Taxes

Foreign Financial Activities and Estate Planning

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Foreign Financial Activities and Estate Planning. The valuation of foreign financial assets with a view to succession planning. The planning of the generational handover of one’s assets has always been an aspect that interests entrepreneurs and private individuals who own assets. This passage usually occurs through succession.

In terms of succession planning, Italy certainly represents a country with a “favourable” tax regime thanks to:

-Reduced rates (from 4 to 8%);

-High deductibles (€ 1 million between spouses and in a straight line), e

-Conservative calculation of values ​​(on real estate, in fact, at the cadastral value and on unlisted equity investments, the book equity).

However, we must ask ourselves what happens when within the estate subject to succession, there are also financial assets held abroad. Let’s try to deepen this topic below to allow you to better manage your estate planning even in these cases.

Declaration requirements for inheritance purposes for assets abroad

The declaration of the succession of a person residing in Italy includes, based on Article 2, paragraph 1, of Legislative Decree no. 346/1990, (TUS) also financial assets and assets held abroad.

From a practical point of view, these assets, substantially (avoiding problems of non-declaration) are those attributable to the RW part of the tax return of the deceased. As for the RW framework, the taxation principle is that of taxation worldwide. In this case, it is the assets existing worldwide that enter the scope of the succession.

Pursuant to art. 26 of the TUS is responsible for the deduction of the tax paid abroad for the same succession and for existing assets in the foreign state, up to the amount of

part of the inheritance tax proportional to the value of the assets themselves, without prejudice to the application of international treaties or agreements.

International conventions on inheritance matters with Italy

The countries that have stipulated conventions with Italy on inheritance taxes are those listed in the following table.

DenmarkFrance
GreeceIsrael
UKUnited States
Sweden 

Countries with a succession agreement with Italy. On the basis of these indications, we can say that, of course, there is little attention in the international arena as regards the succession issue. On this aspect, the recommendation of the EU Commission 15/12/2011, n. 2011/856 / EU on measures to avoid double/multiple taxations in matters of succession.

Convenience choices on holding overseas assets for inheritance purposes

Wanting to carry out a convenience analysis on whether or not to hold financial assets and/or assets abroad, one cannot ignore:

From the type of assets that fall in succession with reference to their impact on direct taxes;

From the inheritance tax to be paid abroad which, although deducted from the inheritance tax due in Italy, may in some cases be substantial. In this context, it becomes important to determine the impact of inheritance taxes in the countries where the assets are located.

For the heirs, the main consequence of the succession for income purposes consists in the fact that the value at which they will bear the financial and patrimonial assets is given by the value taxed for the purposes of inheritance. The inheritance tax burden becomes part of the carrying amount of the asset.

For proper planning and evaluation of real estate and financial investments abroad of a natural person residing in Italy, it is essential also to know the inheritance taxes that are payable in countries where the assets are held.

How is the tax base of foreign assets determined in succession?

The general criteria for determining the value of the assets that form the hereditary assets are determined by the information provided in Articles 14, 15 and 16 of the TUS. In the case of assets held abroad, the taxpayer has the option of declaring the taxable value or providing the one agreed with the foreign state.

In practice, the taxpayer is left with the choice between indicating the value of the assets with reference to the legislation of the foreign country where they are held, or taking the TUS as a reference and thus determining the value. All this, taking into consideration the conventions against double taxation (if any).

On this point, the presence of C.M. 10/1/1973 n. 5 first chapter, which indicates:

“In principle, the offices will not be able to carry out any checks on the existence or the value of assets located abroad and must comply with any declaration by the interested parties. However, should particular circumstances justify it, they may contact the Italian consular authorities with a reasoned or detailed request.”

This is without prejudice to international conventions which provide for mutual assistance and exchange of information between the authorities of the various States, in order to combat evasion and facilitate tax assessments.

The differences between the indication of assets in part rw and the indications in the succession

Taking as a reference the main cases of assets and financial assets held abroad, the cases that may arise are the following. This, in relation to the differences between the enhancement of the activities in the RW framework compared to the succession phase.

ACTIVITIESSUCCESSORY VALUEFRAMEWORK VALUE RW
PropertyMarket valuePurchase cost
Unlisted shareholdingMarket valueNominal value
Quoted participationAverage value pricesMarket value at the end of the period

Basically, the deceased person does not realize capital gains on shareholdings and bonds, as well as on assets, such as real estate, jewellery, etc (art 67 TUIR).

The only exception applies to Mutual Investment Funds which must be virtually redeemed and repurchased by the heirs (which will have the book value at the time of purchase) with the realization of the capital gains which will be taxed in different ways depending on the nationality and nature of the Fund ( see ISIN). For the European funds subject to supervision, these capital gains represent capital income withholding tax in part RM sec. V letter b) of the Income Tax Form.

