Unlocking Wealth Preservation: Navigating Trusts in Italy's Civil Law Jurisdiction
In the intricate tapestry of Italian wealth management, trusts have emerged as powerful instruments facilitating the preservation and succession of wealth across generations. Despite Italy being a civil law jurisdiction, trusts play a pivotal role in tailoring and controlling the transfer of wealth in a manner aligned with the unique needs of individuals and families.
Recognition of Foreign Trusts
Italy, while lacking a specific trust law, recognizes trusts governed by foreign laws. This acknowledgment stems from the ratification of the Hague Convention on the law applicable to trusts and on their recognition in 1989. Moreover, in 2016, Italy introduced civil law provisions addressing trusts for individuals with qualifying disabilities. However, settling assets into a trust is regarded as a gift concerning the calculation of the estate's value for inheritance purposes.
Tax Regime of Trusts
From an Italian tax perspective, trusts can be categorized as 'disregarded' or 'non-disregarded':
- Disregarded Trusts: These trusts are non-existent for Italian income tax purposes. The settlor or beneficiary holds a direct interest in the underlying assets, and income is taxed based on the applicable regime for the individual.
- Non-Disregarded Trusts: These trusts are deemed autonomous entities, treated as taxable persons for income tax purposes. The tax treatment depends on whether the trust is 'opaque' or 'transparent.'
- Opaque Trusts: Subject to withholding taxes or substitute taxes on income and capital gains. Anti-avoidance provisions targeting business assets do not apply.
- Transparent Trusts: Income is determined at the trust level and taxed progressively when apportioned to beneficiaries. Distributions to Italian-resident beneficiaries are not subject to income taxation.
Inheritance and Gift Tax
The 2006 reform of inheritance and gift tax led to debates on when tax obligations arise. The tax authorities initially asserted tax liability during the addition of assets to the trust fund, but case law supported taxation upon distribution to beneficiaries. Circular No. 34 of 2022 clarified that inheritance and gift tax are generally due only on distributions to beneficiaries. This allows a tax deferral until distributions occur, with exceptions for fixed interest trusts.
For disregarded trusts, the look-through approach is adopted not only for income tax purposes but also for inheritance and gift tax purposes. Consequently, assets held by a disregarded trust become part of the settlor's taxable estate upon demise.
Understanding the intricacies of trusts in Italy requires a nuanced approach. At Move To Dolce Vita, we specialize in navigating the complexities of Italian tax regulations and legal frameworks. Our commitment is to assist individuals, families, and entrepreneurs in strategically managing and preserving wealth for current and future generations.
With expertise in trusts and wealth planning, we ensure a seamless journey through Italy's intricate wealth management landscape.
