Italy – Extension of participation exemption (PEX) regime to non-resident (EU/EEA) companies/entities  

Fri 19 Apr 2024

The Italian Budget Law (Law issued on 30.12.2023, No. 213 – “Legge di Bilancio 2024”) established that Italian-source capital gains realised on disposal by EU or EEA resident entities without an Italian PE, where the disposal is of a substantial participation in an Italian company meeting certain conditions, will benefit from the participation exemption (PEX) regime. That regime means that 95% of the gain is exempt. 

The new provision 

Recent judgments of the Italian Supreme Tax Court had confirmed that the previous Italian law infringed the  EU freedom of establishment and free movement of capital principles.  In response, Italian Lawmaker have extended the favourable PEX regime (Art. 87 of the Italian Consolidated Income Tax Code (ICITC)), to companies meeting certain specific conditions, that are not resident in Italy. 

This new treatment applies where the non-Italian resident company is: 

• resident in an EU Member or i an European Economic Area jurisdiction whose Double Tax Treaties (DTT) executed with Italy allows an adequate exchange of information; 
• subject to corporate income tax in their State of residence. 

In light of the above, Art. 68 of the ICITC, ruling capital gains qualified as “other incomes”, has been amended to reduce the taxable base of Italian-source capital gains to 5% where PEX conditions are met: 

• a substantial participation is an interest which grants more than 20% (2% in case of listed companies) of voting rights in the ordinary shareholders’ meeting or more than 25% (5% in case of listed companies) of the share capital; 
• the requirements for benefiting of PEX regime which must be jointly verified are: 

1. The investment must be classified as a fixed financial asset in the first balance sheet closed after the acquisition of the participation;  

2. The investment must have been held continuously for the 12 month period prior to the sale (holding period); 

3. The company being sold must not be resident or located in an Italian  territory with a privileged tax regime; 

4. The company being sold must actually perform a qualifying business activity (for example, investments in real estate companies/entities are not generally entitled to PEX regime) for a minimum of three years prior to sale, or from incorporation if that period is shorter. 

Likewise, the modifications introduced to the aforementioned Art. 68 of ICITC allows the offsetting of the 5% realised capital gains on disposal of substantial shareholdings with the corresponding amount of capital losses which meet PEX requirements. Any capital loss excess can be carried forward and used to offset the 5% capital gains qualifying for the PEX regime in the following four fiscal years. 

Therefore, capital gains realised by Italian non-resident companies/entities, will be subject to an effective 1.3% tax burden, resulting from the application of the 26% substitute tax on a taxable income to 5% of the capital gain.  

It should be noted that in order to fully align with PEX regime for Italian resident companies / entities, Italian-sourced capital gains realised by EU and EEA should subject to the 24% CIT rate.  If this was the case, tax on such a gain would be 1.2% (i.e. 24% x 5%).  We await further clarification from the Italian Authorities on how the law will be applied in this respect. 

Effective date 

Since no specific provision has been provided by the Lawmaker, the new PEX regime for companies/entities not resident in Italy should be effective as of January 1, 2024. 

As a result of the decisions of the Italian Supreme Tax Court, foreign companies/entities may now be able to claim a refund to the Italian Tax Authority aimed at recovering the higher taxes paid on Italian-source capital gains where there has been discrimination arising from the Italian PEX regime. Such refund claim should be filed according to the provisions set forth by Art. 38 of the Legislative Decree No. 602/1972, though under the Italian limitation rules for such claims, it will need to be filed within the following 48 months from the original date of the tax payment. 

Practical effects 

The new PEX regime would not be relevant where an applicable double tax treaty (DTT) exclusively grant the right to tax Italian-source capital gains on shareholding disposal to the non-Italian State of residence.  

With the exception of a few cases, DTTs Italy executed by Italy with the majority of other EU and EEA States grant the right to tax capital gains on disposal of shareholding to the Contracting State where the seller/alienator is deemed to be resident.  

On example of a DTT which provides taxing rights to Italy for a non-resident’s disposal of an Italian shareholding, however, is in the case of the France/Italy treaty.    

Under Italy-France DTT and the relevant protocol, gains deriving from the alienation of a substantial participation made by French companies (i.e., “when the alienator, alone or with related persons, owns directly or indirectly stocks or shares which together carry the right to 25% or more of the profits of the company”) may be taxed by the Italian jurisdiction. 

A similar situation arises concerning gains made by Cyprus resident companies/entities. 

The new PEX regime may even be relevant currently and historically to non-EA/EEA companies when considering the possible infringement of the Treaty on the Functioning of the European Union. Any claims for repayment of overpaid tax would be subject to Italy’s limitation rules, as mentioned above.