IVCA on foreign life insurance policies held through fiduciary arrangements: Clarifications and guidelines

The Italian Ministry of Enterprises and Made in Italy (hereinafter, also MIMIT) has issued guidance on the operational and supervisory issues related to managing tax on the value of insurance contracts (IVCA) concerning foreign life insurance policies held through fiduciary arrangements.

The guidance submitted to the Ministry concerns cases where foreign life insurance policies are issued by insurance companies that don’t act as withholding agents, so the IVCA has to be directly paid by the policyholder/insured. However, where the policy is held in a fiduciary arrangement, the fiduciary company makes the payment in its own name but on behalf of the settlor.

As a result, the funds used for the payment belong to the settlor, the payment is made by the fiduciary company via form F24, and the resulting tax credit is formally registered in the name of the fiduciary company, although it substantively pertains to the settlor.

Upon maturity or surrender of the policy, the substitute tax on capital income must be calculated by the fiduciary company (in the absence of a foreign withholding agent). Since the IVCA paid annually almost always exceeds the final tax due, a tax credit typically arises.

The Italian Revenue Agency, in Circular No. 41/E/2012, clarified that any excess tax must be refunded to the substituted taxpayer and that the fiduciary company can recover the credit through offsetting, refund, or carryforward.

However, based on the same circular, the credit remains formally attributed to the fiduciary company and is recovered through its own tax positions (forms 770/F24), resulting in a lack of full traceability at the level of the individual settlor.

This solution gives rise to several issues in relation to Ministerial Decree of 16 January 1995, including the potential breach of the prohibition on cross-offsetting, the prohibition on assuming financial commitments, and the requirement to operate solely on the basis of pre-existing funds.

According to the MIMIT, aligning with the solution proposed by Assofiduciaria (dated 7 March 2014), the IVCA excess may be treated as a “transferable” tax credit to the policyholder (or their heirs) through certification issued by the withholding agent.

Accordingly, the taxpayer/settlor may report the credit in the Italian Personal Income Tax Return (Modello Redditi PF), in Section RM, on the basis of the certification issued by the fiduciary company (in this case, SER-FID). This section is intended for substitute taxes, related tax credits, and refundable credits pursuant to Article 38 of Presidential Decree No. 602/1973.

In conclusion:

• the IVCA excess can be attributed to the policyholder or their heirs through certification issued by the withholding agent (ie the fiduciary company), which must also undertake not to claim the refund in its own name;
• the taxpayer/settlor or their heirs can report the credit in the Personal Income Tax Return (Modello Redditi PF – Section RM), or alternatively request a refund pursuant to Article 38 of Presidential Decree No. 602/1973.

That said, the certification mechanism largely resolves the inconsistencies between tax procedures and the rules set out in Ministerial Decree of 16 January 1995, as the refund of the excess constitutes a right of the settlor and doesn’t entail any financial advance by the fiduciary company (since the refund is claimed directly by the client). However, this solution must be complemented by appropriate internal organisational measures.

In particular, it would be advisable to implement:

• the establishment of a segregated account for each settlor, to be used for IVCA funding, F24 payments, management of accrued credits, reimbursements, and offsets relating solely to that settlor;
• an IVCA tracking sheet for each policy, detailing funding, payments, credits, usage, excesses, and residual balances;
• additional clauses in fiduciary mandates providing for, inter alia: waiver of early reimbursement, prohibition of cross-offsetting, authorisation to segregate funds, obligation for the fiduciary to issue certification, as well as the fiduciary’s commitment not to claim a refund or offset the certified tax excess and, correspondingly, the settlor’s commitment not to seek reimbursement from the fiduciary;
• an annual statement to the settlor summarizing IVCA paid, accrued credits, certified credits, any excesses, and the balance of the segregated assets.

The guidance issued by the MIMIT represents a significant step towards addressing the operational issues related to managing IVCA in the context of foreign life insurance policies held through fiduciary arrangements.