Italian trust with foreign beneficiaries: open issues

Italian non discretionary trusts are treated as “transparent” for income tax purposes. 

Therefore, the income generated by the trust is allocated to the trust’s beneficiaries and taxed in their hands, regardless of any distribution, in proportion to the beneficiaries’ shares of trust income. Such proportion is determined in the trust agreement or – in the absence of such a determination, by equal shares.
The income is allocated according to the amount of the income that is attributed to the beneficiaries in the trust agreement or by the trustee pursuant to the powers granted to him by the trust agreement. 

Italian tax law lacks of a clear discipline, as for the tax regime to be applied to non-resident beneficiaries of Italian resident non discretionary trust. 

Indeed, for Italian tax purposes the income generated by a trust is classified as “capital income” (reddito di capitale); that means, in a nutshell, as income stemming out from capital outlay  (similarly to dividends).

Art. 23 Consolidated income tax code provides for the taxation of capital income distributed by Italian residents. 

However, such rule can not apply in the case at stake. The income accrued by the non discretionary trust is taxed in the hands of non resident beneficiaries, notwithstanding any distribution. 

For sake of completeness, art. 23 Italian consolidated income tax code provides for the taxation of the income accrued by Italian partnerships in the hands of foreign partners, notwithstanding any distribution. 

However, such rule can not apply in the case at stake, given the fact that it applies specifically to partnerships (trusts are not contemplated). 

The absence of a direct rule on source of income and any authority that attributes the income to the trust’s non resident beneficiaries may create troubles in identifying the correct legal ground for taxation of the income generated by the trust in Italy.

Notwithstanding the absence of an explicit discipline, the Italian Revenue Agency clarified that in any case the income attributed by a foreign discretionary trust is, in any case, taxable. The source rule, in the case at stake, should be identify in the taxation rule itself. In other words, given that the Italian law provides for the taxation of the income generated by foreign discretionary trusts, such income must be taxable, in Italy, also when attributed to foreign beneficiaries. The source rule, according to the Italian Revenue Agency, coincide with the tax rule (see Circular letter 61/2010). 

The clarification issued by the Italian Revenue Agency is based on the needs to avoid the non taxation of foreign beneficiaries of Italian non discretionary trusts. However, such clarification does not seem consistent with the general international taxation principles. It would be advisable to adopt an express rule.