Taxation of Trusts in Italy

Many Israelis hold assets in Italy – real estate, financial investments, family businesses – and in some cases, these assets are held through a trust. Until recently, Italian taxation of trusts remained an unclear and highly interpretive area, leaving considerable uncertainty. In 2025, the situation changed: a combination of updated positions issued by the Italian Tax Authority and legislative reform that came into effect at the beginning of the year created a new tax framework – clearer, but also more demanding.

Anyone who holds a trust with Italian assets, is a beneficiary of such a trust, or is considering creating a structure that includes assets in Italy should now reassess their position

The new normative framework is based on two main sources:

The first is the Italian Tax Authority circular dated 20 October 2022 (Circolare 34/E), which for the first time provided a systematic and comprehensive response to questions regarding the taxation of trust income – both in relation to Italian resident trusts and in relation to foreign trusts with Italian resident beneficiaries.

The second, and even more significant, is Legislative Decree No. 139/2024 (Decreto Legislativo 139/2024), which entered into force on 1 January 2025 as part of a comprehensive reform of inheritance and gift tax. The decree regulates transfers of assets from trusts – and similar entities, such as foundations – to beneficiaries, and applies new rules also to trusts established by will.

The Principle of “Exit Taxation”

One of the questions that has occupied the Italian trust sector for years is: when does the taxable event arise for inheritance and gift tax purposes? when the assets are contributed to the trust, or when they are distributed to the beneficiaries?

The new legislative decree expressly adopts the principle of “exit taxation” (tassazione all’uscita): liability for inheritance and gift tax generally arises only when the assets are actually transferred from the trust to the beneficiaries. The contribution of assets to the trust itself does not usually constitute a taxable event.

However, the decree also allows for an optional upfront payment route: the settlor – and, in a testamentary trust, the trustee – may elect to pay inheritance and gift tax already at the contribution stage. If such an election is made, future transfers to the same category of beneficiaries will not be subject to additional tax. This route provides planning certainty, but whether it is worthwhile depends on the value of the assets, the family relationships, and the expected timing of distributions. There is no one-size-fits-all answer.

Opaque Trusts and Transparent Trusts

For income tax purposes, Circular 34/E distinguishes between two main types of trusts.

• Opaque trust – An opaque trust is a trust whose income is taxed at the trust level, rather than directly in the hands of the beneficiaries. Distributions from an opaque trust to Italian residents generally do not constitute a taxable event for the beneficiary – unless the trust is classified as a business entity, in which case different rules apply.

• Transparent trust – A transparent trust is a trust in which the income is attributed directly to the beneficiaries and taxed in their hands at their personal tax rates – up to 43%, plus local surcharges. The beneficiaries bear the tax burden, and the trust is treated as “transparent” for tax purposes.

Foreign Trusts and Non-Italian Resident Beneficiaries

The complexity increases where the trust itself is not an Italian resident but has beneficiaries who are Israeli residents or residents of other countries who also have a connection to Italy.

Circular 34/E distinguishes between opaque foreign trusts established in jurisdictions where the level of taxation is significantly lower than under Italian law, and trusts established in jurisdictions with a reasonable tax regime. In the first case, distributions to an Italian resident may be treated as “investment income” subject to personal tax at progressive rates – even if the intention was merely to return capital. Circular 34/E is clear on this point: in the absence of sufficient documentation proving which part of the distribution is income and which part is capital, the presumption is that the distribution is income. The responsibility for maintaining the records lies with the trustee.

Reporting Obligations: Who Must Report and What Must Be Reported

Italian residents who are “beneficiaries” of a trust are required to report annually on assets and investments held by the trust outside Italy.

The definition of “beneficiary” for this purpose is derived from Legislative Decree No. 231/2007, which implements the European Union directives on the prevention of money laundering and terrorist financing, and is consistent with the international Common Reporting Standard (CRS) for the exchange of information between tax authorities. It is important to emphasize: the definition of “beneficial owner” (Titolare Effettivo / Ultimate Beneficial Owner) under this legislation is not necessarily identical to the definition of “beneficiary” in the trust deed. Therefore, the wording of the trust deed alone cannot be relied upon when determining reporting obligations.

That said, not everyone connected to a trust is subject to reporting. The obligation applies only to beneficiaries who can be identified and who have a right to claim a distribution. Future interested parties – such as heirs of living beneficiaries – are not required to report, although the issue must be examined individually based on the circumstances of each case.

In addition, opaque trusts held by Italian residents are required to pay property tax on real estate located outside Italy (IVIE) and tax on financial investments located outside Italy (IVAFE) – instead of the beneficiaries themselves.

A Planning Opportunity: Italy’s Flat Tax Regime for New Residents

For certain taxpayers eligible for Italy’s “flat tax” regime for new residents – involving payment of a fixed annual tax of EUR 200,000 – it is possible to obtain an exemption from income tax on foreign-source income, an exemption from inheritance and gift tax on assets located outside Italy, and an exemption from reporting obligations in relation to foreign assets.

Although the amount may seem high at first glance, for someone who holds a trust with significant international assets, it can actually be an attractive arrangement. A person whose trust generates EUR 1 million per year would usually pay up to 43% regular Italian income tax – meaning more than EUR 400,000. Under the flat tax regime, that person pays only EUR 200,000, achieving tax savings of more than EUR 200,000 per year – even before taking into account the exemption from property taxes on assets located outside Italy (IVIE and IVAFE) and the accompanying administrative simplicity.

The reform that entered into force in 2025 creates an excellent opportunity for tailored tax planning for owners of international trusts – especially for Israelis considering relocation to a Western European country. However, eligibility for the regime requires compliance with specific conditions, and the implications must also be examined from the Israeli perspective. This is because changing tax residency to Italy raises questions regarding the severance of Israeli tax residency, which must be addressed separately.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law offices, bringing together legal and economic perspectives. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and practical language. We also work with a professional network of accounting firms and law firms around the world, including in Italy, in order to provide comprehensive support in cross-border matters.

If you have a trust with assets in Italy, if you are a beneficiary of such a trust, or if you are considering creating a structure that includes Italian assets – we invite you to schedule an initial consultation. Together, we will assess the compatibility of the existing structure with the new rules and propose courses of action tailored to your specific circumstances.