For European funds not subject to supervision or for non-European funds (CH, USA, Oriental country funds), capital gains are capital income subject to progressive taxation, cumulative with other income possessed and to be declared in part RL line 2 type of income 4 Such capital gains must be declared in the deceased’s tax return which must be presented by the heirs. (Circ 19 / E of 4 June 2013 p. 10).
Capital losses, on the other hand, are not allowed as a deduction.

Life policies

Insurance policies with financial content (units linked to the performance of the Funds or index-linked) or traditional life policies. These are policies exempt from inheritance tax, except for their eventual requalification in securities deposits and consequent taxability as financial assets, depending on the composition of the portfolio and the management methods. On this point, see C.M. 10/2015 (page 10).

Government bonds

Government bonds are exempt from inheritance tax but their tax value recognized to the heirs is the market value on the date of opening of the succession. In this case, possible revaluations or devaluations with respect to the original purchase value must be taken into account in the calculation of the Capital Gain.

The identification of blacklist countries

A decisive factor for the convenience choices on the possession of assets in a specific foreign state is its qualification as a country with a subsidized tax regime or not. As regards the countries with privileged taxation (blacklist), it is necessary to take into consideration some regulatory implications to be known and not underestimated. I refer to the following:

Art. 12 paragraph 2, 2-bis and 2-ter of the D.L. n. 78/2009 which entail the following:

-Paragraph 2: presumption of undeclared income for natural persons for amounts not declared in part RW, unless proven otherwise. In this case, the sanctions provided for in Article 1 of Legislative Decree 18 December 1997, no. 471, due to omitted or unfaithful declaration, are doubled. The countries indicated in the D.M. are taken into consideration without taking into account the limitations set out in the D.M. themselves;

-Paragraph 2-bis: doubling of the terms for the assessment based on the presumption referred to in paragraph 2;

-Paragraph 2-ter: doubling of the terms for the imposition of penalties on tax monitoring.

For further information: “Doubling of the terms of assessment for undeclared foreign financial assets”.

What solutions for risky situations?

In order to evaluate the convenience of holding a certain asset in a specific foreign country, the considerations analyzed above come into play: when risk arises from this analysis, for example, a high inheritance tax burden, it is necessary to examine the solutions possible in light of both the legislation of the foreign country and the Italian legislation.

Italian legislation now offers a solution to be explored: the Entry Tax referred to in art. 166-bis of the TUIR. This is a rule that governs the entry tax values ​​for commercial entrepreneurs who move to Italy from abroad.

Option for entry tax for entrepreneurs

The internationalization decree (Legislative Decree no. 147/2015), in Article 12, added to

DPR n. 917/1986 (TUIR) art. 166-bis entitled “Incoming tax values”. Article 166-bis of the TUIR establishes that commercial entrepreneurs who come from the states or territories listed in the art. 11, paragraph 4, lett. c) of Legislative Decree no. 239/1996 (the White list) and move to Italian territory, acquire residence for the purposes of income tax and “assume the normal value of the same as the tax value of the assets and liabilities, to be determined pursuant to Article 9 of the TUIR “.

If they come from states or territories other than the above:

If there is a prior agreement with these countries (art. 31-ter of Presidential Decree no. 600/1973, introduced by the internationalization decree) nothing changes and the value of the assets and liabilities will always be assumed to be equal to the normal value pursuant to art. 9 of the TUIR;

If no such agreement exists, the value of the transferred assets and liabilities will be assumed:

For assets equal to the lower of the purchase cost, the book value and the normal value always determined pursuant to art. 9 of the TUIR;

For liabilities equal to the greater of the purchase cost, the book value and the normal value.

The transfer of residence abroad with a view to succession planning

From the perspective of succession planning, it may make sense, in situations of uncertainty in the application of foreign provisions with a view to inheritance, to consider a transfer of residence abroad.

Transferring your residence abroad can be an option to consider not only to evaluate a change in your lifestyle, but also to plan your succession. In choosing a country to settle in, perhaps for the last part of one’s life, it may be interesting to evaluate countries that do not apply inheritance taxes. As we have said, in fact, it is the State of tax residence of the deceased that is directly concerned with inheritance taxes. Indirectly too are the States where foreign assets are held, but only partially.

It is in this context, in fact, that it may be useful to evaluate a transfer of residence abroad also in terms of succession planning.

Let’s see, therefore, in the following table which are the main countries in the world that do not apply taxation in case of inheritance.

Table: Countries that do not apply the inheritance tax

Hong KongSingapore
PortugalMacau
SlovakiaEstonia
MexicoCanada
New ZelandAustralia

Countries that do not apply the inheritance tax

Foreign financial activities and estate planning: consultancy

If you have read this article and are realizing that you need to analyze your personal situation, I invite you to contact us using the form at the following link. You will receive a quote for personalized advice able to resolve your doubts on the subject.

Only in this way, in fact, can you be sure of avoiding making mistakes, which in the future can be challenged and therefore sanctioned.

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