The Relevance of the Hague Convention on Italian Trusts

1. 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

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

3. 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”.

4. 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

5. 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

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

7. 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.

8. Some other legal instruments adopted AFTER the Hague Convention butnot 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…

9. 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.

10. «[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.

11. Köszönöm Thankyou Avv. Martina Moscardi TEP

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

13. Use of Trusts in Italy hasbeenstartedwhenItalianParliamentratified the Hague Convention on Law applicable to Trusts and theirrecognition 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 1985. This law carries the Hague Convention in the italianlegalsystem with no modification so itbecame an italian law. Thiswas the legal base on whichhasbeencreated the «Trust interno» : the trust with italiansettlor, italianbeneficiaries, italian trust fund, italiantrustee and only the regulatory law choosen in an otherjurisdiction.

14. Therehavebeen some troublescaused by the differentmeaningbetweenenglish and french text of the convention An examplesect. 2 of the Hague Convention: French text: « lesbiensdu trust constituent une masse distincte et ne font paspartiedupatrimoinedutrustee» English text: « the trusts assetsconstitute a separate fund and are not a part of the trustee’sown estate.» The twosentencescarry opposite meanings: according to the english text the trust assets do belong to the trusteealtoughthey are not a part of the trustee’sown estate, the french text saysthat the trust assets do notbelong to the trustee and the wordslesbiensdu trustmakeitabsolutelyclear.

15. Anotherdifference: Thereis a significantdifferencebetween «evidenced in writing», thatmeans «a writtendocumentgivesdirectly or indirectly the proof of the voluntarilycreation of thiskind of deed, and «la prouve est apportèe par l’ecrit» thatmeans «the deed must be a «writtenpaper» In Italy the trust deed must be a notarialact ( itmeans a writtendocumentlegalized by a notary) so the questionhasbeensolved in this way. Italianbanks ritengono la forma notarile necessaria per aprire rapporti bancari

16. A wide range of differentuses of trust instrumenthasbeendeveloped in Italy in spite of the harmonization with the italiancivil code jurisdiction for example: • Family trusts: • Inheritanceplanning • Trusts for disabledpeople • Trusts aseetprotection to assist family needs • Charitable trusts : the ONLUS recognition • Trust for business purposes: • Trust asshareoldersagreement • Trust holding • Trust as a guaranteerelated to debts • Trust as a media to separate assetsdevoted to a purpose

17. 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 trustsare 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.

18. Family trusts : • Inheritance planning trusts are a veryinterestinglegalinstrumentthatinvolves a deepknowledge of the inheritancerules of: • Italiancivil code sect. 456-809 • UE regulation n° 650/2012 regarding cross bordersuccessions • The mostimportantharmonization must be related to the forcedheirshipmatterbecauseitrepresent a very strong rule …. • Assetprotection trusts for family needs: thisisone of the mostusedkind of trust in Italy becausewehave a similarlegalinstrumentcalled «fondo patrimoniale» (sect. 167-171 italiancivil code) butithas severe limitations : • Itissuitableonly for specifickind of assets • It can be usedonlyifthereis a «regular» family • Itceasesifone of the spousesdies ….. • Trust is more effective and has no limitations!

19. 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.

20. 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.

21. 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

22. 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.

23. 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.

24. Köszönöm Thankyou Leopoldo MinicucciTEP