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Italy: New rules for foreign trusts, non-commercial partnerships, non-commercial entities

Italy: New rules for foreign trusts

At the end of 2019, Italy introduced two new income tax rules for foreign trusts.

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First rule—distributions by foreign discretionary trusts

The term “capital income” under a provision of the Italian income tax law now includes income distributed to residents of Italy by trusts and trust-like institutions, when established in countries and territories that, with reference to the treatment of trust income, are deemed to be “tax havens” even when the resident payees cannot be considered to be the identified trust beneficiaries.

Previously, Italian income tax law had not regulated the taxation of distributions by foreign discretionary trusts to residents of Italy. This gap in legislation was further complicated by guidance issued by the tax authority (Circular no. 61/E of 27 December 2010) that, in commenting on the allocation of income, made reference to discretionary trusts, even though these were not mentioned in the income tax law itself.

  • The allocation of income by a trust to resident beneficiaries is taxable in Italy in the hands of those beneficiaries as capital income, whether or not the trust is a resident in Italy and whether or not the income has been produced in Italy. Obviously, if the income allocated to resident beneficiaries has been produced by the trust in Italy and already taxed by Italy, it would not be subject to further tax in the hands of the beneficiaries;
  • This tax regime prevents undue tax savings that could be made, for example, in the case of discretionary trusts established in foreign tax haven jurisdictions. In such cases, the lower taxation of the trust would be offset by the taxation of the resident beneficiary.


KPMG observation

Under the new rule, income distributed to resident beneficiaries by discretionary trusts located in tax haven jurisdictions will be taxed on a cash basis—therefore, breaking with the past practice established by the 2010 circular, and not taxed on an accrual basis. The tax authority’s position on the taxation of discretionary foreign trusts, as expressed in the 2010 circular, would seem to be implicitly contradicted by current legislation. Since there is now a clear distinction between the treatment of discretionary and non-discretionary trusts, it would seem that distributions of income to resident beneficiaries by discretionary trusts can be taxed in Italy, provided that the trust is established in a tax haven jurisdiction.

Second rule—distributions of income vs. distributions of principal

The second rule provides that concerning distributions by foreign trusts, or by trust-like institutions, to beneficiaries resident in Italy, if it is not possible to distinguish between distributions of income and distributions of principal, the entire amount is to be treated as income.

The legislation clarified that the new provision is intended to resolve the issue of distributions by “discretionary” foreign trusts, when Italian beneficiaries report they are unable to distinguish between what is principal and what is a distribution of income. For this purpose, the provision stipulates that when it is impossible to make this distinction, distributions by foreign trusts must be treated as income if they might give rise to taxable income as defined by the tax rules. It follows that a determination that a distribution is taxable can be rebutted by providing the tax authorities with proof that the distribution has been made from trust principal, leaving only the “income portion” as taxable.


KPMG observation

There are certain items or issues that require clarification, such as:

  • The date when the new rules will be effective.
  • How the rules are to be applied in relation to foreign trusts.
  • What type of proof to resolve the distinction between principal and income is required. 
  • Confirmation that distributions by trusts other than those located in tax haven jurisdictions are not taxable.


Read a January 2020 report [PDF 192 KB] prepared by the KPMG member firm in Italy

Non-commercial partnerships and non-commercial entities

At the end of 2019, there were new tax rules concerning non-commercial partnerships and non-commercial entities. In particular, there are measures that:

  • Introduce a special system of taxation for Italian dividends received by resident non-commercial partnerships
  • Extend the IVAFE (the wealth tax on financial assets) and IVIE (the wealth tax on foreign real estate) to resident non-commercial partnerships and non-commercial entities

New system of taxation for dividends received by resident non-commercial partnerships

A special system of taxation for Italian dividends received by resident non-commercial partnerships has been introduced. 

