Early termination of a trust: tax neutrality of the retransfer of assets to the settlor

In Ruling No. 146/2026, the Italian Tax Authority clarified that the early termination of a trust, resulting in the retransfer to the settlor of the bare ownership of shareholdings originally transferred to the trust, is subject neither to inheritance and gift tax nor to income tax. This conclusion also applies where the retransferred shareholdings result from a subsequent corporate merger accompanied by a change in the legal form of the companies involved.

The case concerned a trust that was tax resident in Italy, to which the settlor had transferred the bare ownership of shareholdings held in two companies, while retaining the usufruct over them. Following the merger by incorporation of one company into the other and the conversion of the resulting company into a limited liability company, the trust became the holder of the bare ownership of 36,68% of the share capital of the newly formed company.

The parties intended to proceed with the early termination of the trust in accordance with the applicable New Zealand law. The sole beneficiary would relinquish her beneficial interest without consideration and without designating any other person, thereby resulting in the retransfer of the shareholdings to the settlor.

For inheritance and gift tax purposes, the Tax Authority referred to Article 4-bis of Legislative Decree No. 346/1990, pursuant to which trusts are relevant for tax purposes where they result in the gratuitous enrichment of the beneficiaries. In the case under consideration, the termination of the trust does not entail any distribution in favour of the beneficiaries, but merely the return of the assets to the same settlor who had originally segregated them in the trust. The merger and the change in the company’s legal form do not interrupt this continuity, since the retransferred interests derive directly from the shareholdings originally transferred to the trust.

The increase in the value of the bare ownership resulting from the change in the usufructuary’s age does not constitute a transfer of wealth in favour of a beneficiary either. The retransfer therefore lacks the objective requirement necessary for the application of inheritance and gift tax.

he same transaction is also irrelevant for income tax purposes. Articles 9(5) and 67(1)(c) and (c-bis) of the Italian Income Tax Code may result in the recognition of a capital gain in the case of transactions for consideration involving the creation or transfer of bare ownership rights. In the case at hand, however, both the original transfer to the trust and the subsequent retransfer were carried out without consideration.

Accordingly, the termination of the trust and the return of the shareholdings to the settlor do not give rise to taxation where the transaction constitutes the mere retransfer of the assets originally contributed to the trust, without any distributions to third parties, consideration or gratuitous enrichment of the beneficiaries.

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