Avoidance of multiple inheritance taxation within Europe
by
Prof. Raffaello Lupi
I GENERAL
1.1 Overview
At first,[1] Italian inheritance and gift tax (Imposta sulle successioni e donazioni) appears to be applicable to all transfers of goods and rights without consideration.
Nevertheless statistics show that inheritance tax revenue[2] is one of the smallest in the total yield and comes mainly from transfers of real estate. This is probably due to the adoption of the model of Registration Tax, applicable only to formal deeds. The application of the tax to gifts isn’t suitable to the transfers of modern wealth, that rarely are evidenced by a written documents indicating that the transfer is performed to make a gift to the transferee.
This situation is extremely unsatisfactory, and are into discussion several proposals, specially drafted by opposition parties, to abolish the tax at all. A strong negative evaluation of the tax is shared also by government parties and Ministry of finance, which however prefer not to abolish the tax at all. Government is instead planning a radical reform, abolishing the global tax on all
the wealth left, which should be replaced by a very low tax (not exceeding 7%) on the amounts received by each heir or donee. Some effects of this possible reform will be indicated in the specific chapters of this report.
1.2 Criteria for tax liability
The Italian inheritance tax is a “decesead’s tax”, based on the whole deceased estate rather than on the amount of property received by each particular heir[3]. The Italian inheritance and gift tax is imposed on the net value of the deceased’s estate, the taxable base is the difference between the value of the assets, at the date of the death, and the deductible liabilities (the so called asse ereditario netto)[4].
The taxable base for the gift tax is determinated in the same way as for the inheritance one, with reference to assets and liabilities transferred. .
Liabilities allowed as deductions (such as debts of the deceased, funeral and medical expenses[5]). must be proved by an officially dated document[6].
When the deceased or donor is resident[7] the tax is levied with respect to all goods and rights transferred wherever located; in that case the heir or donee residence and nationality and the situs of assets are absolutely not relevant.
Unlike income tax legislation, inheritance tax law does not provide any specific rule to identify the country of residence. Therefore, reference should be made to civil code, whose article 43 states that the place of residence is where a person has his habitual abode.
A person who isn’t resident in Italy is liable to inheritance and gift tax only for Italian situs property. A consequence of the above is that an italian heir or donee is not liable to tax when receives, from a foreign donor, assets located abroad. The reform indicated in point 1.1 should reverse this situation, having reference to the residence of the beneficiary.
The location of goods and rights is determinated at the date of the death or of the deed of gift, so if at that moment the deceased or donor was not resident the tax is levied on the goods and rights situated in Italy.
Some assets are always deemed to be situated in Italy:
· goods and rights recorded in public registers and rights in rem pertaining thereto;
· shares of companies, as well as of non-corporate entities, whose legal seat or principal place of management or principal place of business activities is in Italy;
· bonds or similar securities issued by the state or by the above-mentioned entities;
· title to merchandise located in Italy;
· credits, bills of exchange, promissory notes and cheques of every kind if the debtor, the drawee or issuer is a resident of Italy;
· loans secured by property located in Italy, up to the value of such property, irrespective of the residence of the debtor and
· goods located abroad which are destined for Italy or which are subject to the customs regime for temporary exportation.
Goods located Italy which are destined for a foreign country or which are subject to the customs regime for temporary importation are deemed not to be situated in Italy.
1.3 Tax avoidance
In this chapter are not so important the specific anti avoidance provisions, but the fact that the whole tax is built to be avoided through the non formal transfers of assets described above. If one reads tax legislation seems that the possibility of enrich someone without formal deeds does not exist. The tax ruler seems to be afraid to take a position towards events that are very difficult to find out and to qualify. Italian tax offices, in addition, have applied the tax only on formal deeds of gifts or inheritance returns. We can be sure that nobody tried to pay the tax on donation performed without formal deeds, but were not available even administrative forms and procedures in the case someone had tried to do that. Tax offices have never looked for transfers of asset performed by checks or other movements of bank accounts, related to cash or securities, sales for low prices, payment of debts by third parties.
Anti avoidance law provisions can be effective only with respect to immovable property, which is recorded in public registers and can be transferred only by a formal deed. For those goods is effective the provision according to which is taxable the value of the deceased’s property sold during the six months preceding death [8]. This provision aims to avoid that real estate is changed into money or bearer securities which may be easily avoid the tax.
Nevertheless the value of such property and rights, in order to avoid double taxation, is reduced by various deductions, among which are the amounts or credits received for the sale and the amounts used to purchase property included in the estate.
Another effective provision is related to payments to heirs or donees of credits belonging to the deceased; in this case the debtors are responsible of the tax unless they ascertain that the credit has been reported in the inheritance tax return.
Other anti-avoidance measures are presumptions concerning the inclusion in the taxable base of: bank deposits, current accounts and safety deposit boxes in the name of the deceased and in the name of other persons[9]. Checking that all people entitled to dispose of a bank account are still alive would stop bank and financial operations: this is why such a provision remains theoretical.
Access to safety deposit boxes is possible only by providing a written statement that all other registered holders are alive[10].
In fact the tax is mainly avoided by profiting from the possibilities of transfers of cash, bearer securities and other movable property before death without the application of tax and even immovable property may be registered directly in the name of the heirs.
