Since 2004, Italian corporations have been exempt under certain conditions from paying corporate income
For a transaction to qualify for exemption, it must meet four conditions:
1) The controlling shareholder must have held the shares in the company being sold for at least 12 months.
2) The company being sold has to have been based for at least three years in a country on the Italian Revenue Service’s white list of countries with which it has arrangements to avoid double taxation. The list includes the EU member states, the U.S., and China, among others.
3) The controlled company must carry out an actual business activity; and
4) The investment must be booked as a long-term investment on the controlling shareholder’s balance sheet.
Crucially, Italy’s tax agency recently issued a clarification of “actual business activity.” The clarified definition includes many start-ups that previously had been considered ineligible. It states that actual business activity is generally met if the controlled company has an operational structure — for example, to engage in sales or manufacturing (as opposed, for example, to being set up just to passively manage assets). The start-up may also qualify if it could, even just potentially, begin conducting business in a timely manner — with the standard for “timely” varying from industry to industry.
Start-up activities may qualify as “Active Business” if after the preparatory and auxiliary activities are completed, the foreign business actually begins to carry out the active business that it was organized for.
For example, if an energy company had begun pursuing suitable sites to locate power plants, the business could be considered to be in its preliminary stage and may already meet the “actual business activity” standard.
In light of this new interpretation, it’s worth reviewing any planned sales of shares in non-Italian companies to see if they now qualify for the exemptions. It’s also worth reviewing your Italian subsidiary’s holdings to see if any of them qualify under the clarified standards — which might make them suddenly ripe for selling.
For more information, download the Italy Clarifies Aspects of Capital Gains Participation Exemption Regime by Gianluca Queiroli.