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Issue 5-2016

No Gift Tax Upon Gratuitous Transfers of Assets To a Trust

 

The Regional Tax Commission of Lombardy Region (an appellate level tax court including the city and province of Milan in Northern Italy) with its ruling n. 2846/2016 issued on May 13, 2016 held that a gratuitous transfer of property to a trust is not subject to the gift tax. The court's theory is that the asset transferred to a trust is not immediately available to the beneficiary, who is only entitled to receive it when all the conditions for the final distribution of the trust's property have occurred, and as a result, no enrichment of the beneficiary takes place at the time of the transfer of the property to the trust, which is required for the application of the gift tax.


The decision is in contrast with the Supreme Court's case law, according to which the gift tax applies to any transfer for no consideration, regardless of the fact that the property transferred is immediately available to the recipient, who has an immediate right to enjoy and use it, or is held in trust for a distribution to the recipient at a later stage, with the recipient holding solely a future interest to the property. The most recent decisions of the Supreme Court on the taxation of a gift of property to a trust include rulings n. 3735 and 3737 of February 24, 2015 and n. 5322 of March 18, 2015.


The different rule applied by the Regional Tax Commission of Lombardy is not necessarily favorable to the taxpayer. Indeed, while the immediate advantage is that no gift tax applies at the time of the transfer of the property to the trust, the flip side is that the gift tax will apply at the time of the transfer of the property from the trust to the beneficiary, and it will be charged upon the entire fair market value of the property at that time, including any market appreciation of the property occurred between the time of the transfer of the property to the trust, and the time of the distribution of the property to the beneficiary.


Italy applies a gift tax at tax rates that vary from 4 percent to 10 percent, depending on the relation between the transferor and the transferee, with an exemption up to 1 million euro for transfer to close family members (spouse, parents, children) and up to 100,000 euro for transfer to siblings.