On October 2 2024, Italian Legislative Decree No. 239 of September 18 2024 (the Decree) was published in the Official Gazette. The Decree introduces provisions for the reorganisation of indirect taxes other than VAT, as authorised by the government under Article 10 of Law No. 111 of August 9 2023. Notably, the Decree addresses the tax implications of transfers made through trusts for inheritance and gift tax purposes.
The new provisions take effect on January 1 2025, and apply to deeds executed on or after that date.
The importance of trusts for inheritance and gift tax purposes
Before the enactment of the new legislation, the most recent guidance on the taxation of trusts for both direct and indirect taxation purposes was provided in Circular No. 34/E of October 20 2022 (Circular 34/E), issued by the Italian tax authorities. Among other provisions, Circular 34/E established that the execution of a trust deed and the subsequent transfer of assets by the settlor to the trust were not subject to inheritance or gift tax. According to Circular 34/E, the taxable event occurred only upon the final distribution of trust assets to the beneficiary.
The Decree amends Legislative Decree No. 346 of October 31 1990 (the Consolidated Act on Inheritance and Donation Tax, or TUS), specifically modifying Article 1 (headed “Scope of the tax”) to explicitly state that transfers via trusts are subject to inheritance and gift tax. It also introduces a new Article 4-bis, which provides that trusts are relevant for inheritance and gift tax purposes if they result in a gratuitous enrichment of the beneficiaries, with the tax applying at the time of the transfer to the beneficiaries. The applicable tax-exempt thresholds and rates, based on the degree of kinship between the settlor and the beneficiary, also depend on this relationship.
Article 4-bis also introduces a new concept (paragraph 3): the settlor (or trustee, in the case of testamentary trusts) can opt to pay the tax at the time of each asset contribution to the trust. In this scenario, the taxable base and the applicable thresholds and rates are determined based on the total value of the assets and the kinship degree at the time of the endowment. If the tax is paid upfront, any subsequent transfers to beneficiaries in the same category are not subject to further taxation.
Territoriality of inheritance and gift tax
The Decree also adds a new provision to the TUS (paragraph 2-bis, added to Article 2, TUS), stating that, for trusts, the tax is levied on all assets and rights transferred to beneficiaries if the settlor is an Italian resident at the time of the separation event (i.e., when the assets are transferred to the trust). If the settlor is not an Italian resident, the tax is payable only on assets and rights located in Italy that are transferred to the beneficiaries.
Preliminary thoughts on the new legislation
The introduction of these changes raises several preliminary (and non-exhaustive) considerations, summarised below:
The attribution of tax relevance to trusts for inheritance and gift tax purposes should be interpreted broadly, applying to all types of trusts, including those disregarded for income tax purposes (e.g., revocable trusts). This challenges the position previously taken by the Italian tax authorities in Circular 34/E (and Resolution No. 176 of January 31 2023), which held that assets formally owned by a disregarded trust are included in the settlor’s estate upon death. The new legislation revisits the earlier interpretation of Resolution No. 359 of July 4 2022, where it was held that assets in a disregarded trust are not part of the settlor’s estate, and inheritance tax is due only when the assets are distributed to the beneficiaries.
The verification of the territoriality requirement at the time of the “separation event” suggests that changes in the settlor’s tax residence after the contribution of assets to the trust but before distribution to the beneficiaries are irrelevant. For example, the distribution of foreign assets placed in a trust while the settlor was a non-resident would not be subject to Italian inheritance and gift tax if distributed when the settlor later becomes an Italian resident. This interpretation is particularly relevant for individuals relocating to Italy under the special flat tax regime (the so-called Italian residence non-dom regime), as Italian inheritance and gift tax applies only to assets located in Italy during the tenure of the regime. Distributions of foreign assets contributed while the settlor was an Italian tax resident under the special flat tax regime should not be taxed even if the regime ends and the settlor becomes a regular resident.
The option to pay tax at the time of the contribution of assets to the trust allows for the crystallisation of the taxable event, providing certainty regarding the amount of tax to be applied. This prevents future tax rate increases from affecting future distributions to beneficiaries.
The option to pay inheritance and gift tax in advance applies to each individual asset contribution and is not an ‘all or nothing’ option, allowing for tax-efficient planning on a case-by-case basis.
Changes in trust assets due to discretionary management by the trustee should not affect the territoriality criterion if foreign assets initially contributed at the time of the “separation event” are replaced with Italian assets later.
