAR and other international tax returns that are required to be filed in the United States).

Resident taxpayers subject to reporting include U.S. (or any other foreign) citizens who crossed the line and have become tax residents of Italy under Italian tax residency rules (unless they can claim U.S. tax residency under the tie breaker provisions of article 4 of the U.S.-Italy income tax treaty).

They also include Italian nationals who moved abroad but maintained their tax residency in Italy as a result of keeping their domicile there.   

Reporting requirements extend to any foreign asset, not just bank or financial accounts, which is capable of generating (currently or at any time in the future) foreign source income taxable in Italy (such as houses, boats, jewelry, artworks, etc.). 

Recently, the scope of reporting has been dramatically extended as a result of the enactment of the "beneficial owner" rule, which requires to report assets that are not immediately or directly owned by the taxpayer, but are owned indirectly as a result of owning shares of stock or similar interests in foreign entities, or that will be received in the future as distributions out of trusts of which the taxpayer is a beneficiary.

The new reporting rules adopt a "look through" approach pursuant to which the taxpayer is required to report her pro rata share of the underlying assets owned by an entity in which she is owns stock or other similar interests.

Reporting can be very daunting, in case of multiple entities and levels of ownership, and assets owned foreign in trusts that need to be properly classified and interpreted under Italian tax rules to understand exactly who and how (among the various settlors and beneficiaries) is required to report the assets held in trust.

In this article we provide a general overview of the new Italy’s international tax reporting rules referred to here above. We hope it proves to be useful as an initial orientation guidance in a very complex area of Italian international tax law.                

 

     

Italy operates specific provisions on tax treatment of trusts. Trusts formed under foreign law are recognized and enforced in Italy pursuant to the Hague Convention on Trusts dated July 1, 1985. To the extent they have Italian assets, or Italian grantor, trustees or beneficiaries or Italian source income, foreign trusts may be subject to Italy’s trust tax provisions. Under certain circumstances, trusts are disregarded and trust assets are treated as owned by the grantor or beneficiaries. This is the case when the grantor has an unconditional power to terminate or revoke the trust or when the beneficiaries have an unconditional right to claim an anticipated distribution of all or part of the trust assets at any time during the life of the trust, or when the trustee lacks actual independent power to administer the trust and is under the directions or instructions of either the grantor or the beneficiaries of the trust. When respected for tax purposes, the trust is taxed on a fiscally transparent basis or as a separate entity, depending on whether and to what extent the income of the trust is attributed to identified beneficiaries specifically mentioned in the trust agreement or separately by the grantor during the life of the trust. When a trust is taxed on a fiscally transparent basis, income of the trust is allocated to and taxed directly upon the beneficiaries. When a trust is taxed as a separate entity, the trust itself pays the corporate income tax on its own income. A trust administered in Italy or by an Italian resident trustee is treated a a resident trust and subject to tax on its world wide income. A trust administered abroad or by a foreign resident trustee is treated as a foreign trust and taxed only upon Italian source income. For more details about Italian tax treatment of trusts as it applies to trusts formed under the laws of any State of the United States or any other foreign country, we refer you to this article which was recently published on Tax Notes International.             

The Italian Supreme Court in its Ruling 20285 dated September 4, 2013 held that an individual taxpayer claiming to have his tax residency outside of Italy had properly discharged his burden of proof and correctly established his tax residency abroad by producing copy of his residential lease, regular payments of rent and utility bills and use of personal bank account for day to day expenses, thereby proving that his actual and real residence and domicile was located in the foreign country. 

Under Italian tax law, individual tax residency is determined pursuant to highly factual tests and can be established even when there are relatively minor contacts with Italy, such as a house, frequent visits to the country, or business interests located there. Once determined, it subjects the taxpayer to worldwide taxation in Italy both for income and estate tax purposes including the obligation to report all of taxpayer’s assets wherever located in the world under a form that is the equivalent of the american foreign bank account report, except that it requires reporting of non financial assets (such as cars, houses, planes, artworks, etc.) as well as financial assets and accounts. Foreign persons with interests in Italy must pay particular attention to those rules to avoid to be trapped into unintended Italian tax residency. 

Under the facts of the case decided by the Supreme Court,  the taxpayer – a tennis player originally resident in Italy – claimed to have moved his tax residency to Monaco, while still traveling to Italy and other countries in connection with his business interests and professional activity.

Under Italian law, Monaco is a tax haven, black listed jurisdiction and Italian taxpayers who register as residents there are presumed to be still resident in Italy for Italian tax purpose, unless they prove that their actual residence and domicile is located in that country. For this purpose, residence identifies the taxpayer’s habitual and regular place of living, while domicile identifies the taxpayer’s main center of personal, financial and business interests.  

 

Continue Reading Italian Supreme Court Rules on Individual Tax Residency