The territory was established on 10 February 1947, by a protocol of the Treaty of Peace with Italy, to accommodate an ethnically and culturally mixed population in a neutral independent country.

At the end of World War I in 1918 and the dissolution of Austria-Hungary, Kingdom of Italy annexed Trieste, Istria and part of modern-day western Slovenia, establishing the border region known as the Julian March (Venezia Giulia).

They were also exposed to state violence by mobs incited by the ruling fascist party PNF, which included the infamous burning of the Slovene National Hall in Trieste on 13 July 1920.

Because of this, some native Slovenes and Croats emigrated to Yugoslavia, while others joined the TIGR resistance organization, whose methods included more than 100 bombings and assassinations, mostly against Italian authorities in the region, and especially in the areas around Trieste and Gorizia to the north.

When the Fascist regime collapsed and Italy capitulated with the Armistice of Cassibile in September 1943, the territory in and around Trieste was occupied by the German Wehrmacht armed forces, which made the city the capital of their regional Operational Zone of the Adriatic Littoral (OZAK).

An uneasy truce then developed between New Zealand and Yugoslav troops occupying the area, until British General William Morgan proposed partition of the territory into separate military-administered zones.

A formal agreement on partition was signed in Duino on 10 June, which created the so-called Morgan Line dividing the Julian March territory.

[6][7] In January 1947, the United Nations Security Council approved Resolution 16 under Article 24 of its charter calling for the creation of a free state in Trieste and the region surrounding it.

However, local government bodies were never formed, and it continued to be run by military authorities, respecting the administrative division demarcated by the Morgan Line: Zone A, which was 222.5 square kilometres (85.9 sq mi) and had a population of 262,406 - including Trieste itself - was administered by the British and American forces; Zone B, which was 515.5 square kilometres (199.0 sq mi) with 71,000 residents - including north-western Istria - was administered by the Yugoslav army.

Since no governor was ever appointed under the terms of UN Resolution 16, the Territory never functioned as a real independent state – although its formal status and separate sovereignty were generally respected.

[8] Meanwhile, the Tito-Stalin split in mid-1948 led to the deterioration of relations between Yugoslavia and the Soviet Union, which resulted in a political stalemate, and the proposal to return the territory to Italy was suspended until 1954.

According to the Yugoslav census of 1945 (which was considered falsified by the Quadripartite Commission set up by the UN),[10] in the part of Istria which was to become Zone B there were a total of 67,461 inhabitants - including 30,789 Slovenes, Serbs and Croats, 29,672 Italians, and 7,000 people of unidentified nationality.

In addition, Yugoslavia received several villages of Zone A in the municipalities of Muggia and San Dorligo della Valle, such as Plavje, Spodnje Škofije, Elerji, Hrvatini, Kolomban, Cerej, Premančan, Barizoni, and Socerb (with its castle), according to the demarcation line defined by Annex I.

The first had a peculiar free zone (nowadays also offshore) status originated in 1719[13] and confirmed by the Treaty of Peace with Italy of 1947, which allows the transportation of goods inside the area.