Italy’s New Capital Gains Tax Regime for Nonresident Companies | Fieldfisher
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Italy’s New Capital Gains Tax Regime for Nonresident Companies




Italy’s 2018 Budget Law introduces amendments to the domestic capital gains tax regime that may affect nonresident investors[1]

This article has been published in Tax Notes International, July 2, 2018 – Tax Analysts (All rights reserved)

As of January 1, 2019, the effective tax rate for capital gains — applicable to the sale of “qualified” Italian shareholdings held by nonresidents without a permanent establishment in Italy — will increase from 13.95 percent to 26 percent. These taxes can be avoided under double tax treaty (DTT) provisions generally stating that, for (non- real-estate) companies, capital gains on disposal of shares are taxable only in the seller’s country of residence. There are, however, DTTs between Italy and other countries (including Brazil, China, France, India, Israel, Saudi Arabia, and South

Korea) that derogate from this general rule and do not grant treaty protection under specified circumstances.

Because of the different tax rates applicable to resident and nonresident taxpayers in comparable situations in the Italian tax framework, French shareholders — as residents of an EU member state — may invoke the EU fundamental freedoms and the principle of nondiscrimination (recently also acknowledged by some Italian lower tax courts) to minimize the tax impact in Italy.

Other nonresident shareholders may, in appropriate cases, rely on the EU free movement of capital principle, which applies to shareholders resident in third countries if their country’s DTT with Italy or local tax provisions do not allow them to offset or reduce the Italian tax burden.

Existing Domestic Legislation

According to articles 151 and 73(d) of the Italian income tax code (Testo Unico delle Imposte sui Redditi, or TUIR),[2] nonresident companies doing business in Italy are only liable for Italian corporate income tax (Imposta sul Reddito delle Società, or IRES) on income produced therein — a territorial principle — except for exempt income and income subject to final withholding tax (or substitutive tax). The IRES rate is 24 percent.

To determine domestic income, taxpayers should consult the income categories set forth in article 23 of the TUIR, titled “Taxes Levied on Nonresidents.” The categories are real estate (land and buildings) income; investment income (from capital); employment income; self-employment income; business income; and other income. PE income earned by foreign companies in Italy is taxed as business income, applying the same calculation principles as resident companies. Without a PE, Italy taxes all Italian sources of income separately, with the taxable base calculated using principles similar to those used for resident individuals. When nonresident companies sell a shareholding owned in an Italian company, tax treatment depends on whether the shareholding is deemed qualified (also referred to as substantial).

Italian tax law — specifically article 67(1)(c) of the TUIR — considers a shareholding qualified if:

  • for listed securities, it represents more than 2 percent of the voting rights or more than 5 percent of the entity’s share capital; and
  • for unlisted securities, it represents more than 20 percent of the voting rights or more than 25 percent of the entity’s share capital.

On the other hand, should these thresholds not be exceeded, the relevant shareholding qualifies as a “nonqualified” shareholding.

Domestic legislation (as clarified by Italian tax authorities in Circular Letter 52/E of Dec. 10, 2004) provides that, when determining whether a sale involves a qualified shareholding, all sales that occurred within 12 months of the date of the first sale must be taken into account, even if the sales involved different purchasers.

According to articles 23 and 151 of the TUIR, the transfer of a qualified shareholding by a nonresident company could give rise to a taxable capital gain in Italy. The sale income (that is, capital gain) earned by a nonresident company without a PE in Italy is not classified as business income, but rather recognized (and taxed) as “other income” (of a financial nature) under the Italian tax rules for resident individuals. In practice, this means a nonresident company is required to file a tax return in Italy. Despite the terminology, “other income” is not a catchall; rather, under article 67 of the TUIR, the category only encompasses specific sources of income, including — but not limited to — capital gains.

Under article 68 of the TUIR, an Italian individual (a non-entrepreneur) who sells a qualified shareholding pays ordinary tax rates on 58.14 percent of the capital gain. Tax rates for individuals are progressive based on income and range from 23 to 43 percent. On the other hand, the tax rate for nonresident companies in Italy is a flat 24 percent (nonprogressive IRES rate). Thus, the effective tax rate (ETR) on the nonresident company’s gain on a qualified shareholding would be 13.95 percent (that is, 24 percent of 58.14 percent).

In the past, domestic law granted a special capital gains exemption on the disposal of equity investments (qualified and nonqualified) reinvested in start-ups. However, this ended in 2014.

