trust taxation

Direct Taxation with reference to Trusts profits

The Finance Bill 2007 has introduced in the tax legislation direct tax on trust income with renovation of the article 73 of TUIR, the Italian income tax code for individuals and corporates. According to this article, a trust is considered a tax entity subject to the application of corporate tax (IRES) rate of 27,5%, only when it is without identified beneficiaries.

While, if the trust has identified beneficiaries; it’s not taxable, because are taxed directly the beneficiaries with tax on individuals (IRPEF) attributed in proportion to their share of the income of the Trust;

This article gives us also the criteria for which a Trust is presumed to be resident in Italy. This was clarified in the financial ministerial circular 48/E that reports some special anti abuse rules:

  • It is formed in a nonqualified jurisdiction (no-white list country) and (at least) one grantor and one beneficiary are Italian resident persons;

  • An Italian resident person transfers Italian real estate to a trust;
  • Trust owns or controls an Italian entity and it is owned or controlled by Italian residents.

Indirect Taxation with reference transfer from grantor to a Trust and from Trust to beneficiaries

For the indirect taxation exists some areas of uncertainty in Italian legislation due to a different interpretation of the nature of the Trust.

In fact, the financial ministerial circular 3E of 2008 has determined that transfers from a grantor to a Trust are also subject to indirect taxation.

The transfer of an asset or the attribution of a sum of money to a trust is subject to gift tax; it might be subject to inheritance tax, if the transfer is carried out pursuant to the will of a deceased donor.

According with this circular, the tax gift is computed as if a transfer had been made from the settlor directly to the beneficiaries, so tax rate applicable depends on the degree of relationship between these ones, so:

  • Between the spouse and the relatives pay 4% over € 1 million;
  • Between brothers and sisters:
  • 6% over € 100.000;

  • Between relatives up to 4th degree and collateral relatives u to 3rd degree: 6%;
  • Others: 8%;

  • For a Trust without beneficiaries but with a specific purpose: 8%;

Furthermore there are some exceptions, realized when the settlor’s descendants are nominated as beneficiaries and the trust has as object a business enterprise or shares of a company that is not subject to indirect taxation, an exemption is given under the Italian gift and inheritance tax code.

Instead, distributions of capitals to beneficiaries are tax exempt, since gift tax is collected when the assignment bond is made by the settlor to the trust.

But, many judgments, considered that a Trust can be taxed only at the moment of the final transfers to beneficiaries. References can be found in judgments as Provincial tax commission of Salerno n. 507/4/12, Provincial tax commission of Treviso, n. 14/03/12, Regional tax commission n. 10/29/2012 just to mention the most recent and with the circular of the order of notaries with the Tax studies CNN n. 58-2010/T; has been questioned the subjection to the gift tax for the Trust, considering that does not seem justifiable the legitimation of taxation at the time of the lien for some discretionary trusts when is not configurable an enrichment of certain assets, considering more correct to defer the tax at the time of devolving the trust assets to the beneficiaries.

However the settlor must pay during the constitution only the fixed sum of the registration tax.