Circular 17/E of July 29th provides guidelines for the application of Art. 1, paragraph 59 of Law 213/2023 (2024 Italian Budget Law), regarding the tax regime on capital gains derived from the transfer of qualifying holdings, realized by non-resident companies and entities. Essentially, the provision introduces paragraph 2 bis into Article 68 of the Italian Income Tax Code (TUIR).
It is recalled that the tax treatment of capital gains from the transfer of holdings realized by resident subjects is regulated by the so-called “participation exemption”, under Art. 87 of the TUIR. Capital gains from the sale of qualifying holdings by resident subjects are excluded from taxable income, as they are 95% exempt.
The new provision aims to align the tax treatment of capital gains under Art. 67, paragraph 1 of the TUIR realized by subjects resident in an EU or EEA State with those realized by resident subjects. This follows both Italian jurisprudence (Supreme Court, Section V, No. 27267 of 2023) and EU law.
Paragraph 2 bis of Art. 68 TUIR
Paragraph 2 bis states that capital gains realized by non-resident companies and commercial entities, without a permanent establishment in Italy, contribute to the formation of income for 5% of their amount, provided that the requirements of Art. 87, paragraph 1 of the TUIR are met:
- Continuous ownership of the holdings from the first day of the 12th month preceding the month of transfer;
- Classification of the holding as a financial fixed asset in the first financial statement closed during the holding period.
Holdings in simple partnerships are excluded since they do not engage in commercial activities and thus do not meet the requirements of Art. 87. Additionally, the fiscal residence of the holding company must not be in a privileged tax regime country.
Subjective and Objective Criteria
The new provision and the circular from the Revenue Agency define the subjective and objective criteria for the application of paragraph 2 bis, the methods for determining the capital gain to be taxed at 5%, and the time limit for carrying forward any excess capital losses.
Subjective Criteria
The subjective scope indicates that non-resident EU or EEA subjects can benefit from the provided tax regime if they:
- Are subject to corporate income tax in their country of residence;
- Do not attribute income to their shareholders for transparency; and
- Have a legal form equivalent to that of commercial companies under Italian law.
They must also reside in a country that allows for adequate information exchange.
If the subjects have a permanent establishment in the territory, the transferred holding must be accounted for and functionally attributable to the non-resident entity (parent company).
Objective Criteria
The objective criteria refer to the identification of capital gains as defined by Art. 67, paragraph 1/C of the TUIR. These include qualifying holdings, whether traded on markets or unlisted.
The holding can take the form of shareholding (excluding savings shares) or other forms of participation, when such participation or securities sold represent a percentage of voting rights in the assembly exceeding 2% for traded securities and 20% for other shareholdings. In the case of participation in the capital, the percentages rise to 5% and 25%, respectively.
Exclusions
Capital gains realized on shares in simple partnerships and equivalent entities are excluded, as well as those realized from participation in the capital of companies based in blacklisted countries. Convertible bonds are not included, as they can only theoretically become shares, while other forms of equity investment, such as warrants and options, are included as long as they comply with Art. 87 TUIR.
The Agency reiterates that, according to Art. 87, paragraph 1 letter b), the above-mentioned holdings must be classified as financial fixed assets starting from the first financial statement closed during the holding period.
The Agency also emphasizes that subjective and objective requirements must be verified:
“when the transfer effect of the sale occurs, regardless of the different moment when the consideration due is paid.”
Capital Gains
The capital gain, considered at 5% of the entire amount, must be algebraically added to an amount corresponding to 5% of any loss in the same category. If the loss is not deducted against the corresponding gain in the year in which it is realized, it can be carried forward for deduction against gains in subsequent years, up to the fourth year, provided it is indicated in the tax return for the year in which the losses are realized. Deduction is possible up to the amount of 5% of the gains of subsequent years.
Capital gains determined by the calculation indicated above are subject to a substitute tax of 26%.
Finally, capital gains and losses relevant for determining the taxable balance for the tax year 2024 are only those realized starting from January 1, 2024.
Carried forward excesses from previous tax years do not affect this set.
The circular also specifies that the guidelines provided do not consider the possible applicability of double taxation treaties concluded by Italy.