The transfer of a nonqualified shareholding is not subject to tax if it involves listed securities because Italian domestic law — namely, article 23(1)(f) of the TUIR — does not regard that transaction as Italian-source income. Unlisted nonqualified securities sold by a nonresident company benefit from a tax exemption if the seller is a resident of a “white list” jurisdiction.[3] The Ministerial Decree of March 23, 2017, extended the white list — the list of countries that allow an adequate exchange of information with Italy — to include 11 more countries, for a total of 134 jurisdictions.

A DTT between Italy and the transferor’s country of residence may eliminate the amount of tax due if the DTT contains general provisions like article 13(5) of the OECD model income tax treaty that prevent capital gains on share sales from being taxed in Italy. Article 13(5) of the OECD model provides: “Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident.”

Capital gains tax treatment for nonresidents without PE in Italy is shown in Table 1 (general overview).

On the other hand, Italian resident companies can benefit from a participation exemption regime if specified conditions are met. Under article 87 of the TUIR, the participation exemption regime basically applies if:

  • the seller held the shares for an uninterrupted period of at least 12 months before the transfer;
  • the seller classified the shares as a fixed asset in its first financial statements closed after purchasing them; and
  • during the three years before the transfer, the entity whose shares are being disposed of:

3a) was engaged in a true business activity; and

3b) was not resident in a blacklist country.

In that case, capital gains by Italian (non-real- estate) companies on sales of Italian shareholdings are 95 percent exempt from IRES.

This produces an effective tax rate for an Italian corporate shareholder of 1.2 percent (that is, 5 percent taxable base multiplied by the 24 percent IRES rate).

Over time, the ETR for both nonresident and resident companies has changed because of amendments to domestic legislation affecting the taxable base and the IRES rate (see Table 2).

Table 1. Italian Capital Gains Tax for Nonresidents (Without PE in Italy)

Type of Shareholding

Tax Treatment in 2018


13.95% = 24% x 58.14%*









Investor resident in a white-list country


Investor resident in a non-white-list country

26% substitute tax*

*DTT protection (when applicable) can avoid taxation in Italy.


The Italian Budget Law for 2018

The 2018 Budget Law provides, inter alia, important changes in the domestic capital gains regime.

Beginning January 1, 2019, Italy will tax resident individuals (acting as non- entrepreneurs) who realize capital gains in qualified Italian shareholdings at a 26 percent substitute tax rate instead of using the progressive taxation system described above. As is expressly indicated in the explanatory report for the draft 2018 Budget Law, the legislature intended to simplify the tax system and conform the capital gains realized by residents on qualified and nonqualified shareholdings will be taxed at the same rate through a substitute tax regime.

According to the domestic provisions, these amendments can also apply to nonresidents that do not have a PE in Italy.

In light of the above, ETR on capital gains (realized by nonresidents on qualified shareholding) will actually rise from 13.95 percent to 26 percent beginning in 2019.

The 2018 Budget Law also reintroduces an elective regime[4] that allows resident individual and nonresident entities to step-up the tax value of participations in unlisted shares owned as of January 1 by paying an 8 percent substitute tax. The substitute tax is calculated on the value of the participation as of January 1, as certified by a sworn appraisal that must be completed by June 30. Taxpayers can choose to pay the substitute tax in a single installment by June 30 or in three annual installments (that is, June 30, 2018; June 30, 2019; and June 30, 2020) with 3 percent annual interest due on the second and third installments.

If DTT protection is not available because of unusual provisions, nonresident shareholders may wish to consider whether to take advantage of this optional tax step-up regime to avoid (or reduce) the tax burden on prospective capital gains from the sale of unlisted shares.

The ‘French Matter’

Some of Italy’s DTTs foresee measures waiving — if specific conditions are met — the ordinary procedure provided for in article 13(5) of the OECD model. These DTTs include the treaties with Brazil, China, France, India, Israel, Saudi Arabia, and South Korea.

Although article 13(4) of the France-Italy DTT[5] is in line with the OECD model’s article 13(5), this general rule is waived by the protocol to that treaty. Specifically, paragraph 8(b) of the protocol provides:

  1. B) Gains from the alienation of stocks or shares other than those mentioned in paragraph (a) forming part of a substantial participation in the capital of a company which is a resident of a State shall be taxable in that State in accordance with the provisions of its domestic legislation. A substantial participation shall be deemed to exist when the alienator, alone or with related persons, owns directly or indirectly stocks or shares which together carry the right to 25 [percent] or more of the profits of the company.

