Participation exemption rule extended to companies not resident in Italy

As of 2024, the participation exemption regime extends to the capital gains of non-resident companies or commercial entities with no permanent establishment in Italy, the result of which the taxable base of the capital gain is reduced to only 5%.

The change in the regulations is a consequence of recent judgments passed by the Italian High Court in which reference was made to the need to subject both resident and non-resident companies to the same system of taxation.

The fundamental notion is that capital gains are to be taxed both in Italy and in the state of residence in line with internal provisions and the convention for the avoidance of double taxation.

If they are to benefit from the new regulation, foreign companies or commercial entities not only must have no permanent establishment in Italy, they should also be subject to taxation in their state of residence and be resident in a European Union or European Economic Area (EU/EEA) member state with which a sufficient exchange of information can be guaranteed.

Participation still has to be regarded as “qualified” under Italian law (normally at least 25% of the share capital); it must not regard simple partnerships or companies subject to a preferential tax regime, and participation should have been held for at least a year and been entered in the accounts as forming part of the company’s financial fixed assets. The tax residence of the investee company should not be in a state with a non-preferential tax regime, and the investee company must operate a business enterprise.

Tax is applied at the rate of 26% on 5% of the capital gain, which means that the rate applicable to the capital gain is 1.3%. 

Any capital losses sustained on the assignment of participations of a similar nature is deductible from the capital gain obtained and taxed at 5%. The deduction is therefore also subject to the 5% rate. If the capital losses should be greater than the capital gains, these must be declared in the four subsequent tax years, on condition that they are entered in the tax return for the tax period during which the capital loss was sustained.

Sergio Finulli specialises in tax and corporate law. He has built up considerable experience in assisting Italian and foreign clients with the setting up of a multidisciplinary approach to the management of their operations, for which purpose he works with lawyers and professionals specialising in other areas.