STEP Hungary Conference 2014 The relevance of the Hague Convention on the Law applicable to trusts and their recognition on the Italian legal framework Trusts in civil law jurisdictions : the Italian developments on trust Martina Moscardi TEP Leopoldo Minicucci TEP

“The Hague Convention on the Law applicable to trusts and their recognition” Signed in 1989 Entered into force in 1992

The Hague Convention is a Convention of Private International Law whose feature is also to provide for substantial rules. Article 1: “This Convention specifies the law applicable to trusts and governs their recognition”.

What are the main features of the Italian “Trust Interno”? The Settlor is Italian The trust fund is mostly formed by Italian assets The Trustee is an Italian person or an Italian trust company The beneficiary is Italian or the purpose is to be fulfilled in Italy The only international element is the governing law

The Hague Convention prescribes the evidence in writing. Article 3 : «The Convention applies only to trusts created voluntarily and evidenced in writing» The Italian legal practice adopts a more rigorous approach: Trust made in writing Trust executed by a public notary

THE LONG RUN TOWARDS VALIDITY Tribunal of Bologna 1 st October 2003, published in many specialized Law reviews, dispelled many doubts: There’s no legal ground to say that trust is in contrast a priori with the fundamental principles of Italian civil Law Law 364/89 ratified the Hague Convention and all its principles. That Law is duly part of the entire legal framework. The segregation effect provided by the Hague Convention trust (article 11) is similar to the legal effects produced by other Italian legal instruments.

Some of the legal instruments already existing BEFORE the Hague Convention Family Patrimonial Fund The General partnership The private Foundation Article 161 Civil Code: the prevision for the spouses to choose a foreign law regulating their patrimonial regime.

Some other legal instruments adopted AFTER the Hague Convention but not as a consequence of it. Limited company separates funds. Laws on investments and retirement funds and securitisation. (article 2645 ter C.C.) Registration of a restraint or an encumbrance on immovable /estates or registered chattel for a specific purpose or for worthy interests of less able people, minors…

Real boost towards the use of trust positive attitude of the Judiciary in many fields. Separation and divorce agreements approved by the Court in which contains a trust deed for the benefit of children. Use of trust for unmarried couples Special Court for Guardianship authorized the Administrator to create a trust for the benefit of less able person.

«[T]his Convention is more particularly intended to built bridges between countries of common law and countries of civil law » (Von Overbeck Report) This positive attitude started to grow a common law system in a civil law jurisdiction.

Köszönöm Thank you Avv. Martina Moscardi TEP

Use of trust in Italy: Family trusts Trusts for business purposes

Use of Trusts in Italy has been started when Italian Parliament ratified the Hague Convention on Law applicable to Trusts and their recognition of 1° july 1985 Law 16 ottobre 1989, n. 364: Ratifica ed esecuzione della convenzione sulla legge applicabile ai trusts e sul loro riconoscimento, adottata da L'Aja il 1° luglio This law carries the Hague Convention in the italian legal system with no modification so it became an italian law. This was the legal base on which has been created the «Trust interno» : the trust with italian settlor, italian beneficiaries, italian trust fund, italian trustee and only the regulatory law choosen in an other jurisdiction.

There have been some troubles caused by the different meaning between english and french text of the convention An example sect. 2 of the Hague Convention: French text: « les biens du trust constituent une masse distincte et ne font pas partie du patrimoine du trustee» English text: « the trusts assets constitute a separate fund and are not a part of the trustee’s own estate.» The two sentences carry opposite meanings: according to the english text the trust assets do belong to the trustee altough they are not a part of the trustee’s own estate, the french text says that the trust assets do not belong to the trustee and the words les biens du trust make it absolutely clear.

