Italian beneficiaries of non-Italian irrevocable and discretionary trusts are required to impose supervisory obligations (section RW of the tax return) – Taxation


Italy: Italian beneficiaries of non-Italian irrevocable and discretionary trusts are required to impose supervisory obligations (section RW of the tax return)

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With the recent fiscal decision (Interpello) n ° 693/2021 of 8e October 2021, the Italian tax authorities clearly addressed a controversial tax audit obligation of Italian beneficiaries of foreign discretionary and irrevocable trusts, confirming the obligation to potential beneficiaries of the trust to declare their rights and the amount of the trust in the “RW tax audit section” of their Italian tax return. This conclusion is based on the interpretation of the definition of “actual beneficiary” (titolare effettivo) of the assets of trusts, as amended by Legislative Decree No. 90/2017 (and in force since 2018).

The above interpretation and conclusion is also reported in the current draft tax circular on trusts, open for comment until September 2021, and which has received several requests for clarification and modification by academics and stakeholders in the market and which is still in the pipeline but is expected to be published and formally promulgated by the tax authorities in the near future.

Warning and actions:

This is not a change of law but a relevant interpretation of the Italian tax authorities in a specific anticipatory tax ruling. The principle, if confirmed (as expected) by the new tax circular on trusts, will be binding on tax offices with a significant impact on future tax assessments of Italian beneficiaries of foreign trusts on tax years from 2018.

Italian tax resident beneficiaries of a discretionary and irrevocable foreign trust are clearly required to declare their “potential” right to the foreign assets of the trust in their tax return only for “tax audit” purposes by completing section RW.

The omitted deposit is heavily penalized by a variable tax penalty between 3% and 15% (increased to 6% – 30% if the trust is incorporated in a non-cooperative country) per fiscal year on the total value of the assets held in trust.

Summary of the tax ruling

An Italian settlor planned to create a true irrevocable and discretionary trust governed by foreign law, appointing a non-Italian trustee and designating as final beneficiaries his minor children (identified only as a category of beneficiaries) tax residents in Italy.

The question raised by the tax ruling concerned the qualification of minor children as “beneficial owners” (titolari effettivi) of the trust: in this case, they must file the Italian tax declaration indicating the “potential” trust law in the tax audit section RW.

In the event that the children were qualified as titolari effettivi, and therefore required to file section RW of the tax return, the settlor asked whether the appointment of an Italian trust company, acting on behalf of its children in the collection of the future income / capital of the trustee, would have avoided this obligation to tax declaration of compliance due to the intermediation activity of the same Italian trust company.

The tax ruling confirmed that, following the 2017 amendment introduced by the IV ° Directive on the fight against money laundering (legislative decree no.90 / 2017), the Italian law on fiscal control (decree-law no. No. 167/90 and art. 1 and 20 of Legislative Decree No. 231/2007) includes among the titolari effettivi trusts and similar entities (committed to filing section RW of the income tax return), also beneficiaries who can be easily identified by reference to a category, such as “my children” and regardless of the percentage of assets allocated to each beneficiary.

Furthermore, with regard to the question on the interposition of an Italian trust company, the Italian tax authorities denied that such a circumstance would have exempted from the obligation of Section RW because this exemption only applies to to trust companies with fiduciary management powers (which would rather be exercised by the trustee in the case in question).

Conclusion

The principle expressed in this tax ruling is very important as it will probably be confirmed by the new tax circular on trusts becoming a mandatory tax directive for Italian local tax offices in their ordinary tax procedures.

We anticipate that, if this is the case, in the near future, tax offices may begin to challenge the omitted RW section filing to all Italian tax resident beneficiaries of foreign, discretionary and irrevocable trusts, even in cases where these beneficiaries are identified only. as a category of potential beneficiaries (such as “my spouse” or “my children”) when these persons can be easily identified at the end of each financial year (ie the spouse or the real children of the settlor).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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