The Italian Supreme Court has officially confirmed in two new legal decisions that trusts are entitled to tax relief under Italy's double tax conventions, regardless of any specific provision for them. The Supreme Court's judgments represent an important recognition of trusts in Italy.
The two decisions (which are identical but referring to different tax years) involve National Westminster Bank (NatWest) in its capacity as trustee of the Baring Global Growth Trust.
NatWest, at the end of the 1990s, invested in shares in Italian companies whose dividends (received between 1995-2000) were accounted for and taxed in the UK, producing a tax credit.
The Supreme Court confirmed that trusts are officially recognized by the Italian legal system and the articles of the Italy-UK double tax convention are therefore also applicable to trusts under the definition of 'person'.
In order to avoid the double taxation of the dividends in Italy and in the UK, NatWest requested that the Italian tax authorities reimburse the tax credit in accordance with the Italy-UK double tax convention, which states: "A resident of the United Kingdom who receives dividends from a company which is a resident of Italy shall […] be entitled, if he is the beneficial owner of the dividends, to the tax credit in respect thereof to which an individual resident in Italy would have been entitled had he received those dividends […]"
Despite having granted a partial reimbursement (in relation to the tax years 1995-97), in 2010 the Italian tax authorities changed their position, claiming that the trustee of a trust cannot be considered to be a 'person' as described in the tax convention provisions. This was based on the assumption that there are no regulations in Italian law regarding the role of trustees and, consequently, the concepts of "residence" and "beneficial owner" could not be applied to them.
NatWest appealed this decision in front of the Provincial Tax Court of Pescara in 2011, but the Court ruled in favour of the Italian tax authorities, as did the court of second instance, which dismissed the appeal in 2013. The latter also stated that the claimant (i.e. the trustees) did not provide sufficient evidence to prove they were the beneficial owner of the dividends and that such dividends had already been taxed in the UK.
The decisions of the Supreme Court
The Supreme Court argued that:
- article 3, paragraph 1 of the Italy-UK double tax convention lists general definitions which should be applied to the other provisions of the convention "unless the context otherwise requires". This allows the treaty states to interpret the general definitions according to the nature of the agreement between them, the development of their legal systems and their economic framework;
- Although the OECD Model Tax Convention on Income and on Capital does not provide a definition of 'trust', scholars have demonstrated that an extensive interpretation of the definition of 'person' in article 3 includes trusts;
- the definitions in article 3 are only general and non-exhaustive. The Convention can therefore be interpreted in line with new economic and juridical entities/subject that have developed over the years, and that should fall within the definition of 'person';
- a trust is a juridical instrument fully recognized in Italy following the 1992 ratification of the Hague Convention (1985) and fully regulated for tax purposes since 2007.
In light of the above, the Supreme Court confirmed that trusts are officially recognized by the Italian legal system and the articles of the Italy-UK double tax convention are therefore also applicable to trusts under the definition of 'person'.
The conditions for the application of the conventions
Finally, the Supreme Court has also accepted that the structure of a trust is not always the same (frequently varying depending on the country in which it is settled) and, thus, a case-by-case analysis is always required. In order for trusts to benefit from the tax treaty provisions, it is therefore necessary to provide evidence of the trust structure, a description of the powers of the trustees and the presence of identified beneficiaries that enables the identification of the Ultimate Beneficial Owner(s) of the dividends.
The Supreme Court has also clarified that trustees must provide evidence of the fact that the dividends have not only been taken into account in calculating taxable income but that they have been taxed effectively in the other jurisdiction. This can be proved via an ad hoc certificate issued by the tax authorities of the other country.
Roberto Bonomi is a senior associate in Withers' Milan office