A trust does not exist in Italy if the beneficiary can remove the trustee

The inquiry concerned three trusts established under Texas law (Texas Trust Code) by a deceased settlor over a decade ago. The beneficiary is an American citizen residing in Italy for tax purposes, while the trustee, an employee of a local bank, resides in Texas. The request sought guidance on the tax classification of the trusts and the treatment of income distributions received in 2024 and beyond.

The Agency first outlined the regulatory framework governing trust taxation, including principles of tax residency and the distinction between transparent and opaque trust taxation. In transparent taxation, the trust has an identifiable beneficiary, whereas in opaque taxation, no specific beneficiary is identified. After this classification, the Agency conducted a case-by-case assessment of each trust.

Trust 1: Fiscally non-existent

The Agency determined that this trust is fiscally non-existent for two main reasons:

• The trust deed grants the beneficiary the right to remove the trustee at any time and appoint a new one through a simple written notice; and
• The trustee is required to report directly to the beneficiary on trust management.

According to the Agency, these conditions significantly limit the trustee's autonomy, effectively preventing independent management. Consequently, the trust is deemed fiscally non-existent, and its income is directly attributed and taxed to the beneficiary, who is a tax resident in Italy.

Trust 2: Transparent taxation

The Agency concluded that this trust does not allow the trustee discretionary power due to the following conditions:

• All income must be distributed to the beneficiary annually.
• Upon reaching the age of 55, the beneficiary will receive the entire trust estate.

In this scenario, the trust is subject to transparent taxation, meaning its income is directly attributed and taxed as capital income to the beneficiary, an Italian tax resident, regardless of the trust's tax residency.

Trust 3: Again, fiscally non-existent

For this trust, the Agency identified an additional restriction on the trustee’s autonomy: the requirement to consult the beneficiary's siblings and obtain their written consent for financial decisions. This mechanism effectively grants the beneficiary a degree of control, rendering the trust fiscally non-existent. As a result, its income is directly attributed and taxed to the beneficiary, who is a tax resident in Italy.

In summary, according to the Italian Revenue Agency, when a trustee lacks genuine management autonomy – whether due to the beneficiary’s possibility to remove them or constraints on financial decision-making – the trust loses its fiscal relevance, and its income is directly attributed and taxed to the beneficiary.

---

Roberto M. Cagnazzo, Founding Partner, is a chartered accountant and statutory auditor with considerable experience in domestic and international taxation acquired as Head of Tax in some of Italy’s leading multinational groups, and as Professor of Comparative Tax Systems and of Tax Law at the University of Turin.