In Italy, with the new draft budget law, several changes are planned at the domestic regulatory level that will have significant consequences in an international context.
In fact, the new budget law, which must be definitively approved by December, is preparing an important change with regard to the taxation of capital gains realised by foreign companies and whose assets consist for more than 50% of real estate located in Italy.
Article 24 of the Budget Law envisages an amendment to the text of the current Article 23 of the TUIR2, which would provide as follows:
"'Income realised through the onerous transfer of participations in non-resident companies and entities, more than half of the value of which is derived, at any time during the 365 days preceding their transfer, directly or indirectly, from immovable property located in Italy, shall be deemed to be produced in the territory of the State.
The provisions of the preceding sentence do not apply with reference to the transfer of securities traded on regulated markets”.
In addition, another law would be amended, namely Legislative Decree No. 461 of 21 November 1997, in which a new paragraph would be added:
“5- bis. The provisions of paragraph 5 do not apply to income deriving from the disposal of participations in companies and entities not traded on regulated markets to the value of which more than half, derives at any time during the 365 days preceding their disposal directly or indirectly from immovable property located in Italy”.
The principles laid down are mainly twofold: capital gains in Italy realised through foreign corporate vehicles whose assets are mainly composed of real estate would be taxed and, at the same time, taxation would be avoided if the value of the companies is composed of other assets not in the nature of real estate.
In summary, the capital gains under consideration will be assimilated to those deriving from the disposal of participations in resident companies and will be qualified as miscellaneous income of a financial nature.
This provision is in accordance with Article 13(4) of the OECD Model Convention, which, moreover, has already been implemented in several Conventions aimed at avoiding double taxation entered into by Italy.
Italy has already signed bilateral Conventions with several States that provide for the taxability of such capital gains.
Among those that already provide for such possibility are, by way of example, the Conventions with Armenia, Azerbaijan, Barbados, Canada, China, Estonia, Finland, France, Hong Kong, India, Israel, Kenya, Mexico, New Zealand, Pakistan, Philippines, Romania, Saudi Arabia, Sweden and Ukraine.
In the event that the Conventions in force already provide for the possibility of taxing such capital gains, the new legislation should allow Italy to exercise concurrent taxation on such income, if the domestic legislation of the other State provides for such taxation: in this hypothesis, the non-resident should be able to enjoy the tax credit with reference to what has already been paid abroad.
In the event the Convention signed by Italy does not provide for this possibility, the rule should not apply and therefore capital gains realised from the transfer of shares of foreign companies would not be taxed in Italy even following future changes in domestic law.
Where there is no convention between states, Italy could, on the basis of the new legislation, tax capital gains and exercise this power concurrently: in this case, there will be no mechanism to avoid double taxation.
The purpose of the inclusion in Article 23 of the TUIR, provided for by the Model Convention, is therefore to subject the capital gains to taxation in Italy where this is already permitted by the Convention provisions.
The regulatory intervention on Article 5, paragraph 5, of Legislative Decree No. 461 of 1997 is also intended to avoid that the exemption regime is also applicable to participations in companies and entities, not traded on regulated markets, the value of which, for more than half, derives, directly or indirectly, from immovable property situated in Italy.
This is intended to avoid the sale of company shares and not real estate: in this way, taxes on the transfer of real estate would only be deducted in the country of residence of the company where, in some cases, taxation of capital gains is not provided for by domestic law.
On the other hand, the second part of the legislation aims to avoid that, in the proximity of the transfer, liquidity is injected into the company to avoid paying taxes in Italy.
In fact, with the assessment of the value of the company based on a time frame longer than 365 days, the possibility of abusive manoeuvres will certainly be limited.
The introduction of paragraph 1 bis to Article 23 of the TUIR therefore falls within this context, since by introducing new territoriality rules with respect to the taxability of such disposals, Italy could be allowed to tax such capital gains that, as of today, are not covered by domestic law.
In conclusion, this is a significant change from the past, but it will only be possible to assess the impact of the legislation once we have the final text approved by Parliament.
We will of course remain available to discuss the effects of these amendments with you.
Best regards.