Another difference: There is a significant difference between «evidenced in writing», that means «a written document gives directly or indirectly the proof of the voluntarily creation of this kind of deed, and «la prouve est apportèe par l’ecrit» that means «the deed must be a «written paper» In Italy the trust deed must be a notarial act ( it means a written document legalized by a notary) so the question has been solved in this way. Italian banks ritengono la forma notarile necessaria per aprire rapporti bancari

A wide range of different uses of trust instrument has been developed in Italy in spite of the harmonization with the italian civil code jurisdiction for example: 1. Family trusts: Inheritance planning Trusts for disabled people Trusts aseet protection to assist family needs Charitable trusts : the ONLUS recognition 2.Trust for business purposes: Trust as shareolders agreement Trust holding Trust as a guarantee related to debts Trust as a media to separate assets devoted to a purpose

Family trusts are the first kind of trust used under the effect of the Hague Convention The very first are the trusts for disabled people. This kind of trusts are considered a valuable help for disabled people and due to this aim they are considered with positive attitude. Forced inheritance should not prevail on the worthy interests of less able people. On the other hand charitable trusts are going to spread increasingly. This kind of trust, as charitable trust, fulfill the requirements to be a no profit organization and to be registered in the special Register. Thus means to profit of fiscal favorable taxation.

Family trusts : Inheritance planning trusts are a very interesting legal instrument that involves a deep knowledge of the inheritance rules of: Italian civil code sect UE regulation n° 650/2012 regarding cross border successions The most important harmonization must be related to the forced heirship matter because it represent a very strong rule …. Asset protection trusts for family needs: this is one of the most used kind of trust in Italy because we have a similar legal instrument called «fondo patrimoniale» (sect italian civil code) but it has severe limitations : It is suitable only for specific kind of assets It can be used only if there is a «regular» family It ceases if one of the spouses dies ….. Trust is more effective and has no limitations!

Trust deed as shareholders agreement: a view from Italy This is one of the most effective kind of “business trust” in italian jurisdiction During a company and corporate life often arises the problem how to regulate the relationship between shareholders in order to assure the easy management and the development of the business. In practice we can easily try to use one of the following instruments: A shareholders agreement (SHA) A trust deed made by shareholders According to the Italian law and practice the shareholders can arrange an agreement in which they bind themselves to vote in one way. This agreement is a kind of contract between shareholders. They are asked to behave (to vote) following the agreement lines.

We can easily imagine a trust draft as follows: Purpose trust deed = purpose ruled to the vote and related share activity; Transfer of the shares by a free of charge act; Appointment of the Trustee and establishment of his/her power in order to fulfill the purpose and to keep shares safe. In case Settlor(s) could appoint a ”Protector” (who is different by the trustee) and establish his/her powers to control and suggest the trustee in taking decisions consistently with the trust deed rules. Protector should be regarded as an additional guarantee to Settlor(s) and final Beneficiaries. Duration of the Trust: in case of Purpose trust duration is usually related to the fulfillment of the Purpose. In the case of SH duration should be related to the vote(s). Anyway a duration period should be indicated in the trust deed. A lack of indication makes the trust deed void. Purpose and duration usually run together.

Pro and contra SHA Trust is compatible with the pre-emptive right of the Company Statute. In fact there’s no payment for the transfer of the shares to the Trustee and that’s not a gift because Trustee holds the share on behalf of the Settlor(s) or beneficiaries. Maximization of probability to obtain the accomplishment of the deed rules Planning and execution of exit strategies Tax planning compliant with Italian rules Trust is a fire and forget instrument once the deed is signed the trust will go on following the rules fixed in it It is always possible to revoke the Trustee who infringe the rules in the trust deed We spent a significant time on this argument because we think that it is one of the most interesting kind of trusts for the italian practitioners

Trust Holding For its very favorable tax treatment on dividends this trust can be considered a very helpful mean for companies. A discretionary trusts normally pays a 27,5% tax (IRES tax on companies’ earnings) on 5% of earned dividends, it means a 1,375% tax on the total amount. And in this case the beneficiary shouldn’t pay any other tax amount on earnings.

Trusts tax treatment in Italy In reference with the tax on earnings, trusts have a low pressure in Italy. In fact Fiscal Authorities provided for clear and coherent guidelines to avoid any misuse of the legal instrument. On the other hand the same Authorities attempted to have a different approach in terms of taxation for the transfer of assets. Nobody can understand why this different attitude has happened and as a result a big contentious on tax treatment grew. The Courts often agreed with Fiscal Authorities claims but in many cases the decisions has been overruled.

Köszönöm Thank you Leopoldo MinicucciTEP