Italy issues guidance on tax treatment of Liechtenstein family foundations
The Ruling arose from a case concerning a Stiftung established by nine now-deceased Italian tax-resident individuals. The founders were the original and primary beneficiaries of the foundation, followed by their heirs. Their plan was that the land should be sold and the proceeds distributed to the heirs.
The tax authority accepts that a Stiftung can sometimes be treated as a trust for income tax purposes, but only if the trustee has powers to apply the assets on a discretionary basis. If the trustee does not have these powers, the tax authority can look through the trust and tax the assets in the hands of the settlor or beneficiaries.
In the case under consideration, the tax authority took into account that:
- the founders were also the primary beneficiaries;
- the fund was managed by its council in cooperation with a committee composed of the beneficiaries or their descendants;
- the Stiftung could only be terminated, amended or liquidated with the approval of the beneficiaries' assembly, which could not be challenged unless in actual breach of the law; and
- the executive committee could revoke the council's appointment if not consulted with regarding disposal of the fund's assets.
The tax authority concluded that, since the beneficiaries could interfere in the management of the fund, the Stiftung was not a trust and could be looked through for Italian income tax purposes.
There remained the matter of some of the fund's income that had been distributed via trusts situated in low-tax jurisdictions. This issue has not yet been resolved, as the tax authority has not yet clarified how the new trust rules introduced in 2021 should apply. Publication of the final version of the draft circular letter on the taxation of trusts, subject to public consultation in August 2021, is still awaited before the tax authority can take a final view on the subject.
Regarding the liabilities to Italian inheritance tax (IHT) and gift tax, the Italian authority maintains that the allocation of the proceeds deriving from the sale of the Stiftung’s land fell within the definition of mortis causa transfers to the Stiftung founders' heirs. Italian IHT therefore applies to the amounts, the authority states.
According to law firm Withersworldwide, the ruling further confirms that trustees of foreign trusts and foundation councils must act independently from any interference by any Italian resident beneficiaries and should ensure that any decision they take is properly recorded.
The firm also notes that the ruling appears to confirm that Italian IHT and gift tax has to be assessed at the time the assets leave the Stiftung fund, in compliance with the August 2021 consultation paper.
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