The name “terzo settore” refers to the sector of institutions and legal entities in Italian society which are not connected to either corporate enterprises or to the state. This so-called “third sector” is made up of organisations such as private foundations that are non-profit making (“senza scopo di lucro“) and is gradually replacing the diminishing contribution that the state makes to the welfare of its citizens and the preservation of cultural and historic heritage.
In Italy since the 1948 Constitution (Article 18 – the right to form an association) and more recently in legislation developing from the 1990’s onwards, the third sector has been continually expanded by growing numbers of voluntary organisations, cooperatives, cultural, environmental and consumer associations as well as NGOs, and is playing an increasingly crucial role in society, allowing wealthy individuals or companies to demonstrate their sense of civic duty, citizenship, solidarity with the community, in some cases even raising their political profile.
In 2017, the Third Sector was formalised by legislation D.lgs. n. 117/2017 now known as the Codice del Terzo Settore. This law defined the specific legal entities which can be established to pursue a civil goal or a social objective through the use of voluntary services or unpaid contribution. These entities once established must be registered on a National Roll “Registro unico nazionale del Terzo settore“.
Private foundations in Italy
The private foundation is one of the specific legal entities recognised as part of the third sector, and is growing in popularity, the number of established private foundations having doubled in the past 10 years in Italy, although 63% of these are concentrated in the wealthier north of the country.
The foundation itself has a long history deriving from the early type of philanthropic entity in Roman Law known as “piae causae”, meaning funds or groupings of assets, even without any formal legal structure, which were specifically destined to be used for a charitable purpose or for the benefit of society.
As in countries such as France and Spain, for example, current law also requires the establishment of a private foundation in Italy to follow strict guidelines, and have as its aims and objectives a public interest element.
The formation of a private foundation follows the same rules as those for establishing an association (Articles 12 and 14 -35 of the Italian Civil Code) both of which are now also regulated by specific legislation (D.P.R. n. 361/2000). This law defines what is considered to be a legitimate public interest element which includes healthcare, charity, education, artistic or cultural promotion or protection, international development, the environment, civil liberties and scientific research.
There are clear differences however between the Italian foundation and those established countries such as Liechtenstein, Austria, Panama, Malta or Switzerland, for example, where there are no requirements for a specific underlying “social benefit” purpose and which have particular tax planning advantages making them increasingly popular tools for wealth planning and estate planning for private individuals.
As Italy has a very low inheritance tax structure (the threshold before payment of any inheritance tax where the heirs are the spouse or direct line descendants is one million Euro per heir) there is not the same prevalent culture of using the foundation as an estate planning tool.
As a lifetime wealth-planning tool, given the fact that it must have a socially beneficial purpose and not follow the personal interests of the founder, the foundation certainly ranks in popularity in Italy well behind the formation of a Trust inter vivos (an instrument of common law which is recognised in Italy in accordance with the 1985 Hague Convention subject to it being regulated by a foreign law) or what is now known as the “internal trust”, which was enshrined in 2005 in the Italian Civil Code (Article 2645-ter).
The “trust interno” is an instrument is formally known as an “atto di destinazione dei beni” by which moveable or immoveable property can be directed to be held or used for the benefit of a specific person or legal entity, and is the closest legal structure Italian law has developed in similarity to the functions of a common law trust.
The private foundation in Italian law does have some similarity to a common law trust in that both intend to pass and preserve wealth through generations, and in that the assets are totally separate from the property belonging to the settlor of assets into a trust or the founder of a foundation. However, where a common law trust is required to have a limited time in which to operate, an Italian foundation does not have such limitations. A trust of course is able to have private aims and objectives whereas the foundation must be for a public interest purpose and is strictly regulated by the public authorities. The trust may specify that profits shall be distributed to beneficiaries, but a private foundation cannot distribute profits.
Although the private foundation in Italy is not a popular estate planning tool in comparison to a trust, it is on the other hand regarded as an efficient way to preserve important social contributions or cultural and artistic heritage for future generations. For example, Giorgio Armani established the Fondazione Giorgio Armani in 2016 investing a “symbolic” 1% of his assets with the aim of carrying out projects of social and public interest. At the same time, the structure also has an estate-planning goal, to guarantee that the founding principles of his company (such as his emphasis on innovation and excellence and an ethical approach to management) will be continued after his death by his heirs.
The film-director Franco Zeffirelli also set up a non-profit foundation in 2015 a few years before his death, to run a public archive and library which is based in Florence, to preserve the memory of his lifetime work spanning seventy years of films.
In general Italian private foundations will fit into one of a number of categories including corporate, banking, family, memorial, public or community foundations. Banking foundations, which in addition to a public interest purpose are also characterised by their promotion of economic development (eg. Fondazione Monte dei Paschi di Siena) are the fewest in number but represent the highest value of assets.
Legal structure and taxation of Italian foundations
The foundation is a separate legal entity (by contrast with common law legal systems including England and Wales where it is does not have separate legal “personality”) and is established by the “Fondatore” either by a public deed witnessed by an Italian Notary. Alternatively the foundation can be established by an express direction in clause drafted in a Last Will and Testament. A clause in a will to establish an Italian foundation would be valid whether the will is made in an English law form or an Italian holographic or public will.
The foundation will be one of three specific types:
- “operating foundations” – active organisations normally with a structure and buildings such as a school, library, research centre, museum, art collection, or
- “grant-making foundations“- providing finance and donations to specific organisations to carry out the social interest purpose of the foundation, or
- “mixed operating and grant-making”
The public deed which establishes the foundation will set out in the attached “Statuto” the name, purpose, description of the assets which must be adequate to fulfill the stated purpose of the foundation, the organization of an administrative body, staff and legal office, and the rules for the running of the foundation. In addition the foundation must not permit for the distribution of profits, and not have any purpose which is contrary to rules of public order.
The public deed is then registered with the Regional Authorities (specifically the “Prefettura” which is part of the Ministero dell’Interno), which can not only deny approval for the registration but also has the power to close down the foundation if it is not meeting the public interest rules.
The transfer of assets into a foundation is taxed in the same way as other non-profit organisations (D.L.G.S. n. 460/1997). Tax advantages for donations made to an established foundation or income generated by a foundation also exist, even if limited, and are regulated by the Codice del Terzo Settore. The foundation must submit annual accounts which can follow the simplied rules (forfeittario) and is also obliged to declare assets held overseas.
In summary the private foundation is growing in popularity in Italy, not as a wealth planning tool but because of the possibility of leaving a legacy which contributes to the public interest. The foundation is also attracting interest in recent years given the prominent role now played in society by the Terzo Settore and the impressive organisation and publicity generated by the recent legislation.