Foreign transparent trust: the beneficiary’s income is determined under the rules of the foreign State
The Italian Tax Authority, in Ruling No. 165/2026, clarified how the income attributable to an Italian-resident beneficiary of a foreign transparent trust must be determined. The ruling does not concern, as such, the taxation of the trust assets distributed to the beneficiary, but rather the identification of the income generated by the trust that must be taxed in Italy in the hands of the identified beneficiary.
The case concerns a US citizen who is tax resident in Italy and is a beneficiary of a trust established in California by her parents. Following her mother’s death on 20 May 2025, the assets of the resulting trusts, consisting of financial investments and real estate located in the United States, were to be divided equally among the three children. From that date, according to the taxpayer’s position, which the Tax Authority accepted as an assumption without specifically reviewing it, the trust was to be regarded as transparent in relation to the beneficiaries.
The issue submitted to the Tax Authority concerned, in particular, the criterion to be used to distinguish the capital component from the income component. The taxpayer argued that, upon her mother’s death, the trust assets should acquire, for Italian tax purposes, a new tax value equal to their fair market value at that date. Accordingly, such value would represent capital, while only any subsequent increase in value could potentially constitute taxable income in Italy.
The Tax Authority did not accept this approach. First, it excluded the application of Article 45(4-quater) of the Italian Income Tax Code, under which, where it is not possible to distinguish between the income and capital components of distributions made by a foreign trust, the entire amount received is treated as income. According to the Tax Authority, this provision applies, in principle, to distributions made by foreign opaque trusts established in low-tax jurisdictions and does not apply to a transparent trust with an identified beneficiary.
Second, the Tax Authority confirmed that, in the case of a foreign transparent trust, the income to be attributed to an Italian-resident beneficiary must be determined according to the tax rules of the State in which the trust is resident or established. It is therefore not possible to independently recalculate the income under Italian tax rules by assigning a new tax value to the trust assets as of the date of the settlor’s death.
In other words, for income tax purposes, the beneficiary’s one-third share of the trust assets is not automatically taxed in Italy: what is relevant is the income generated by the trust and attributable to the beneficiary, determined in accordance with the tax rules applicable in the foreign State. The distinction between capital and income therefore remains relevant, but it cannot be made by introducing, for Italian tax purposes, a new tax basis for the assets as of the settlor’s date of death.
As from 20 May 2025, the taxpayer, as an identified beneficiary of the foreign trust, is also required to comply with the relevant Italian tax obligations, including, where applicable, foreign asset reporting requirements and IVIE and IVAFE.
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