The Court of Cassation, through the recent rulings no. 27267 and 21261 of 2023, established that, according to the EU principles of freedom of establishment and prohibition of restrictions on capital movements, capital gains made in Italy by non-resident companies without a permanent establishment must be subject to the same tax regime as gains made by Italian companies (the so-called PEX regime, Participation Exemption, under Article 87 of the TUIR).
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Therefore, they must be exempted by 95% instead of being subject to the full taxation at a substitute tax rate of 26%.
The Court emphasized:
- the inadmissibility of the current disparity in treatment, and
- the circumstance that restrictions on community law provided by domestic legislation cannot be resolved by resorting to Conventions, particularly through the accreditation of taxes paid in Italy on the same income.
Indeed, regarding the first point, the judgment of inadmissibility arises from the same premises that previously led to the criticism of Italian legislation on dividends (resulting in Italy introducing paragraph 3-ter in Article 27 of DPR 600/1973). On that occasion, a withholding tax of 1.2% on dividends paid to EU resident companies not entitled to the “parent-subsidiary” regime was provided, essentially equating it with that levied on Italian shareholders.
Concerning the second point, the judgments highlighted how the convention may not necessarily allow for the total recovery of foreign taxes (as often it is only partial). Eliminating disparities in treatment between Italian and European companies stands on a different plane from that of reducing or eliminating double taxation, which is the purpose of conventions.
The decision made by the Judges, therefore, is based on the interpretation of Italian tax laws in conformity with European law.
The Cassation indeed considered denying the benefit of the PEX regime, participation exemption, to European companies as discriminatory and a breach of the principle of free movement of capital within the European Union.
Specifically, compliance with the requirements established by Italian regulations would apply the PEX regime.
Taxation of non-resident companies: capital gains
Income obtained by a non-resident company without a permanent establishment is regulated by Article 151, paragraph 3, of the TUIR:
- the overall income of non-resident companies and commercial entities is comprised solely of income generated within the territory of the State (excluding those exempt from tax and subject to withholding tax or substitute tax);
- income listed in Article 23 is considered to be generated within the territory of the State;
- such income contributes to the overall income and is determined according to the provisions of Title I of the TUIR (relating to IRPEF) concerning the individual income categories to which they belong (land income, self-employment income, dependent employment income, miscellaneous income).
Capital gains resulting from the sale of stakes acquired by foreign companies fall into the category of miscellaneous income (thus taxed upon income declaration, RT section).
Therefore, the PEX exemption regime (Article 87) within the business income does not apply.
The conventional regime
Most Double Taxation Treaties provide for non-taxation in Italy of gains made by non-resident entities. They reserve the taxing authority exclusively to the seller’s country of residence. Exclusive taxation by the seller’s country of residence avoids the issue.
However, there is a limited number of treaties allowing for concurrent taxing authority between the seller’s country of residence and Italy (for example, under certain conditions, the treaty with France). In such a scenario, a violation of the free movement of capital may be identified.
In principle, this violation might not occur if the foreign selling party could benefit – in their country of residence – from a tax credit.
However, this tax credit might not be enough to prevent the distortion in question if, for any reason, the non-resident seller couldn’t practically offset the foreign tax (paid in Italy). This occurs, indeed, in the case of France (subject of the referenced judgments), where, since the gains in question are exempt under French domestic law, the tax credit is not recognized.
Current situation: management options for the sale’s capital gains
In the current context, therefore, the sales of stakes in Italian companies:
- carried out by EU companies, and
- taxed in Italy as well, at a rate of 26%, based on the Treaties (concurrent authority)
could be managed by requesting a refund of the substitute tax paid in Italy.
Future prospects: the Budget Law 2024 proposal
In light of the Cassation’s well-established orientation, the Budget Law 2024 proposal includes a modification to the PEX regime.
In particular, through an amendment to Article 68 of the TUIR, it is proposed that for companies and commercial entities resident in a EU or EEA State, gains resulting from the sale of stakes:
- qualified (under Article 67, paragraph 1, letter c) of the TUIR), and
- meeting the PEX requirements
are taxable at 5%.
For completeness, it’s important to recall the requirements that the stake must meet to benefit from the PEX regime:
- Balance sheet classification: registration among financial fixed assets from the first subsequent financial statement after the purchase;
- Holding period: the stake must have been continuously held, without interruption, from the 1st day of the twelfth month preceding the sale;
- Residence: the regulation requires the stakeholder’s residence in a state that doesn’t grant preferential tax treatment (in the case at hand, the requirement is met as the stake pertains to a company residing in Italy);
- Commerciality: the stake must engage in commercial activity, which must be verified from the third period preceding the sale (thus, holdings in real estate companies are generally excluded).
As a result, such entities will declare and pay tax at 26% on 5% of the realized gain, with an effective rate of 1.3% (equal to 5% of 26%).
However, it should be emphasized that the new legislative intervention is partial, as it doesn’t extend the PEX regime to non-EU participants. Thus, an (unjustified) restriction on the free movement of capital is maintained.
For non-EU sellers (whose treaties foresee concurrent taxing authority, e.g., China, South Korea, and Israel), Italian regulations would, therefore, remain tainted with discriminatory aspects. To address this discrimination, the route of a refund request might be considered.