In other words, capital gain on the disposal of Italian shares will, in some cases, also be taxed in Italy in the hands of the French seller. This means a French company selling a qualified (substantial)[6] shareholding owned by an unlisted (non-real-estate)[7] Italian company cannot benefit from any treaty protection — Italy will tax them in accordance with the above-illustrated domestic rules (that is, an effective tax rate of 13.95 percent in 2018 and 26 percent beginning in 2019).

By contrast, in an entirely domestic scenario, capital gains realized by Italian (non-real-estate) companies on sales of Italian shareholdings can benefit from the participation exemption regime (with an ETR of 1.2 percent). Thus, in comparable situations, the tax rate applied in Italy on capital gains by a nonresident French seller will be significantly higher than the rate applied to an Italian seller. See Table 2.

The above formal discrimination would materialize should French domestic legislation foresee a participation exemption regime to the French shareholder.

In that case, double taxation could not be eliminated by DTT provisions (for example, the foreign tax credit mechanism in article 24 of the France-Italy DTT). Likewise, nonresident companies in a tax loss position may be unable to offset taxes levied in Italy against their corporate income tax liability.

This condition caught the attention of some Italian tax courts that recently ruled in favor of French corporate shareholders (without PE in Italy).

Table 2. Qualified Shareholdings: Nonresident Vs. Resident Companies

Tax Year

CIT Rate

TB Nonresident*

ETR Nonresident**

TB Resident

ETR Resident

























*TB percentages applicable to resident individuals apply also to nonresidents.

**DTT protection (when applicable) can avoid taxation in Italy.


Tax Court Cases in Pescara

The first of these cases was brought before the Provincial Tax Court of Pescara (Decision 80 of March 5, 2014). In 2008 a French company sold 100 percent of the shares of its Italian subsidiary and realized a capital gain that was taxed in Italy according to domestic provisions. In 2010 the nonresident company filed a tax refund claim with the Italian tax authorities (ITA) in Pescara (Centro Operativo di Pescara) citing a disparity in the tax treatment on capital gains accrued by residents and nonresidents.

Because the ITA did not respond to the taxpayer referenced above, the taxpayer raised a tax dispute[8] asserting that the Italian tax provisions breached the freedom of establishment principle under article 49 of the Treaty on the Functioning of the European Union. The Provincial Tax Court of Pescara decided in favor of the claimant, but the ITA appealed to the Regional Tax Court of L’Aquila arguing that the France-Italy DTT eliminated any discrimination. The Regional Tax Court of L’Aquila ruled in favor of the claimant (Decision 1477 of December 23, 2015).

The court stated that EU law prevails over international law (including the DTT) in relations between EU member states — a principle that the Court of Justice of the European Union applied in Commission v. Italy, C-540/07 (CJEU 2009). That case involved outbound dividends that did not qualify for the EU’s parent-subsidiary directive (Directive 90/435/EEC, as amended). This may happen, for example, when a holding does not meet the directive’s minimum holding period or percentage. When the EU’s parent-subsidiary directive did not apply, dividends paid to companies residing in other member states were subject to a domestic withholding tax in Italy of 27 percent (which could be reduced to 15 percent or

12.5 percent in some cases). On the other hand, Italian companies receiving dividends could benefit from a participation exemption regime leading to an ETR of 1.65 percent (that is, 5 percent taxable base multiplied by the 33 percent IRES rate), which fell to 1.375 percent in 2008 when the IRES rate was fixed at 27.5 percent (and has, since the time of the ruling, decreased further to 1.2 percent, as noted above).

The CJEU ruled that the different tax treatment based on the residence of the dividends recipient — that is, the rates paid by Italian companies versus those resident in other member states — resulted in discrimination based on nationality and was thus prohibited by EU law. The Court therefore declared that the Italian tax legislation at issue breached the EU’s guarantee of free movement of capital (article 63 of the TFEU). Anticipating the ruling, Italy changed the withholding tax regime just before the CJEU issued the decision, introducing a reduced 1.375 percent withholding tax rate (now 1.2 percent) for outbound payments to European Economic Area companies so that the tax treatment of EU and EEA outbound dividends is in line with the treatment of domestic dividends, thus eliminating the alleged discrimination.

In accordance with the CJEU’s above- mentioned decision, the Regional Tax Court of L’Aquila noted that unequal taxation treatment can be avoided when a DTT allows nonresidents to recover the taxes paid. Here, the relevant provision was article 24 of the France-Italy DTT — “Methods for elimination of double taxation” — which prevented double taxation by allowing an ordinary tax credit for foreign taxes incurred on gains (although credit for tax paid abroad may not exceed the amount of tax due domestically on the foreign income). During the trial, however, the claimant proved that it could not use DTT provisions to avoid tax discrimination suffered in Italy: Under French tax law — specifically local tax exemption rules — the capital gains were not subject to tax.

