The Italian Revenue Agency, in response No. 258 of 2024, provided clarification on the tax qualification of trusts established abroad by a deceased settlor, with a beneficiary tax resident in Italy. The petition presented concerns three trusts governed by Texas law, with specific peculiarities on the duration and management of distributions.
The Question
The trusts are administered by the Trustee, an officer of Alfa Bank residing in Texas, with no professional or personal ties to the Applicant. Income from the trusts comes from financial assets (interest, dividends, capital gains) and is subject to the Trustee’s professional activities and fees. The Applicant therefore considers the trusts to be non-commercial.
The three trusts have different characteristics regarding duration and income distribution:
- Trust 1 terminates 21 years after the death of the last of the Dispositor’s family members or when the properties have a value of less than $100,000.
- Trust 2 ceases when the Beneficiary reaches age 55, with an obligation to distribute property held by the trust.
- Trust 3 ends three years after the death of the Dispositor, with the obligation to transfer property to Trust 1.
The Applicant requests an opinion on the tax qualification of the trusts and the tax treatment of allocations for the year 2024 and later.
In its interpretation, the Applicant believes that the three Trusts qualify as “opaque” and established in a country with non-preferred taxation, according to Circular No. 34/E of October 2022.
The Applicant believes that, given the Trustee’s place of residence, the Trusts are to be considered established in the United States, and that the latter has broad discretionary powers in the management and distribution of the funds. Finally, since the level of taxation in the United States is at least 50 percent of that applicable in Italy, the provision of Article 44, paragraph 1, letter g) sexies of the Tuir, which provides for the attribution to the resident taxpayer of income produced by trusts of which he is a beneficiary, established in states and territories that are considered to have a privileged tax status, is not considered applicable.
The opinion of the Revenue Agency
The Revenue Agency’s opinion concerns the tax regulation of trusts in the Italian system, particularly in relation to the classification of trusts into:
- Difference between “transparent” and “opaque” trusts as per Paragraph 2 of Article 73 of TUIR;
- Realized and established by mere interposition of income, as specified in Circular No. 61/E of 2010 referring to Circular No. 43/E of 2009;
In the case of trusts with identified beneficiaries (transparent trusts), income is taxed directly to the beneficiaries, while in trusts without identified beneficiaries (opaque trusts), income is taxed at the level of the trust itself. The opinion examines the three specific trusts and provides their tax qualification.
Trust 1
The trust is considered nonexistent for Italian tax purposes and the beneficiary is to be regarded as an interposing party in Italy as provided for under Article 37(3) of Presidential Decree No. 600 of September 29, 1973. This is because the trustee can be removed and replaced at any time, as provided by deed of trust itself, and has reporting obligations to the Instant. Because of the lack of autonomy in management and the beneficiary’s right of revocation, income is therefore subject to imputation to the Italian resident beneficiary.
Trust 2
The trust has as its sole beneficiary the Applicant, with an obligation to distribute income and other property annually upon reaching certain ages (45 years, 50 years and 55 years). Since the contractual provisions reveal a restricted, if not almost nonexistent, autonomy in the trustee in deciding the distribution of the sums, the trust qualifies as “transparent” as per Art. 73(2) of the TUIR, and the income is imputed to the beneficiary by transparency. The income received will therefore be considered as capital income regardless of whether the trust is considered tax resident in Italy, as expressed in Circular 34/E of 2022.
Trust 3
This is a trust in which the beneficiary is the Applicant, but management of the assets is limited by the need to consult the beneficiary’s siblings for “Major Decisions.” Due to the lack of autonomy of the trustee as in Trust 1, the trust is considered nonexistent for Italian tax purposes, and income is imputed back to the Italian resident beneficiary as the intended interposing party under Article 37(3) of Presidential Decree No. 600 of September 29, 1973.
Conclusions
In essence, the Italian Revenue Agency clarifies that nonautonomous management and control rights exercised by the beneficiary influence the tax qualification of trusts. The distinction between transparent and opaque trusts depends on the beneficiaries’ right to receive income and the trustee’s actual discretion in management.
This response provides key guidance for Italian taxpayers who are beneficiaries of foreign trusts. It is essential to carefully evaluate the powers of the trustee and the rights of the beneficiaries to determine the correct tax regime applicable.