With Ruling no. 9 of 11 January 2022, the Italian Tax Authorities provided some guidance concerning:
- the features that lead to a Liechtenstein family foundation being disregarded for Italian income tax purposes; and the treatment of the
- distribution of the proceeds from the sale of its assets to the heirs of the beneficiaries, for Italian inheritance and gift tax purposes.
The case dealt with by the Italian Tax Authorities concerned a Liechtenstein family foundation (Stiftung) established by nine late Italian tax resident individuals, all deceased. The founders were also the primary beneficiaries of the Stiftung, followed by their heirs.
The sole asset of the Stiftung was represented by forest land situated in Austria. The asset was intended to be sold and the proceeds so derived by the Stiftung were to be distributed to the heirs of the founders.
As a first remark, the Italian Tax Authorities observed that Liechtenstein family foundations may be treated as trusts for Italian income tax purposes if they present their same essential features.
The Italian Tax Authority rules that in order for a trust to qualify as a separate taxable entity for Italian income tax purposes, the trustee must have the power to administer and dispose of the assets entrusted to it by the settlor on a discretionary basis. By contrast, whenever the trustee does not have such powers, the trust is disregarded for Italian income tax purposes with the consequence that the assets constituting the trust fund (together with the income they generate) must be attributed to the settlor or the beneficiaries that effectively exercise those powers.
The following features of the Stiftung, resulting from the analysis of the statute and the regulation of the same, led the Italian Tax Authorities to conclude that its Council was not completely independent from the beneficiaries and their heirs. In fact:
- the founders were also the primary beneficiaries of the Stiftung;
- the management and the administration of the Stiftung fund pertained to its Council “in cooperation with the Executive Committee”,
- composed by the beneficiaries or their descendants;
- the termination of the Stiftung, the amendment of its statute and the sale of its fund were subject to the approval of the Beneficiaries Assembly;
- the Stiftung Council and its Executive Committee could challenge the resolutions of the Beneficiaries Assembly only when taken in breach of the law;
- the Stiftung Council could be revoked in the event that it did not consult with the Executive Committee for the sale of the Stiftung fund.
Given that the beneficiaries could interfere in the management of the fund, the Stiftung has to be disregarded for Italian income tax purposes. Accordingly, the income formally generated by the Stiftung after the death of the founders has to be taxed directly in the hands of the beneficiaries. Nevertheless, the beneficiaries were not to be subject to Italian income tax on the proceeds from the sale of the forest land entrusted in the Stiftung as a result of a particular rule laid down in the Italian income tax code.
With respect to the taxation of the income distributed by non-Italian resident trusts situated in low tax jurisdictions, the Italian Tax Authorities did not have the opportunity to clarify how the rules recently introduced should apply; indeed, having considered the foundation as a disregarded entity, the relevant income was deemed as to have been directly derived by the beneficiaries. Therefore, it is still necessary to wait for the publication of the final version of the draft Circular Letter, subject to public consultation in August 2021, in order to understand the view of the Italian Tax Authorities on this subject.
From an Italian inheritance and gift tax perspective, the Italian Tax Authorities maintained that the allocation of the proceeds deriving from the sale of the forest land fell within the definition of mortis causa transfers to the resident heirs of the beneficiaries of the foundation. Indeed, after the death of the founders, their heirs automatically inherited the position of beneficiaries of the Stiftung. Accordingly, Italian inheritance tax applies.
As a consequence, the heirs and current beneficiaries of the Stiftung are required to submit a supplementary inheritance tax return to declare the amounts received.
All that considered, Ruling no. 9/2022 seems to confirm that the applicability of Italian inheritance and gift tax has to be assessed at the time of the “exit” (on the ‘way out’) of the assets from the trust (or Stiftung) fund, in compliance with the draft Circular Letter dated August 2021.
Moreover, the Ruling represents a further confirmation for trustees of foreign trusts and foundation councils that would like not to incur in a “look-through approach” to act independently of any interference from any Italian resident beneficiaries and it would be also advisable to ensure that any decision taken by them be properly recorded.