ABOUT THE AUTHORS: Dott. Alessandro Belluzzo and
Dott. Luigi Belluzzo are Senior Partners at Belluzzo &
Associati LLP
The Italian tax authority Agenzia delle Entrate (‘the Agenzia’)
has issued circular 61/E/2010 (‘the Circular’) at a time when
trusts in Italy are becoming increasingly common instruments for
estate planning and management of the generational passage of
family businesses. This is the result of favourable and pragmatic
positions adopted by Italian courts over the last few years and of
an increased understanding of the advantages and possibilities
offered by this instrument in comparison with those in existence in
Italian law. These advantages are now becoming particularly
apparent as a result of the growing number of Italian entrepreneurs
and wealthy individuals, many of whom have built their wealth over
the last few decades, who are getting concerned about the transfer
of the family business to the next generation and are looking for
the best ways to protect and enhance the value of their estate, in
some cases with the added complexity deriving from having benefited
from the Italian tax amnesty (scudo).
Trusts fiscally inexistent
In the Circular, the Agenzia affirmed that, in accordance with
their interpretation of the law, trusts that are created and
managed to achieve a mere interposition in the ownership of assets
cannot be considered in existence from a tax point of view.
More precisely, if a settlor retains, to any extent, a power to
manage and use assets settled in trust, it can be deemed that the
settlor has actually retained a level of ownership of the assets
and therefore the trust is merely an interposition and consequently
‘fiscally inexistent’. Any income deriving from such assets will
therefore necessarily be reattributed to the settlor.
The tax authority deems that, in order to achieve separate
ownership, trust funds must be completely disconnected from the
settlor, meaning that the settlor cannot be in a position to exert
his/her will over them. Trust funds must be managed and
administered exclusively by the trustees.
In resolution 8/E/2003, the Agenzia clearly stated that the
vital prerequisite for a trust is the duty and the power by the
trustees to manage and exercise their will over the trust funds,
settled in trust by a settlor. The consequence is that any faculty
that the settlor might want to retain for himself will need to be
limited to the point that in no way can he/she prevent the trustees
from exercising their rightful powers over the assets.
Circular 43/E/2009 had highlighted a number of cases where
trusts were deemed fiscally non-existent; this ‘list’ was reworked
and extended in the Circular. Table 1 lists the cases where trusts
are ineffective, in accordance with Circular 43/E/2009 (left) and
the Circular (right).
Table 1. Fiscally ineffective trusts
1 |
Trusts which the settlor (or the beneficiary) can freely
terminate at any time, generally for his own benefit, or for the
benefit of other persons |
Trusts which the settlor (or the beneficiary) can freely
terminate at any time, generally for his own benefit, or for the
benefit of other persons |
2 |
Trusts in which the settlor has at any time the power to
designate himself as beneficiary |
Trusts in which the settlor has at any time the power to
designate himself as beneficiary |
3 |
Trusts in which the trust deed provides the settlor (or the
beneficiary) with powers that allow him to prevent the trustees
from exercising their powers without his consent, including cases
where the trustees still have discretionary powers in the
administration and management of the trust |
Trusts in which the settlor (or the beneficiary) has powers,
indicated in the trust deed or inferable from factual elements,
that allow him to prevent the trustees from exercising their powers
without his consent, including cases where the trustees still have
discretionary powers in the administration and management of the
trust |
4 |
Trusts in which the settlor has the power to terminate the
trust in advance, designating himself and/or others as
beneficiaries |
Trusts in which the settlor has the power to terminate the
trust in advance, designating himself and/or others as
beneficiaries |
5 |
Trusts where the beneficiary has the right to receive
advancement of capital from the trustee |
Trusts where the beneficiary has the right to receive
appointments of wealth from the trustee |
6 |
|
Trusts where the trustees must take into account the settlor’s
indications in relation to the management of the trust funds and
related income |
7 |
|
Trusts where the settlor has the power to modify the
beneficiaries |
8 |
|
Trusts in which the settlor has the power to appoint income or
assets or can lend money to individuals chosen by him |
9 |
|
Any other circumstances in which the trustees’ power to manage
the trust and take decisions in relation to it is to some extent
limited or simply conditioned by the will of the settlor and/or of
the beneficiaries |
Ineffective trusts: the evolution of cases
considered by the Agenzia
As highlighted in Table 1, the Circular has clarified some of
the previously listed cases and introduced new cases.
The four new cases
Case Six – trusts where the trustees must take into
account the settlor’s indications – belongs to case history. Such
‘trusts’ can be considered fiscally non-existent, and not more than
a fiduciary mandate, and, as such, well outside the definition of
the Hague Convention.
