Complex rules that can be simplified with proper inheritance planning: a topic that also concerns Italians in Romania

The globalization of the economy has made not only the exchange of goods, services, people, and capital more international, but also successions, which refers to the transfer of assets and liabilities to one or more heirs due to someone’s death; the ownership of assets abroad, or the residence of the deceased or of their heirs abroad, triggers duels, if not trios, worthy of the best Sergio Leone films among:

• The legislation of the state of residence of the deceased;

• The legislation of the state of residence of the heirs;

• The legislation of the state where the inherited assets are located.

Dozens of thousands of Italian citizens in Romania, who have here their investments (romanian company shares directly held as individual, real estate properties, credits, bond, securities accounts, or bank accounts), their family (or part of it), or even their residence, do not escape this complexity.

When it comes to succession, we Italians quickly turn to the fiscal aspect ("How much tax will my heirs have to pay?"), but in chronological order, the tax collector is the last to appear; before reaching the calculation and payment of (possible) inheritance taxes, the heirs must go through the procedure regulated under the civil law or under the deceased's will for inventory of the inheritance assets and for their evaluation process, as well as its allocation to the heirs.

In cases of inheritance spanning two or more States, there could be clashes between the respective civil law rules, with unexpected expenses and efforts (including psychological) for the heirs.

However, starting with the aspect that concerns Italians the most, namely taxes, let's first see what the Italian regulations provide: Article 2 of Legislative Decree 346/90 sets the principle of worldwide taxation when the deceased had residence in Italy at the time of death: in this case, the inheritance tax is due "in relation to all transferred assets and rights, even if existing abroad"; but if the deceased was residing abroad, then "the tax is due only for the assets and rights existing here" (= assets and rights existing in Italy).

If the second State had the same fiscal rule to the Italian one, this would be enough to trigger the duel over:

• Foreign assets and rights, belonging to a deceased resident in Italy, or

• Italian assets and rights, belonging to a deceased resident abroad.

Additionally, the inheritance tax on the heirs, perhaps residing in a third State (different from the one of the last residence of the deceased and different from the one where the inherited assets and rights are located), can complicate things.

To solve the various complications between different national fiscal systems, double taxation treaties on inheritance taxes can come to the rescue, but at now, Italy has signed only 7 (seven), with the following: Denmark, France, USA, Greece, Israel, United Kingdom, Sweden. Therefore, many countries are missing, where "Italian" assets are located or “AIRE” registered citizens live, including Romania. Consequently, in the case of "Italian-Romanian" successions, there are no "clearing houses" available, so the succession planning must consider the fiscal provisions of both countries.

Regarding the different principles and civil-law procedures for inheritance process in force in different States, the EU Legislator intervened with Regulation No. 650/2012, offering some solutions to make the exercising of rights by its citizens in cross-border succession easier; in particular, this regulation grouped and standardized various provisions related to the applicable law and the modes of acceptance of inheritance and execution of inheritance process, finally creating the European Certificate of Succession recognized in all EU countries; however, the regulation does not cover fiscal, customs, or administrative matters (Article 1), for which reference must always be made to national legislations or to the international treaties for avoiding double taxation.

Among the various solutions introduced by the Regulation, it is noteworthy that a person can choose, as the law governing his entire succession process, the law of the State of which he has the citizenship at the time of choice or at the time of death; in the absence of choice, the law of the State where he had habitual residence at the time of death applies.

In the case of an Italian deceased resident abroad with heirs in Italy, this choice is noteworthy for two reasons:

• For experts on law, it undermines the prohibition of succession agreements established by Article 458 of the Italian Civil Code;

• For all us common people, it allows the future deceased to place their future heirs in a less distressing legal and psychological situation by assigning them Italian legislation (the one of the deceased's citizenship, provided he hasn't lost it in the meantime) and thus allowing them to deal with national professionals (excepting the challenges of enforcing the succession abroad).

