14 February 2020 - Article
Italian resident beneficiaries of foreign trusts should pay attention to the new position taken by the Italian Government concerning distributions made by foreign opaque trusts resident in low-tax jurisdictions. With the provision set out in its Art. 13, the recent Italian Law Decree No. 124 of 26 October 2019 has provided new tax consequences on such distributions that will affect Italian resident beneficiaries.
The new provision is reasonably aimed at providing new certainty and to fill an historic void in the Italian Tax Code on the tax treatment of distributions from foreign trusts. Moreover, the Law Decree will be converted into law within 60 days from its issuance, so it is not possible to ascertain whether this provision will be further amended.
A preliminary remark
Under existing Italian tax law, trusts can be classified as follows:
a) “transparent trusts”, i.e. trusts with identified beneficiaries who are entitled to receive the trust income. In such a case, the trust income is directly attributed to beneficiaries on an accrual basis, regardless of its effective distribution;
b) “opaque trusts”, i.e. trusts where beneficiaries are not identified and have no right to claim vis-à-vis the trust income (e.g. pure discretionary trusts). In such a case, the trust income is subject to taxation in the hands of the trust, which is treated as a separate taxable entity.
The new provision: explicit and implicit dispositions
Art. 13 inserts a new provision that will affect distributions operated from foreign opaque trusts to Italian resident beneficiaries.
First of all, income paid to Italian tax resident beneficiaries by trusts or similar entities established in states that are considered to be low-tax jurisdictions is taxable as income from capital in the hands of the Italian tax resident beneficiaries, even if they do not qualify as identified beneficiaries.
Moreover, the new disposition also introduces a presumption according to which distributions to Italian tax resident beneficiaries from foreign opaque trusts are deemed as distributions of income if the taxpayer is not able to demonstrate that capital has been distributed.
It is important to notice that the new provision set out in Art. 13 implicitly confirms that:
- distributions from foreign opaque trusts that are not established in low-tax jurisdictions should not be subject to taxation in the hands of the beneficiaries;
- according to the literal wording of the Law Decree, undistributed income of a trust, even if resident in a low-tax jurisdiction, is not subject to taxation in the hands of the recipients;
- distributions of capital from trusts resident in low-tax jurisdictions are not subject to income tax.
What is a low-tax jurisdiction?
In order to identify the meaning of low-tax jurisdiction for the purpose of this Article, the abovementioned Law Decree specifically refers to Art. 47-bis of the Italian Tax Code. Firstly, Art. 47-bis seems to exclude Member States of the European Union and of the European Economic Area with which Italy has concluded an Exchange Information Agreement from the definition of low-tax jurisdictions. Furthermore, Art. 47-bis considers those countries in which the nominal (or, under specific conditions, the effective) tax rate applied to the trust is lower than half of the Italian Corporate Income Tax, i.e. lower than 12%, as low-tax jurisdictions.
In the light of the broader definition of low-tax jurisdiction provided by the Italian Tax Code, it is possible to identify that various countries will fall within the scope of the new provision, such as Switzerland, New Zealand, Uruguay and Hong Kong.
When will the new rules apply?
In the absence of any specific provision with reference to the entrance into force of the new rules, we can assume that the new provision applies to distributions made starting from fiscal year 2020. In such a case, distributions that have occurred within the end of fiscal year 2019 would not be subject to taxation, irrespective of whether they are distributions of income or distributions of capital.