Capital gains from the disposal of participations by non-Italian resident companies

This publication is part of the Ashurst Milan Budget Law Series. Please be in touch with our Italian Tax Team if you would like to receive the whole collection.

Article 1, paragraph 59, of the Italian Budget Law for 2024, amending Article 68 of the Presidential Decree No. 917 of 22 December 1986 (the Italian tax consolidated code or the ITC), extends the applicability of the Italian participation exemption (PEX) regime to qualifying non-Italian resident companies even when the participation is not held through an Italian permanent establishment.

Generally , the Italian PEX is applicable provided that the conditions set out in Article 87 of the ITC are satisfied by the transferor:

1. uninterrupted possession by the seller since the first day of the twelfth month preceding that of transfer;
2. classification of the participation in the category of financial fixed assets in the first balance sheet closed during the holding period;
3. tax residence of the company in a State or territory other than those with a privileged tax regime;
4. the exercise by the company of a business activity for at least the past three-year period (or the shorter period available from incorporation).

According to this latest amendment, the exemption on capital gains formerly available to Italian companies and commercial entities, or foreign entities holding the participation through an Italian permanent establishment, has now been extended to companies and commercial entities neither resident in the territory of the Republic of Italy nor having a permanent establishment therein, provided that they are resident in a EU or EEA Member State, which allows for an adequate exchange of information with the Italian tax authorities.

The fulfilment of these conditions allows the transferor to benefit from the PEX regime, which exempts 95% of the capital gain realised through the disposal of the qualified participation.

Before this amendment, the Italian Supreme Court highlighter the discrimination implicit in this provision, which resulted in a higher taxation of non-Italian companies compared to Italian companies. The amendment to Article 68 of the ITC reflects the decision of the Court, trying to eliminate the discrimination at hand.

It is worth mentioning though that in the majority of circumstances such taxation would be in any event excluded under the provisions of the double tax treaties entered into by Italy and the relevant EU Member State of the seller.