STEP

Title Research

New guidance on trust taxation

  • Author : Alessandro Belluzzo
  • Author : Luigi Belluzzo
  • Date : April 2011
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

Circular 43/E/2009 Circular 61/E/2010
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).


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