1.4 Valuation and exclusions
Methods of appraisal the value of property included in the estate are traditional: for immovable property and other goods[11] the market value at the moment of death (for property fully owned by the deceased); the market value less the value of the right of usufruct, use or habitation[12] (for property on which others have the right of usufruct, use or habitation); for ships and aircraft the market value talking into account its state of use[13]; the value determinated according to the average list prices of the quarter preceding the death plus interest accrued thereafter for listened shares and securities; for non listened shares the law takes into account the equity resulting from the last approved balance sheet [14], but tax administration claims that must be included also goodwill, and many tax litigations are developping about this. For interest bearing credits is relevant the principal credit plus the accrued interests.
Tax ruler seems to be aware of the abovementioned possibility that money and bearer securities or other movable property avoid taxation. This becouse of the provision that at least 10% of the value of the net estate is deemed to consist of money, jewels and forniture[15] except that heir makes up an analytical inventory.
Some goods and rights are excluded from the taxable base: bonds and similar securities issued by or guarantee by the Italian state; registered goods, rights and securities that were alienated by the deceased before his death and whose alienation can be proved by documents; works of art (article 13 Decree) etc[16]….
1.5 Rates and tax-free base amounts (reliefs)
Italian rates are really high especially for significant estates. The tax reform described above will adopt lower rates from 5 to 7 percent. .
If there are only qualified heirs (the spouse or a direct lineal heir[17], included step and adopted relatives) the total tax is determined by applying the progressive rates fixed with the Finance Act 488/99 at the difference between the value of the assets, at the date of the death, and the deductible liabilities (the so called asse ereditario netto). That value must be more than 350 million lire: this is the tax free base amount applies only to qualified heirs.
The rates don’t depend only on the amount received by each heir, but also on the degree of the relationship with the deceased or donor. The rates for qualified heirs are: 7% (from 350 through 500 million lire), 10% (from 500 through 800 million lire), 15% (from 800 through 1.500 million lire), 22% (from 1.500 through 3000 million lire), 27% more than 3 billion lire. Special provisions apply for not direct lineal heirs or donees (according to Article 5 Decree direct lineal heirs are: natural parents and children, direct lineal ascendants and descendants, adopter and adopted, affiliated and affilianter). Where the relationship between the deceased, or the donor and the beneficiary isn’t direct is applicable, in addition to the tax levied upon the whole estate, a specific taxation on the heir or donor. The rates are among 3 percent up to 33 percent. The maximum tax charge can therefore reach 60 percent (27 percent on global estate plus 33 percent on the share of the single heir.
Article 159 of Italian Civil law that provides the possibility of community of property between spouses, but most people choose the different rule of separate property. However the community of property is relevant also for tax purposes, with advantages, for instance, when the estate of the deceased spouse increased very much.
1.6 striking features
In Italy and in the United Kingdom, the inheritance tax is levied on the estate as a whole (deceased’s tax), in other countries like Austria, Belgium, Denmark, France, Germany, Greece on the net value of the taxable property transferred to each beneficiary.
It is difficult to ascertain how other countries deal, in theory and practice, with the above described problem of donations performed without formal deeds. However, according to the comparative study issued in 1994 by IBFD those transfers appear not to be taxable in France and Belgium: No information seem to be given with reference to other countries.
From an international point of view, most countries charge tax on inheritance and on gifts on two grounds:
1) worldwide taxation based on the connection of the taxpayer with the country (this connection can be citizenship, domicile or residence);
2) and assets situated in the country.
The foundation of worldwide taxation is the connection of the taxpayer with the country, and this connection is citizenship in USA, Norway and Greece; residence in Italy and domicile in the United Kingdom and Ireland. However the same criterion may be differently applied in practice whether it’s relevant the donor/deceased’s connection with country (like in Italy) or the heir/donee’s (Spain) or both of them (Germany and Austria).
The second ground for taxation is on the basis of assets situated in the taxing country, when there isn’t any connection of the taxpayer with the country. Some countries have a list of taxed property (Germany and Sweden for nationals).
II. DOUBLE TAXATION RELIEF
2.1 Unilateral relief
Tax, as presently settled, is a wreck of the past also from international point of view, and there are very few experiences of application of domestic or treaty double taxation relief.
Domestic provisions about double taxation relief are however quite traditional. According to a specific law provision[18], where taxes have been paid to a foreign state on property or rights situated in that state and also subject to tax in Italy for the same inheritance, the foreign tax can be credited against the Italian tax. The credit is allowed up to the amount of Italian tax attributable to the asset located abroad, so that excess foreign tax cannot be credited against italian tax arising from other assets. This method is quite similar to those adopted for double taxation relief about income taxes. .
To avoid double taxation and double exemption the present value of all donation made before the relevant taxable event by deceased or donor to the heir or donee is taken into account[19].
2.2 Tax treaties – overview
In Italy are in force seven double tax treaties with respect to inheritance and gift taxation. These treaties are in force with the following countries: USA, Sweden, Greece, United Kingdom, Denmark, Israel and France.
Most of the above treaties relate only to inheritance tax and not to gift tax; this happens for the treaty with USA, agreed on 30 March 1955[20], Sweden on 20 December 1956[21], Greece on 13 February 1964[22], United Kingdom 15 February 1966[23], Denmark on 10 March 1966[24], Israel on 22 April 1968[25]. Only the treaty stipulated with France on 20 December 1990[26] concerns both inheritances and gifts tax according to the 1982 Model Double Taxation Convention on Estates and Inheritance and on Gifts (produced by the Fiscal Committee of the Organization for Economy Cooperation and Development OECD).