Therefore, in the case of an Italian deceased resident in Romania, with heirs in Italy and assets in both countries, underestimating this aspect will bind his heirs to deal exclusively with Romanian law, which will govern the entire succession for both Italian and Romanian assets (excluding fiscal issues, as already explained).

So, the "future deceased" - who proactively thinks about what will happen "after him" - must make specific statement to take the opportunity offered by the EU Regulation, and here a second opportunity arises, namely to make this option within a will (i.e. testament), thereby dictating precise instructions both for the choice of applicable law and for disposing of his assets for the event of his death.

Both the Italian and Romanian Civil Codes provide for forced shares and available shares on the inheritance properties, although weighted differently for the same type of "called to inheritance." The "forced share" is the minimum fraction of inheritance that goes to the so-called "legitimate heirs," regardless of the deceased's will: it is a provision rooted in centuries, which goes hand in hand with family law and essentially aims to preserve and transmit the inherited assets within the family (therefore to the spouse and descendants, primarily); in both the Italian and Romanian systems, there are specific mechanisms to protect legitimate heirs if this minimum fraction is compromised against them through testamentary dispositions or acts performed by the deceased during their lifetime.

The "available share," on the other hand, is the maximum fraction of inheritance that the deceased can freely dispose of, and the main instrument where to express these dispositions is the will (or testament): in its absence, in fact, the entire estate will be allocated solely to legitimate heirs, according to the fractions established by the civil code.

To give a simple idea of how the two systems can create very different situations, consider the example in the table below, where the deceased leaves behind a spouse (wife or husband) and two children; here is how the fractions of the inheritance mass attributable to heirs change in the two countries in the presence of a will (testament) aimed at allocating the available share:

In fiscal matters, as already stated, each State has its own rules. Italy taxes with the inheritance tax all properties and rights (e.g., credits) owned by the deceased:

• Both those existing in Italy and those abroad (e.g., shares of Romanian companies), if the deceased was habitually resident in Italy at the time of death;

• Only those existing in Italy at the time of death, if the deceased was habitually resident in Romania.

Summarizing:

The Italian inheritance tax provides different rates depending on the degree of kinship with the deceased:

• 4% for spouse and direct descendants;

• 6% for brothers or sisters, relatives up to the 4th degree, direct-line in-laws, collateral in-laws up to the 3rd degree;

• 8% for unrelated parties.

The tax base is the total value at the opening of the succession of the assets and rights forming the inheritance mass, net of the debts left by the deceased and other deductible liabilities. Only for the spouse and direct descendants no tax are payable on the amount up to 1 (one) million euros for each heir of this type (a sort of “no tax area”): therefore, for them, the 4% rate applies only to the part of the inheritance received that exceeds 1 (one) million euros; for siblings, the exemption is reduced to only 100,000 euros, while there is no exemption for all other possible heirs.

A particular case of total exemption from the Italian inheritance tax, which may interest Italian entrepreneurs in Romania who have retained habitual residence in Italy, concerns the shares or stocks that grant company control in Romanian companies: the exemption applies under certain conditions.

Romania does not have a true inheritance tax but regulates the various cases within the Fiscal Code, particularly in the area of income taxes that the heirs are called to pay. Some examples:

• Real estate: 1% of their value if the succession takes more than two years (a sort of "punitive" property tax);

• Cash, bank accounts, securities (shares, company shares): non-taxable, but the heirs inherit the fiscal value recognized to the deceased (an aspect to consider in calculating the tax burden on income taxes borne by Italian heirs in case of transfer of Romanian shares or stocks received by succession, even if the Convention for the avoidance of double taxation rules must be take into account).

This quick overview does not exhaust all the issues and criticalities of international successions, but I believe it is sufficient to understand how the different family and asset compositions of Italians operating in Romania, with or without residence, can hide complexities and obstacles for future heirs, mitigable through adequate inheritance planning.

Marco Posocco

Accounting Partner

Crowe Romania

marco.posocco@crowe.ro