Trusts and the New Italian Inheritance and Gift Tax Regime: Legal and Cross-Border Implications

This article is a condensed version, adapted for online reading, of a more comprehensive analysis published in the journal Ingénierie Patrimoniale, “Italy: New Optional Regime for the Advance Payment of Inheritance and Gift Tax on Transfers from Trusts” (JFA Juristes & Fiscalistes Associés Éditions, October 2024).

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I. Introduction: From Judicial Uncertainty to Legislative Reform

Italy was the first civil law country to ratify the 1985 Hague Convention on Trusts (1989). Tax recognition followed in 2007, with the trust brought within the scope of Italian corporate income tax (IRES). However, for inheritance and gift tax (ISD), the lack of dedicated rules triggered diverging case law and tax administration positions.

The 2025 legislative reform, approved on 7 August 2024, introduces specific ISD rules for trusts. It allows settlors—or trustees in testamentary trusts—to opt for advance taxation on contributions. This mechanism crystallizes tax liability at the time of transfer to the trust, potentially shielding taxpayers from future rate hikes or reduced thresholds.

This article explores the legal evolution, the structure of the new regime, and its potential conflicts with constitutional and international norms.

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II. Legal Background: Italian Case Law on the Taxable Event in Trusts

1. Historical Administrative Approach

Prior to the reform, Italian law lacked ISD rules for trusts. The Italian Revenue Agency took the position that the taxable event occurred at the contribution stage, not at distribution. Their rationale:

• Trusts were seen as a subtype of "destination constraints" under Civil Code Article 2645-ter.
• ISD applied to gratuitous transfers and creation of destination constraints (2006 Decree-Law No. 262).

Therefore, contributing assets to a trust triggered ISD. Allocation to beneficiaries did not constitute a second taxable event, even if asset values increased.

2. Judicial Reversal (2018–2022)

The Italian Court of Cassation reversed this doctrine. Key rulings (post-2018) held that:

• ISD applies only upon effective enrichment of the beneficiaries.
• The trust segregates assets without transferring ownership to the trustee.
• Only the final allocation to beneficiaries represents a taxable transfer.

The Supreme Court's interpretation aligned with Article 53 of the Italian Constitution, requiring actual economic capacity as a condition for taxation.

3. Administrative Alignment

Circular 34/E (2022) confirmed the new approach, stating that "bare trusts"—where beneficiaries have enforceable rights from the outset—may still trigger ISD at creation.

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III. The 2025 Reform: Legislative Structure and Key Provisions

A. Scope and Territorial Application

• Article 1(1) TUS: ISD applies to gratuitous transfers via trusts and other destination constraints.
• Article 1(2-bis) TUS: ISD is due on worldwide assets if the settlor is Italian resident at contribution; otherwise, only on Italian-situs assets.

B. Tax Rates and Obligations

• Declaration due within 30 days (60 for life-contingent transfers).
• Rates and exemptions depend on kinship:
  • 4% on amounts exceeding €1M (spouse, direct-line relatives);
  • 6% on amounts over €100k (siblings);
  • 6% or 8% without exemption for more distant relatives or third parties.

C. Advance Payment Option

• Article 4-bis TUS: Settlor/trustee may elect to pay ISD at the time of contribution or succession opening.
• ISD crystallized at that time (rates, asset value, kinship).
• If beneficiaries are not identifiable: 8% rate, no exemption.
• No refund if final transfer to beneficiaries does not occur.

The aim is legal certainty and revenue predictability, also applicable to pre-existing trusts.

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IV. Constitutional and International Compatibility

A. Constitutionality under Article 53

• Advance taxation occurs before any enrichment.
• Article 53 requires contributive capacity based on economic reality.
• Advance ISD may conflict with this principle if tax is levied in absence of beneficiary enrichment.

B. Compatibility with the 1990 Franco-Italian Convention

1. Taxpayer Identity and Legal Incidence

• French tax law limits relief if different persons are liable in each country (e.g. trustee vs beneficiary).
• The OECD Commentary, however, confirms that differing liable parties do not preclude treaty application.
• The French position arguably introduces an additional, non-textual condition.

2. Covered Taxes under Article 2 of the Treaty

• Optional ISD may fall outside the treaty’s scope if triggered before the wealth transfer.
• Key issues: nature of the taxable event, method of calculation, and timing.
• Legal uncertainty remains pending clarification from authorities or courts.

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V. Conclusion

The 2025 Italian reform clarifies the ISD treatment of trusts, offering predictability and planning tools via the advance-payment regime. However, constitutional and cross-border tensions remain. Legal professionals must assess the implications carefully, particularly in international estate planning.

S. Assogna
sandro.assogna@avocat.fr

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