Inheritance and gift tax: the Italian Government changes the rules. Interesting clarifications regarding trusts - First insights

The Council of Ministers has given the green light to the Legislative Decree implementing the Indirect Tax Reform. The approved decree will enter into force, with any amendments to the original text, once the relevant parliamentary commissions have given their opinion. 

The interventions with the greatest impact concern the regulation of trusts, transfers of family businesses, inheritance declarations, tax settlements and the adjustment of the gift tax. 

In the following, for the sake of brevity, we will analyse in a purely preliminary manner only some of the proposed regulatory changes, more specifically those concerning trusts and transfers of family businesses. 

With reference to trusts, it should be noted that, firstly, the Draft Decree is concerned with defining the rules on the territoriality of transfers deriving from trusts and the so called “vincoli di destinazione” (other analogous relationships).

 If, for example, the settlor is resident in Italy at the time of the transfer of assets, tax will be due on all assets and rights transferred to the beneficiaries (e.g. worldwide principle). Conversely, if the settlor is not resident in Italy at the time of the transfer of assets, the tax will be due only on those assets and rights located in the territory of the State transferred to the beneficiaries. 

Secondly, the Legislator, implementing the recent guidelines issued by the Italian Cassation Court - accepted also by the Italian Tax Administration in its recent Circular 34/2022 - establishes that trusts and other “vincoli di destinazione” are relevant for tax purposes, as they contribute to the determination of the gratuitous enrichment of the beneficiaries; it also establishes that the tax is levied at the time of the transfer of the assets and rights to the latter¹. 

The Draft Decree also provides that the settlor may opt for the advance application of inheritance and gift tax upon the transfer of assets to the trust, based on the settlor’s relationship with the beneficiary and the applicable tax rules. 

The rationale behind this provision is twofold: 

• the settlor could exempt the beneficiary from paying gift tax at the time of his or her enrichment;
• there would be the opportunity to freeze the tax at the rate applicable at the time of transfer of the assets to the trust. This would make it possible, for example, to avoid possible legislative changes in peius that would imply an increase in the tax, or to eliminate the risk of a heavier tax burden as a result of, for example, an increase in the value of the trust assets. 

On the other hand, however, it must be noted that in the case of advance taxation, as set forth in the Draft Decree, no refund is due if the transfer to the beneficiary does not take place² (e.g. if the trust assets are completely depleted). 

It should also be noted that the option for taxation at the initial endowment of the trust assets may be exercised by the settlor or - as expressly mentioned by the Legislator - in the case of testamentary trusts, by the trustee. 

The Draft Decree also addresses the regulations that provide for an exemption from inheritance and gift tax for transfers of companies, branches of companies, and shares, including when they are carried out through family pacts (the so called “Patto di Famiglia”), in favour of spouses and descendants. 

The exemption applies on condition that the successors in title continue to carry on the business activity or hold control for a period of not less than five years from the date of the transfer, making an appropriate declaration to do so at the time of the presentation of the declaration of inheritance or the deed of gift. 

The Draft Decree - adopting the indications established by the Court of Cassation - specifies that the benefit, under the same conditions as for transfers of shares and stocks of resident entities, also applies to transfers of stocks and shares in companies resident in countries belonging to the European Economic Area or in countries that guarantee an adequate exchange of information.

Edited by Giulia Sorci

¹ The effects of this provision on the identified beneficiaries holding full and enforceable rights will have to be evaluated after the issuance of the Italian Tax Authority’s Provision, since the beneficiaries’ obligation to report self-assessment of the tax – as provided for by law - is triggered by the formal transfer of the property. Therefore, account is not taken of cases where the deed of trust in itself already confers rights on the beneficiaries that are not at the discretion of the trustee;

² In this case also, it is necessary to await the issuance of the Italian Tax Authority’s Provision clarifying this situation, in order, inter alia, to settle any disputes concerning cases in which the devolution of the assets takes place - for whatever reason - to beneficiaries other than those indicated at the time.