Tax Reform (Italy): IHT exemptions to facilitate the inter-generational transfers of businesses and companies

With Legislative Decree (LD) No. 139 of September 18, 2024 on “Provisions for the rationalization of the registration tax, inheritance and donation tax, stamp duty and other indirect taxes other than VAT”, article 3 par. 4-ter of Legislative Decree No. 346/90 is amended, which dictates the conditions for exemption from inheritance and donation tax for transfers of businesses or branches thereof, company shares and interests made in favour of the spouse and descendants of the deceased or donor.

The exemption under art. 3 par. 4-ter is also applicable in cases of transfers of companies or shares made in trusts and established in favour of the spouse or descendant(s) of the settlor, carefully considering the conditions of application set out below.

The LD entered into force on October 3, 2024, but the relevant provisions will take effect starting from January 1, 2025.

The new wording of the rule aims at defining more precisely (i) the scope and conditions of of the tax exemption with regard to the different types of exempted transfers, (ii) to indicate in a punctual way the hypotheses in which the exemption is conditional on the continuation of the business activity and those in which it is conditional on the maintenance of a position of control or ownership of the share and, finally, (iii) to establish the territorial area of application.

On the subjective side, however, nothing has changed. The tax exemption, in fact, continues to apply with respect to transfers made in favour of the spouse and descendants of the deceased or donor (including the settlor of a Trust).

1) Broadening of tax exemption for transfers of minority interests and shares, which supplement a pre-existing control

The Legislator clarifies that the tax exemption to transfers (including transfers into a Trust) that enable the “acquisition or integration” of the control pursuant to Article 2359 par. 1 no. 1 of the Italian Civil Code, is also extended to transfers by which an “already existing” control is “integrated” (in fact including transfers of minority interests in which the beneficiary(ies) already held control).

This overcomes the restrictive reading of the provision given in the ruling by the Italian Revenue Agency No. 497/2021 and No. 72/2024, where, on the other hand, it was affirmed that the exemption under art. 3 par. 4-ter of LD No. 346/90 could not apply to the beneficiary(ies) who were already holders of company control (so-called “de jure”), but simply “strengthened” it through the donative (or successor) transfer of the minority shareholding.

2) New specific requirements to take advantage of the exemption in the case of businesses, shares or interests of companies under article 73, paragraph 1(a) of the TUIR

The additional conditions to benefit the inheritance and donation tax exemption are defined in the rewritten rule in the following terms:

• in the case of businesses or branches thereof, continuation of the business activity, by the successors in title, for a period of not less than 5 years from the date of transfer;
• in the case of Entities¹, holding of control, by the successors in title, for a period of not less than 5 years from the date of transfer;
• in the case of other interests, holding of ownership, by successors in title, for a period of not less than 5 years from the date of transfer.

Thus, the new wording seems to be aimed at broadening the scope of application of the exemption, in fact, in the previous points 2 and 3 there is an absence of reference regarding the nature of the activity carried out (commercial/non-commercial, business/ non- business), therefore, the following opportunities could be seen:

a. applicability of the exemption to the transfer of shares or interests of holding companies;

b. applicability of the exemption to the transfer of shares of partnerships (including “società semplice”).

In relation to trusts, regarding the identification of the moment in which one is called upon to assess the entitlement (or not) of the tax exemption, Circular No. 34/E/2022 clarifies that “the conditions for the entitlement of the exemption (...) will have to be assessed at the time of the appointment of the aforementioned interests to the beneficiaries”, identifying, therefore, the moment of taxation with the moment of the actual enrichment in the hands of the trust beneficiaries. The Italian Revenue Agency, also confirmed that “(...) the five years required for the maintenance of control run from the date of the aforementioned appointment to the beneficiaries and not from the date of gift into the trust.”

In order to take advantage of this exemption, the spouse and/or descendants (beneficiaries of the transfer), must make a special declaration of commitment to the continuation of the business or the holding of control or the retention of title.

In particular, it is necessary that:

• in the case of a gift (inter vivos transfer), the beneficiaries make special declaration to this effect to be included in the deed of gift;
• in case of succession (mortis causa transfer), the beneficiaries make a declaration in lieu of affidavit to be attached to the succession declaration;
• in case of distribution by a trust, the beneficiaries make appropriate declaration to that effect to be included in the deed of appointment.

3) Exemption for transfers of companies not resident in the territory of the State.

Lastly, in the new wording of article 3 par. 4-ter of LD No. 346/90, it is specified that the exemption also applies, under the same conditions as for transfers of shares and interests of resident entities, to transfers of shares or interests of companies resident:

• In countries of the European Union and the European Economic Area; or
• in countries that guarantee an adequate exchange of information.

This will make it easier to involve international companies in asset reorganization transactions, if they meet the same requirements and conditions as in the case of shares or interests of Italian companies and partnerships.

***

The information provided in this article is of a purely general nature and is not a substitute for specific advice that may be requested here.

^[1] Joint-stock companies, limited partnerships, limited liability companies, cooperatives, mutual insurance companies, European companies referred to in Regulation (EC) No 2157/2001 and European cooperative companies referred to in Regulation (EC) No 1435/2003 resident in Italy.