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 revenue2 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 heir3. 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 expenses5).
must be proved by an officially dated document6.
When the deceased or donor is resident7 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.
1
according to the general provisions included in law n. 346 of 31 October 1990.
In 1993 the revenue of the Italian inheritance and gift tax was approximately 700 billion lire compared to VAT
(75.000 billion lire).
3
The reform of this tax aims at the taxation on the amount of property received by each particular heir.
4
Article 8 Decree.
5
Article 24 Decree.
6
Article 21 Decree.
2
7
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.
8
Article 10 Decree.
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 persons9. 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 alive10.
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 goods11 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 habitation12 (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 use13; 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 forniture15 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) etc16….
9
Article 11 Decree.
Article 48 Decree.
11
Article 19 Decree
12
Article 14 Decree.
13
Article 15 Decree.
14
Article 16 Decree.
15
Article 9 Decree.
16
Article 12 Decree.
10
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 heir17, 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).
17
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 provision18, 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 account19.
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 195520, Sweden on 20 December 195621, Greece on 13
February 196422, United Kingdom 15 February 196623, Denmark on 10 March 196624, Israel on 22
April 196825. Only the treaty stipulated with France on 20 December 199026 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).
All the treaties, according to the Model Conventions (1966 or 1982) aim to avoid double taxation,
by agreement between the Contracting States; to conflict to solve is that between the taxation on the
basis of the location of assets and of the residence of deceased or donor. Generally speaking the
conflicts are solved safeguarding tax jurisdiction of the state in which the assets are located. The
state of fiscal domicile is required either to allow a tax credit in respect of the tax imposed by the
jurisdiction of situs or completely to exempt from its taxation property situated there.
18
Article 26 Decree.
Article 8 Decree.
20
Passed with law 943/56 and come into force on 26 October 1956.
21
Passed with law 280/58 and come into force on 3 June 1958.
22
Passed with law 524/68 and come into force on 1 January 1976.
23
Passed with law 793/67 and come into force on 9 February 1968.
24
Passed with law 649/68 and come into force on 9 July 1968.
25
Passed with law 201/73 and come into force on 8 August 1973.
26
Passed with law 708/94 and come into force on 1 April 1995.
19
All the treaties contains, more or less, the same provisions concerning the taxation of different form
of property (immovable property, tangible movable property, shares and stock in a corporation and
other goods), for the deduction of debts and for the mutual assistance and the exchange of
information.
2.3 Method to avoid double taxation
In order to avoid double taxation when two countries tax, one on the basis of the situs of property
and the other, on the basis of the deceased’s domicile, the treaties use two different methods: the
completely exemption of property taxed by one country on the base of situs from taxation in the
other country (that taxes on the basis of domicile), or a credit for a foreign tax against the taxes
levied by the country of domicile (or residence or nationality).
If it exempts the property, it can still take its value into account when fixing the applicable tax rate
on the remaining property (exemption with progression).
We can find, in the USA/Italy treaty, the exemption without progression method and a credit,
granted by the state of residence, for taxes paid in the other state in respect to property situated in
the other contracting state. The Sweden/Italy treaty provides for the possibility to apply the
exemption with progression method, according to Denmark/Italy Treaty the exception with
progression method is allowed only if provided under domestic legislation.
Where one of the states taxes property situated in the other state, the first state will grant a credit
equal to the tax levied in the other state on the net value of the property taxed (in the UK/Italy
treaty).
The Treaties between Israel and Italy and Greece and Italy provide mainly situs rules. The treaty
between France and Italy provides that the Contracting State of domicile exempts the property taxed
by other country on the base of situs.
III. EC LAW
In Italy has never been discussed or investigated a possible contrast between national law and EC
Treaty’s provisions; In Italy the tax is levied with respect to all goods and rights of resident
deceased or donor and there isn’t any restriction of free movement, in absence of any anti avoidance
provision for the case of change of residence. In addition, we have already pointed out that
nationality is not relevant for the purposes of the tax, so that no discrimination problems arose so
far.
4. CASE
Country A. No
Country B No
Country C Yes
Country D Yes
Country E. No.