Reform of the Inheritance and Gift Tax in Italy: Focus on Trusts

The recent approval of the legislative decree by the Council of Ministers on August 7, 2024, implementing the delegated fiscal reform law (law of August 9, 2023, no. 111), marks a significant turning point in the fiscal regulation applicable to trusts, particularly concerning inheritance and gift tax.

The reform is part of a broader process of rationalizing indirect taxes, aimed at providing greater legal certainty and consistency, filling the gaps previously left to administrative practice and case law.

Territoriality and Taxation of Assets Segregated in Trusts

The new decree confirms and formalizes the principles of territoriality of inheritance and gift tax concerning trusts, an aspect previously governed primarily by administrative practice, as indicated in Circular 34/E/2022 of the Italian Tax Authorities ("Agenzia delle Entrate").

Specifically, the text stipulates that if the settlor is resident in Italy at the time of the segregation of assets into trust, the tax applies to all assets and rights, wherever located in the world, transferred to the beneficiaries. Conversely, if the settlor is a non-resident, taxation is limited to assets and rights located in Italy.

This principle aligns with the case law of the Supreme Court, which has clarified that the relevant moment for applying the tax is when the assets exit the trust to be transferred to the beneficiaries, thereby realizing a gratuitous enrichment. This approach has been further reinforced by the decree, emphasizing the obligation to verify the territorial conditions at the time of the transfer of assets into the trust.

The New Option for Advance Taxation

The most significant innovation of the reform is the introduction of an optional regime for advance taxation, representing an alternative to the traditional taxation at the "exit" of assets from the trust. This regime allows the settlor, or the trustee in the case of a testamentary trust, to pay the gift tax at the time the assets are transferred into the trust or at the opening of the succession.

The applicable rate and allowances are determined based on the relationship between the settlor and the beneficiaries, as provided by the general rules of inheritance and gift tax. In particular, the rate for transfers to a spouse or direct descendants is set at 4% with an allowance of €1,000,000, while for siblings, the rate is 6% with an allowance of €100,000. Other categories of beneficiaries, such as relatives up to the fourth degree, are subject to a rate of 6% without any allowance, while for other persons, the applicable rate is 8%.

However, the decree states that in cases where it is not possible to precisely identify the "category of beneficiaries" at the time of the transfer of assets into the trust or the opening of the succession, the highest rate will be applied without considering any allowances. This occurs when the class of relatives or related persons, for which taxation would be homogeneous, cannot be determined. This provision serves as a protective mechanism for the treasury, ensuring that there are no gaps in taxation when there is uncertainty about the final destination of the segregated assets.

Impact and Future Prospects

The introduction of this advance taxation option could encourage the use of trusts as a tool for estate planning, offering taxpayers the possibility of benefiting from greater tax certainty and more effective planning of wealth transfers.

Italy continues to offer a particularly favorable tax regime for the transfer of assets by gift or upon death, with rates and allowances among the most competitive in Europe.

In a context of increasing international mobility of individuals, it is essential to consider that Italy has bilateral agreements in place to avoid double taxation on inheritances and gifts with a limited number of countries: Denmark (1996), France (1990), Greece (1964), Israel (1968), Sweden (1956), the United Kingdom (1966), and the United States of America (1955).