Article 13 of the Italian Law Decree No. 124 of 26 October 2019 has provided new tax consequences on distributions made by foreign opaque trusts resident in low-tax jurisdictions 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.
Under 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.
the trust income is directly attributed to beneficiaries on an accrual basis, regardless of its effective distributions.
b) “opaque trusts”, e. trusts where beneficiaries are not identified and have no right to claim the trust income.
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 DISPOSITIONS:
Law Decree No. 124 (Art. 13) regulates distributions made by foreign opaque trusts to Italian resident beneficiaries as follow:
Income paid to Italian tax resident beneficiaries by trusts resident in 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.
The Decree 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.
The new regulation 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;
- 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.
Law Decree specifically refers to Art. 47-bis of the Italian Tax Code.
First of all, Art. 47-bis excludes from the definition of low-tax jurisdictions Member States of the European Union and of the European Economic Area with which Italy has concluded an Exchange Information Agreement.
Furthermore, Art. 47-bis considers as low-tax jurisdictions those countries in which the nominal (or the effective) tax rate applied is lower than half of the Italian Corporate Income Tax.
WHEN WILL THE NEW RULES APPLY?
The new rules apply to distributions made starting from fiscal year 2020.
It means that distributions that have occurred within the end of fiscal year 2019 would not be subject to taxation, no matter if they are distributions of income or distributions of capital.