One can infer from this case the importance of sound
administration practices normally enforced by professional
trustees, which, while allowing compliance with possible duties to
communicate with individuals indicated in the trust deed, in no way
indicate a limitation of their powers to decide.
Similarly, in Case Seven, while the settlor’s power to
change beneficiaries is not customary in trusts with an Italian
element, it is sometimes present in international trusts. Following
the Circular, it will be necessary to make sure that such a clause
is not present in trust deeds.
Case Eight – trusts in which the settlor has the power
to appoint income or assets or can lend money to individuals chosen
by him – can be substantially treated as the two previous ones,
although it should be noted that such clauses might still
occasionally be present, particularly in some jurisdictions,
primarily with the aim of limiting trustees’ responsibility.
Case Nine – any other circumstances in which the
trustees’ power to manage the trust and take decisions in relation
to it is to some extent limited or simply conditioned by the will
of the settlor and/or of the beneficiaries – highlights the tax
administration’s will to attack, from a tax point of view, any
other cases where the trustees’ power is to some extent diminished
and/or partially abdicated in favour of the settlor or
beneficiaries. As a result, it will be critical to use trustees who
always act professionally and in accordance with predefined
procedures.
It is worth highlighting the role that trustees should play when
they are the sole or the controlling shareholder of a holding
company. Best international practices would require them to have a
full understanding of the assets they own. At the same time, it is
understandable that some tax professionals deem a trust fiscally
effective in cases where the trustee has no power to interfere with
the company management, limiting its function to simply acting as
an institutional shareholder.
Direct taxation: trusts and
beneficiaries
The Circular analyses and further defines the meaning of
‘transparent’ trusts (trusts trasparente) and ‘opaque’
trusts (trusts opachi), sometimes in an innovative way,
changing the accepted interpretation of past circulars and best
doctrine.
The Legge Finanziaria 2007 introduced trusts in tax
law, recognising them as a legal entity that is liable to taxes in
accordance with art. 73 TUIR (Testo Unico delle Imposte sui
Redditte), and more precisely IRES (Imposte sul Reditto delle
Società), i.e. corporate tax.
The legislator indicated, however, that this is true only in
cases where beneficiaries are not specifically designated.
Otherwise, the last paragraph of art. 73 reattributes the trust
income directly to the beneficiaries, as a flow-through entity, in
proportion to their rights, indicated in the trust deed or
subsequent deeds, or, where not indicated, in equal share.
This has led to the distinction between two different types of
trusts, trusts trasparente where beneficiaries have a
current and legal right to benefit from the trust income and are as
such taxed directly, and trusts opachi where there is no
such right and taxes (IRES) are paid by the trustee.
It should be noted that it is also possible to have trusts that,
in relation to income, are partly transparent and partly opaque
(trusts misti).
Non-resident trusts
The Circular interprets art. 44, comma 1, lett. g-sexies of
TUIR: ‘income is imputed to a beneficiary of a trust in accordance
with art. 73, paragraph 2, also when non-resident’, as intending
that income deriving from non-resident trusts must be imputed to
beneficiaries. This is an innovative interpretation, different from
the one given in circular 48/E/2007. The reason for this innovation
can be found in the expressed desire to provide an equal tax
treatment for all trusts, either resident or non-resident. While,
according to circular 48/E/2007, a trust was taxable only on
territorial basis, and as such only on assets situated in Italy,
this would not be the case following the amended interpretation.
Supposedly, this would prevent the beneficiaries from obtaining
undue tax savings that could, for example, be achieved by using
opaque trusts located in foreign jurisdictions with privileged tax
rates. This is because any income distributed by the trust would be
taxable again when received by the beneficiaries, even if taxes
were already paid abroad.
While one can understand and agree with the desire to avoid
abuse, which is rightly addressed by the provisions for inexistent
trusts, it is not possible to agree with the innovative and
punitive interpretation by the Agenzia. Under current legislation,
it appears that trusts that are properly managed should not be
impacted by this interpretation, although it is advisable to adopt
and further develop best practices in the administration of the
trust funds, in order to make absolutely clear the discretionary
nature of the trust.
Italian resident trusts with non-resident
beneficiaries
In the last paragraph, the Circular deals with the taxation of
non-resident beneficiaries of Italian resident trusts. According to
the Agenzia, the income deriving from such trusts that is imputed
to beneficiaries is taxable at the time such income is imputed,
without taking into account the effective payment, which is a
position that it is certainly possible to agree with. This
obviously can be the case with regard to trusts ‘trasparente’ or
‘misti’ (mixed). The Agenzia deems that income imputed to
non-resident beneficiaries must always be deemed as arising in
Italy (art. 23, letter b, TUIR).