Under new anti-money laundering legislation due to become effective in Italy in 2017, all foreign trusts with tax effects in Italy shall have to be filed and registered on the Italian Register of Enterprises. They include trusts with Italian settlor, Italian beneficiaries, Italian assets, Italian source income or treated as Italian resident trust under Italian tax law.
The tax effects of a trust in Italy and the consequent obligation to disclose it on the Italian Register of Enterprises is determined under Italian tax laws. The way in which a trust, its income or its beneficiaries are treated under foreign tax law is not determinative for that purpose.
Trustees of trusts subject to the new disclosure and filing rules shall have to collect, conserve and disclose adequate information about trust’s ultimate beneficial owners, which are meant to include the settlor, the trustee, the guardian, the beneficiaries, and any other person having any type of control or authority over the trust.
The scope of the new disclosure and reporting rules for trusts is very wide. All trusts with any apparent or potential point of contact with Italy should be revised to determine whether they fall within the application of the new rules.
As part of Italy’s domestic legislation implementing the EU IV Anti Money Laundering Directive of 2015 (EU 2015/849), the legislative decree presented by the Government to the Parliament on February 23, 2017 provides that trusts with tax effects in Italy must be registered in a specific section of the Register of Enterprises.
The Register of Enterprises is a public register in which all incorporated and unincorporated business entities and individual commercial enterprises are registered and file their initial organizational documents, annual financial statements, list of owners or shareholders, and changes to their organization and structure (such as sales of shares, mergers, divisions, dissolutions, acquisitions, opening of new of branches and the like).
The Register of Enterprises will have a new section specifically for trusts pursuant to the new anti money laundering legislation.
Access to the Register’s trust section shall be limited to the tax agency and anti money laundering authorities (while the Register’s information on business entities and enterprises are available to the public).
Italy does not have any law on trusts. Trusts organized under foreign (non-Italian) law are recognized and have legal effects in Italy pursuant to the provisions of the Hague Convention on Trusts dated July 1, 1985 (ratified in Italy with law n. 364 of October 16, 1989).
For tax purposes, article 73 of Presidential Decree n. 917 classifies trusts as taxable entities.
Trust’s income is then taxed either in the hands of the trust, in case of discretionary trusts with no beneficiaries having a fixed right to the current distribution of the income of the trust, or in the hands of the trust’s income beneficiaries, if identified in the trust agreement and having a fixed right to the distribution of income of the trust, depending on the terms of the trust.
Non-resident (fiscally non-transparent) trusts are taxable solely on their Italian source income, while resident (fiscally non-transparent) trusts are taxed on all of their income wherever produced. The tax residency of a trust is determined with reference to its place of administration.
For the income beneficiaries of an Italian (fiscally transparent) resident trust, the trust’s income is always classified as Italian source income (following the residency of the trust), and characterized as income from capital taxable in Italy (subject to exemption under any applicable tax treaty), regardless of the source of the income when earned by the trust. For Italian income beneficiaries of a non-resident (fiscally transparent) trust, the trust’s income is foreign source income carrying with it potential foreign tax credit.
Italian resident beneficiaries of a trust with foreign assets are required to report their interests in the corpus or income of the trust on their Italian income tax return. An Italian resident individual who is the grantor of a trust with foreign assets is not required to report the value of the assets of the trust on his or her Italian income tax returns, on the assumption that the trust is a valid trust (as opposed to a mere conduit of tax scheme) and the transfer of the assets to the trust for the future benefit of the trust’s beneficiaries is effective and complete.
According to article 21, paragraph 3 of the legislation decree of 2/23/2017, all trusts with relevant tax effects in Italy, according to article 73 of Presidential Decree n. 917 of 1986, are required to be filed and registered in the Register of Enterprises.
Situations in which a trust has relevant tax effects in Italy, and shall have to be filed with the Register of Enterprises, are very wide in scope and include some not entirely obvious scenarios such as the case of a foreign (non-resident) trust with foreign settlor, foreign assets and foreign trustee, but Italian resident beneficiaries, or a foreign (non-resident) trust with foreign assets, foreign trustee and foreign beneficiaries but an Italian resident settlor.
In the case of a foreign trust with foreign settlor, foreign assets and foreign trustee but Italian beneficiaries, the trust has tax effects in Italy, because the Italian beneficiaries are or will be required to report their income from the trust, and are required to disclose their interest in the trust on their Italian income tax return. That is the case of U.S. trusts where everything is the the U.S. except that one or more beneficiaries are in Italy.
In the case of a foreign trust with foreign assets, foreign trustee and foreign beneficiaries, but an Italian settlor, the trust has tax effects in Italy because the settlor as a result of setting the trust no longer has the tax obligation to report his or her interest in the assets transferred to the trust, which he or she would otherwise be required to report under Italian international tax reporting rules.
Sometime, a trust may be treated as a domestic trust under the tax legislation of the country in which the trust is organized, and as an Italian resident trust under Italian tax rules. In that case, the trust is also required to be registered on the Italian Register of Enterprise. The same happens when a trust as income that is treated as Italian source income, under Italian tax rules, and may be regarded as not having Italians source under the tax rules of a foreign country.
The duty to file and register the trust in the trust section of the Italian Register of Enterprise falls upon the trustee. The trustee is also required to communication the relevant information about the trust, on an annual basis, to the Register.
As to the scope of disclosure, article 21, paragraph 5 of the legislative decree refers to the “ultimate beneficial owner” of the trust and provides that future regulation will be adopted by the government to clarify in detail what information will have to be filed with the Register.
However, article 22, paragraph 5 of the legislative decree expressly provides that trustees of trusts governed by law n. 364 of October 16, 1989 (ratifying in Italy the 1985 Hague Convention on Trusts) shall collect and conserve adequate information about the ultimate beneficial owners of a trust, by that meaning information about the settlor, the trustee, the guardian, persons acting on behalf of the trustee or the guardian, the beneficiaries, or any other person who exercises control over the trust or has any authority over the assets of the trusts.
The definition of ultimate beneficial owner and the list of persons who need to be disclosed is very wide. The term trust “beneficiaries” is not otherwise defined and would seem to include both income and corpus beneficiaries, as well as present and contingent beneficiaries. The reference to any other persons who has control of authority over the trust also extends the scope of disclosure and puts additional burden upon the trustee who is ultimately, personal liable to comply with the new trust disclosure legislation.
In conclusion, all trust planning structures with any point of contact with Italy should be revised, to make sure whether they fall within the application of the new anti money laundering legislation. Also those trusts with no apparent point of contact with Italy should be reviewed, to determine whether they may have tax effects in Italy, under Italian tax law principles, and fall within the scope of the new trust disclosure rules, due to some discrepancy between the way a trust or its income is treated and classified in Italy, under Italian law, compared to the way in which its is characterized under the tax laws of the country in which the trust has been organized or is administered.
Subscribe to TaxConnections Blog
Enter your email address to subscribe to this blog and receive notifications of new posts by email.