Italy hits foreign trusts with new anti-avoidance provisions

With Law Decree no. 124/2019 (which entered into force on 27 October 2019), Italy introduced new provisions aimed at making trust taxation heavier. In particular, according to article 13 of the Decree, distributions from trusts (and similar schemes, eg foundations) located in tax havens would be taxed in the hands of the Italian resident beneficiary.

According to the Italian rules, trusts are generally subject to different tax regimes depending on whether the beneficiaries are identified and have an actual right to the amounts (so-called transparent trust) or not (so-called opaque trust). In the case of transparent trusts, tax is levied on the beneficiaries on an accrual basis, while for opaque trusts taxes would be paid at the level of the trust. With the new rules coming into force, the Italian recipient of a distribution from an opaque trust would be taxed in Italy, provided that the trust is located in a tax haven.

Furthermore, if is not possible to understand whether the proceeds distributed include trust fund and/or trust income, the Decree states that the amount distributed by foreign trusts would be fully taxed in the hands of the Italian beneficiary.

DLA Piper comment: With the newly introduced provisions, Italy is trying to hit trust structures located in tax havens by derogating to the ordinary trust taxation principles and creating a peculiar tax regime for anti-avoidance purposes. However, this regime lacks clarity as it does not specify whether potential foreign withholdings can be deducted and what definition of “tax haven” should be considered for its purposes. Furthermore, the Decree also misses the opportunity to clarify the territoriality rules applicable to foreign-sourced incomes derived by foreign trusts. A greater degree of analysis is then requested for foreign trust companies in terms of identification of trust fund/income.