The tax court concluded that the French company should be taxed in the same way as resident companies and declared that overpaid taxes on capital gains must be refunded. Also, the court declared that interest on tax repayments the ITA owed the claimant must be calculated as of the payment date, and not, as the provincial tax court had previously held, from the date of the claim submission.

Provincial Tax Court Case in Milan

In another notable case, a French company brought suit before the Provincial Tax Court of Milan (Decision 5738 of June 24, 2015). After selling an Italian shareholding in 2011, the French company — following Italian domestic provisions — paid IRES on its capital gain in Italy.

The French company asserted that there was discrimination in its tax treatment compared with an Italian company that saw a capital gain on a similar transaction, and it filed a tax refund claim with the ITA. The French company received no response from the ITA and appealed to the Provincial Tax Court of Milan.

The tax court acknowledged the claimant’s arguments, in particular the reference made to the CJEU’s 2009 Commission v. Italy judgment.

Addressing the principles in that decision, the tax court declared that dividends and capital gains matters should be treated the same way.

When comparing the taxation of the French company — a foreign company from another EU member state — with the taxation of a domestic entity that realized capital gains on an Italian share disposal, the court said the less favorable tax treatment of the French shareholder was clear — as was the fact that EU law mandates that the discrimination be eliminated.

At trial, the French company successfully proved that it would have met all the requirements for the application of the participation exemption regime had it been an Italian entity. The Provincial Tax Court of Milan upheld the taxpayer’s appeal and ordered the ITA to provide a tax reimbursement on capital gains to the French company. However, the ITA has presumably filed an appeal, which is still pending.


General Framework

Absent treaty protections, the amendments to the capital gains tax regime introduced by the 2018 Italian budget law create a de facto increase in the potential tax burden on nonresidents selling qualified shareholdings — from 13.95 percent to 26 percent.

To minimize or eliminate the local tax impact, nonresidents owning unlisted Italian shareholdings may wish to elect the revamped tax step-up regime to adjust shareholdings to a fairer market value. However, the 8 percent substitute tax payment should be duly considered and the opportunities available to sellers should be evaluated on a case-by-case basis.


French Shareholders

French shareholders may refer to the Italian lower tax court rulings discussed above — that is, those holding Italian tax provisions in breach of EU principles regarding the freedom of establishment and free movement of capital — to attempt to address the historically atypical, negative effect of the France-Italy DTT provisions on capital gains taxation following the alienation of shares.

Determining the appropriate tax treatment for this kind of transaction is not a straightforward matter. If taxpayers do not comply with domestic rules (in conjunction with DTT provisions), the ITA may challenge share disposal transactions alleging a default on tax payment subject to penalties and late interest.

However, if a nonresident seller decides on a conservative approach and pays taxes on capital gains, it will later (presuming it wishes to recover the arguably excessive payments) have to file a tax refund claim with the ITA. Because I have seen no evidence of the ITA adopting a different interpretation than that noted above, it is very likely that the taxpayer will have to litigate the dispute in tax courts, and litigation is likely to take several years.

The legal principle applied by lower tax courts in the cases discussed above appears well- founded, so I expect that the “French matter” will be resolved soon, either through specific legislative action or ITA clarifications, and possibly before the cases make their way to the Supreme Court of Cassation or the CJEU. Now, the regional tax court decision from Pescara is presumably pending before the Supreme Court of Cassation, and the provincial tax court decision from Milan is on appeal to the regional tax court.

Notably, both the Regional Tax Court of Pescara and the Provincial Tax Court of Milan acknowledged tax discrimination on grounds of nationality by using EU laws, and in both cases the tax courts ruled without considering it necessary to refer the case to the CJEU. Beyond Commission v. Italy, the CJEU has already ruled that, at least for direct taxation, EU freedoms apply to capital gains on the disposal of assets.[9] Concerns based on the nondiscrimination clause set out in article 25(1) of the France-Italy DTT might also have been explored.

In both the Milan and Pescara cases, a comparison of French and Italian businesses demonstrated that French companies are more heavily taxed than Italian entities on capital gains from qualified shareholdings. Indeed, as I note above, French companies that realize capital gains are subject to (Italian) taxation at a rate of 13.95 percent, rising to 26 percent in 2019. Meanwhile, under the circumstances discussed, capital gains realized by Italian companies from shareholding sales eligible for the participation exemption have an ETR of 1.2 percent.

