The growing mobility of labour within the EU is one of the pressures making a recognition of this Anglo-Saxon concept inevitable on the Continent
As a student of philosophy, the fundamental difference between the Anglo-Saxon empiricist and the Continental rationalist philosophical tempers was impressed upon me.
The Anglo-Saxon starts with the obvious facts and arrives at the truth through a process of analysis and trial and error. Philosophy is the finding of bad reasons for what we believe upon instinct. The Continental approach is to start with clear ideas and to arrive at the truth through a process of synthesis. Philosophy is an incontrovertible system of certain truths.
Many years later as a student of trust taxation, I discovered that this difference was also reflected in the Anglo-Saxon and Continental approaches to matters of law. The former is happy to live with the facts of a common law that has never been codified and a constitution that has never been written down. This approach would be intolerable for the Continental, for whom something exists only if it is written down.
Civil law and trusts
The Continental civil law systems therefore struggle with trusts, which arise quite naturally in Anglo-Saxon law systems as a result of the fundamental distinction between legal and beneficial ownership. Since unity of title is a fundamental principle of civil law, the general rule in civil law jurisdictions is that trusts are unknown. Furthermore, since it is a matter of public policy that decedents have absolute rights in their antecedent's estate, the potential defeat of those rights through the use of a trust is prima facie viewed as anathema.
Given all this, can trusts be used by an individual and their family if they are connected with a civil law jurisdiction? And, if they cannot, what is the effect if a trust has been set up either by or for the benefit of such an individual and/or their family?
There is no all-encompassing answer to these questions and Continental countries must be examined on a case-by-case basis and so, by way of example, the rest of the article will look at the case of Italy.
Italian investors' first encounter with trusts came with the negotiation of the double tax treaty between the US and Italy in 1985. Since trusts are recognised in the US, it was necessary that the treaty accommodate their use by US citizens subject to Italian tax.
However, the problem of accommodation is highlighted in the Italian version of the treaty, associazione commercial (commercial association) the nearest, but ultimately inaccurate, translation in the Italian legal code for a trust.
The next encounter came in 1986 with the abolition of exchange control, which meant that Italians could transact with foreign residents for the first time in 40 years, including offshore trustees. When a civil law jurisdiction encounters trusts, its first reaction is to seek to identify the trust with an already recognised legal entity.
Possible candidates within the Italian code included the usufruct, the fiduciary agreement and various types of mutual fund and investment management agreement. However, none of these arrangements, which are essentially contractual, fitted the bill.
A trust must, the UK courts have decided, include "an element of bounty" in the form of a free, non-reciprocated gift. A contractual arrangement by definition must include consideration, or be paid, on both sides.
The next encounter occurred in 1990 when Italy ratified the Hague Convention on Trusts of 1 July 1985. This meant that, while there continue to be no means of establishing a trust in the Italian legal system, nevertheless trusts are 'recognised' to the extent required to resolve conflicts of law and to provide recognition and uniform treatment of trusts created abroad.
However, the Italian Parliamentary Report on the Convention stated that Italian law does not intend to create obstacles to impede Italian citizens (citizenship being the prime connecting factor for civil law) who have emigrated to other nations (which appears to mean those who are habitually resident abroad) using trusts in managing assets that are located in Italy, as long as Italian tax and exchange control regulations are respected. The same consideration would apply to assets held offshore. The convention came into force on 1 January 1992.
As a result, the recognition of the legitimacy of the distinction between legal and beneficial ownership has been grafted onto the Italian legal system and the trust as legal owner of property, located both within Italy and abroad, can operate within Italy independently of the trust's settlor and beneficiaries, subject to Italian tax and exchange controls being respected. This means that the fundamental principle of the non-admissibility of forms of ownership different from the historic absolute, unitary Roman ownership has been put on an entirely new basis.
The ending of exchange control and the limited recognition of trusts will open opportunities for offshore tax planning for expatriate individuals moving to Italy and Italian citizens moving abroad.
Inevitably, however, pressures will arise for their domestic use for all the reasons discussed in previous articles. But if the UK's experience is followed it will take some time for trusts to be widely used for tax and estate planning within the Italian domestic context.
However, continued in inward and outward commercial and personal investment, the proliferation of cross-border commercial and personal relationships and the increased mobility of labour within the EU will bring pressure for the use of trust relationships.
The status of the Hague Convention on Trusts worldwide can be seen at www.hcch.net/e/ status/stat30e.html. As will be examined in future articles, the ratification and coming into force of the Convention will be a slow process. However, it will form a basis for the worldwide recognition of trusts over time.
The next step regarding change will be when Italy introduces tax anti-avoidance legislation, which will have the ironic effect of formally introducing the concept of a trust into Italian law while at the same time defining the limits and possibilities of acceptable tax planning.
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