A UK trust is a “person” for the purposes of the Italy-UK double tax treaty - that is the good news coming out of a recent Italian Supreme Court decision. The bad news is that trusts may nonetheless struggle to obtain treaty benefits; they will certainly need a thick file of solid factual evidence to support a claim.

National Westminster Bank plc, acting as trustee of Baring Global Growth Trust claimed a refund of the Italian imputation credit on certain Italian source dividends under the Italy-UK double tax treaty (cases no. 2617-2618).

UK trusts as “persons”

The lower courts rejected the claim on the basis that the trust was not a “person” under Article 3 of the treaty. Rules on the tax treatment of trusts were enacted in Italy only after the treaty had been signed. How could Italy have intended to grant treaty benefits to UK trusts if, at the time of the signature, the Italian tax system did not even recognize their existence?

The Supreme Court cast aside this doubt. It stated that the definition of “person” in Article 3 is valid “unless the context otherwise requires”.

Here, the context required otherwise: a trust can be a “person” for the purposes of the treaty, even though it is not expressly included in the definition of “person”.

The Supreme Court recalled that, shortly after signing the treaty, Italy “recognized” trusts by ratifying the Hague Trust Convention. It found additional support in the 2014 update of the OECD Model Convention which expressly addresses trusts in a footnote to the commentary.

Obstacles to obtaining treaty benefits

To obtain treaty benefits, merely being recognized as a “person” is, unfortunately, not enough.

The “person” must also be “resident” in one of the Contracting States and the “beneficial owner” of the income in respect of which treaty benefits are claimed.

For a trust, beneficial ownership is not an easy criterion to fulfil. A beneficial owner must have the right to use and enjoy the income without being constrained by a legal or contractual obligation to pass it on to another person. Hence, only a discretionary trust can hope to qualify as a “beneficial owner” of a foreign source dividend.

And even this may not be enough. Treaty benefits could still be denied in the case of abuse – for which the best antidote is actual economic activity, evidenced by reference to the management of the entity, its balance sheet, the structure of its expenditure, and its staff, premises and equipment. Again, not necessarily an easy criterion for a trust to fulfil.

In any event, the trustees of the UK trust in this case failed to provide sufficient evidence of its beneficial ownership of the relevant dividends. They also failed to prove that the dividends had effectively suffered UK tax (which was specific treaty requirement). So, the trust lost the case.