The Provincial Tax Court of Milan apparently agreed to refund the entire amount of capital gains tax paid by the French seller. In contrast, the Regional Tax Court of Pescara only agreed to repay the overpayment — that is, the difference between the taxes actually paid and the taxes that the ITA would have theoretically imposed on an Italian company eligible for the participation exemption regime. The Pescara court’s approach appears to be more in line with Commission v. Italy, which both tax courts relied on to support the judges’ decisions. Further, only the Regional Tax Court of Pescara addressed the issue of the overall tax impact on capital gains in both France and Italy. This is because the nonresident shareholder demonstrated at trial that it did not benefit from the DTT foreign tax credit mechanism to offset local taxes on capital gains against its tax liability in France.

Non-EU Shareholders

Non-EU shareholders that realize capital gains on qualified shareholdings in Italian companies — and more precisely, those that do not have treaty protection from the capital gains tax and that cannot offset the Italian taxes against their domestic tax liability — could consider relying on the EU’s free movement of capital principle (article 63 TFEU). That article is not restricted to intra-EU situations, but applies to capital movements to and from third countries as well.

Over the years, the CJEU has introduced the “decisive influence” principle to try to clarify when the free movement of capital applies versus when the freedom of establishment governs.[10] This case law shows that the actual percentage of shareholding is not a crucial factor when breaking a tie on this issue. These situations must be analyzed on a case-by-case basis. A detailed analysis of this issue is beyond the scope of this article; a recent discussion of the issue, including the so-called standstill clause contained in article 64 of the TFEU, can be found in the Advocate General’s opinion in EV v. Finanzamt Lippstadt, C- 685/16.[11]


[1] Article 1 (999-1006) of Law 205 of Dec. 27, 2017, published in the Italian Official Gazette 302 of Dec. 29, 2017. The Italian 2018 Budget Law also affects the dividend taxation regime. For a detailed overview focused on Italian taxpayers, see Raul-Angelo Papotti and Lorenzo Ferro, “Italy’s New Rules on Taxing Income From Shareholdings,” Tax Notes Int’l, Mar. 12, 2018, p. 1071. This article is mainly focused on the tax implications for nonresident companies.

[2] Presidential Decree 917 of Dec. 22, 1986.

[3] Article 5(5) of Legislative Decree 461/97.

[4] Article 1 (997-998) of Law 205 of Dec. 27, 2017.

[5] Signed on October 5, 1989, and ratified by Statute 20 of January 7, 1992.

[6] For the stake of simplicity, I assume in this analysis that this is 25 percent of share capital.

[7] The provisions designed for real estate companies in para. 8(A) fall outside the scope of this article. I will, however, note that the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting will affect the treatment of shares in real estate companies.

[8] According to domestic provisions, if the ITA does not reply within 90 days after a taxpayer submits a claim, it is interpreted as a tacit rejection of the claim (silenzio-rifiuto). In this case, the claimant can bring the case before the local tax courts within 10 years. In Italy, qualified judges operating in tax courts of first and second instance — respectively, the provincial tax court (Commissione Tributaria Provinciale) and the regional tax court (Commissione Tributaria Regionale) — deal with tax disputes. The Italian Supreme Court of Cassation (Suprema Corte di Cassazione) is the highest level of jurisdiction (the third and final instance).

[9] See, e.g., Commission v. Spain, C-562/07 (CJEU 2009); Hollmann v. Fazenda Pública, C-443/06 (CJEU 2007); Bouanich v. Skatteverket, C-265/04 (CJEU 2006); and De Baeck v. Belgische Staat, C-268/03 (CJEU 2004).

[10] See, e.g., SECIL, C-464/14 (CJEU 2016); Emerging Markets Series of DFA Investment Trust Company, C-190/12 (CJEU 2014); Test Claimants in the FII Group Litigation, C-35/11 (CJEU 2012); Marianne Scheunemann v. Finanzamt Bremerhaven, C-31/11 (CJEU 2012); Holböck, C-157/05 (CJEU 2007); Commission v. Italy; and Baars, C-251/98 (CJEU 2000).

[11] For a recent analysis of questions on the free movement of capital and third countries, see CFE ECJ Task Force, “Opinion Statement ECJ-TF 1/2017 on the Decision of the Court of Justice of the European Union in SECIL (Case C-464/14) Concerning the Free Movement of Capital and Third Countries,” 57(4) European Taxation (Mar. 20, 2017).

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