A lifeline to trustees with taxed Italian income

In two decisions published in February (2016/2020 and 2017/2020), the Italian Corte di Cassazione considered the availability of a tax credit for a UK-resident trust in receipt of dividends from Italian companies under the Italian-UK double tax treaty (the DTT).

In denying the availability of credit, the Italian Supreme Court (the Court) followed the decisions, on the facts at least, of the lower courts and denied the credit. However, crucially, the Court provided some useful commentary on the applicability of the DTT to trusts (which overrules some of the remarks of the lower courts).

  1. A trust is, in principle, capable of benefitting from a DTT.

    The term “person” in the DTT is to be construed widely: this principle is a helpful departure from the more restrictive approach taken by the lower courts.

    In deciding whether a legal entity or arrangement is a person, the relevant context is to be taken into account.  Trusts are generally recognised in Italian law. They also form part of the law of the UK. They therefore should be considered persons for the purposes of the DTT.
  2. A “fiscally transparent” trust cannot be regarded as the beneficial owner of income; it therefore will not get the credit.

    A trust characterised by Italian eyes as “transparent” is broadly similar in effect to an English bare trust, whereas a trust termed “opaque” broadly equates in its effect to an English discretionary trust.

    The Court’s view in relation to the DTT, that a transparent trust should be ignored for the purposes of determining the recipient of income – and therefore credits – remains consistent with the line taken by the Agenzia delle Entrate in its interpretation Circulars on the taxation of trusts.
  3. The tax refund was only available where the dividend has been effectively subject to tax in the UK.

This appears to be an aggressive interpretation of the DTT but is consistent with the Court’s interpretation of similar pieces of legislation (e.g. the Parent-Subsidiary Directive). 

It is also consistent with the premise behind a benefits limitation article.

A similar question has arisen in relation to the new Italian “remittance basis” of taxation, namely whether the substitutive tax paid under the remittance basis constitutes a tax and therefore whether it would give rise to a tax credit outside Italy.

Maisto e Associati have considered the decisions in detail in this note on the Italian Supreme Court judgment and also in this earlier article from 2013 on the first degree tax court judgment

This article was co-authored by Damiano Sogaro, trainee solicitor, tax litigation.