As background, after the repeal of article 47(1) of the Italian income tax law by the Budget Law for 2018, it was possible to assert (based on an interpretation of the legislative framework and on the lack of a specific rule) that dividends received by resident non-commercial partnerships were fully taxable. This approach was endorsed by the Italian tax authority. However, there were those who asserted that it was not possible to tax the full amount of dividends received by such non-commercial partnerships because this would be contrary to the principles of tax law.

A new provision (article 32-quarter) resolved this controversy by establishing that dividends paid to a non-commercial partnership are to be taxed on a look-through basis at the level of the partners. Furthermore, it is expressly stipulated that this system of taxation will also apply where there is a withdrawal or exclusion of partners, redemption, reduction of surplus capital, or liquidation (even in insolvency proceedings).

Article 32-quater continues to describe the following situations based on a principle of look-through taxation:

  • Dividends paid to a non-commercial partnership whose partner is a joint-stock company or commercial entity—95% of the dividends are excluded from the calculation of the partner’s total income
  • Dividends paid to a non-commercial partnership whose partner is a sole proprietorship or a commercial partnership—41.86% of the dividends are excluded from the calculation of the partner’s total income, in the financial year in which they are received.
  • Dividends paid to a non-commercial partnership whose partner is a resident individual who holds an interest (whether substantial or otherwise) but not in the course of business—the dividends are subject to a 26% withholding tax (the issuers of the shares or financial instruments that have generated the dividend paid to the non-commercial partnership must apply the withholding tax on the basis of the information supplied by it).


KPMG observation

There are two points to observe: 

  • First, article 32-quater does not specify the date when it will apply (it could be assumed, based on normal practice, that the new system of taxation applies to dividends paid from 24 December 2019).
  • Second, with regard to dividends paid to a non-commercial partnership whose partner is a resident individual who holds an interest but not in the course of business, it is uncertain whether the transitional rules on the taxation of proceeds paid out of profits will apply when individuals do not receive these proceeds in the course of business.

Moreover, despite the introduction of this new regime, there are still situations when dividends received by non-commercial partnerships are not expressly governed by law, such as:

  • Receipt of dividends by a resident non-commercial partnership held by a trust or non-commercial entity
  • Receipt of foreign dividends by a resident non-commercial partnership
  • Receipt of dividends by a resident non-commercial partnership held by non-residents

In these situations, it could be assumed (since there is no clear rule) that look-through taxation does not apply and that the non-commercial partnership must therefore be taxed on the full amount of dividends it receives. However, this tax treatment might, in cross-border cases, be contrary to the EU principle of the free movement of capital.

Extension of IVAFE and IVIE to non-commercial partnerships (societàsemplici) and non-commercial entities (entinon commerciali)

IVAFE and IVIE have been extended to resident non-commercial partnerships and non-commercial entities. This second category includes, if pursuit of business is not their main activity, trusts that are resident for tax purposes in Italy.

This new rule will apply from 2020.

The two wealth taxes are due by resident individuals, non-commercial partnerships and non-commercial entities that, in a given financial year:  

  • In the case of IVAFE—are holders of foreign financial products, current accounts and savings accounts
  • In the case of IVIE—own or hold other property rights over foreign real estate

IVAFE is an annual tax and is 0.2% of the value of the financial products or a fixed amount in the case of current accounts and post office savings accounts, whereas IVIE, also an annual tax, is 0.76% of the value of the real estate. For both taxes, there is a tax credit for taxes of the same kind already paid abroad, up to an amount that is equal to the amount of tax due in Italy.

Finally, note that the obligation of resident non-commercial partnerships and non-commercial entities to pay these taxes is additional to their existing tax reporting duties. More specifically, resident individuals and resident non-commercial partnerships and non-commercial entities must if they have foreign investments or foreign financial assets that could generate income that is taxable in Italy satisfy certain tax reporting requirements by filling in Section RW of their income tax return. A return must be filed for each year in which they have held (even for one day only) such investments and assets.

Read a January 2020 report [PDF 194 KB] prepared by the KPMG member firm in Italy

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