Dissolution of the family-owned business and “communion of residue”: the amount received by the spouse are tax free.

The recent answer of the Italian Tax Authorities to ruling n. 195/2021 gives the opportunity to examine the tax treatment of the amounts received by the spouse, in case of dissolution of the family business and transition from the communion of property regime to the legal separation property regime.

In order to understand the real impact of the Tax Authorities’ opinion, it must be recalled that the family business, despite its residual spread (1), is still a widespread business reality in Italy, regulated by the article 230 bis of the Italian Civil Code.

The purpose of the rule is to give a legal recognition of the work performed by family members (spouse, relatives within the third degree and relatives-in law within second level), within the individual enterprise mainly governed by one of them.

Indeed, this structure is similar to the sole proprietorship, in which the entrepreneur has a central role, but with a specific valorization of the work carried out by the entrepreneur’s family members from a formal, fiscal and social security contributory perspective.

For this reason, the family business differs from the atypical institution of the conjugal business, which, instead, is run by the spouses exclusively, without participation of others.

With reference to administrative and patrimonial rights, the entrepreneur’s family members are entitled to take part to business management, and are granted the right to maintenance, participation in profits, distributions of business increases and the liquidation of the shares.

On the tax front, however, the rules provides that the incomes arising from the business activity can be attributed (2) pro quota – but, in any case, within the maximum limit of 49 % of the total achieved – to each family member who works continuously during the tax period, and, consequently, taxed for transparency.

On other hand, the tax treatment of the liquidation given to the family member in case of the dissolution of the business was uncertain.

In this regard, the Tax Authorities clarified that such amount is not relevant for tax purpose, for the application of income taxes, because both it is paid by the entrepreneur without being a cost for the business (which cannot deduct such expense), and it has been already taxed pursuant to the transparency regime.

For indirect taxation purpose, instead, it is essential to formalize the termination of the collaboration by means of a specific deed, so as to cause the termination of the income effects deriving therefrom. Therefore, the parties will have to execute a notarized private deed or a public deed, which will be subject to a fixed registration tax pursuant to Article 4 (1) (c) of the Tariff, Part One, annexed to Presidential Decree 131/1986. The same fixed tax must apply to the deed of allocation of the liquidation quotas, also to be executed in the form of notarized private deed or public deed.

In the case in comment, the tax Authorities also addressed the issue of the taxation of the amount paid to the spouse - in addition to the amount due as a result of the liquidation of his quota in the family business we have been talking about above - in the event of the transition from the regime of the legal communion of properties to that of separation.

In fact, according to article 178 of the Italian Civil Code “the goods destined to the exercise of one of the spouses’ business constituted after the marriage, as well as the increments of the business constituted also before marriage, are considered as subject to the communion regime only when they are existing at the time of the business dissolution”. That is known as communion of residue.

This expression is used to identify that residual and deferred communion regime which becomes effective, for the spouses, when the legal property regime terminates provided that condition that the concerned assets have not been consumed before that time.

As we said, the family business is similar, in every aspect, to the sole proprietorship of one of the spouse – except for the compulsory remuneration of family members who work for such business on a continuous basis. For this reason, at the time of the transition from one property regime to the other, either the assets destined to the business activity, or the increments of the same business, can become part of the communion of residue, with the consequent allocation to the spouse to the extent of 50%.

To this end, the Italian Tax Administration clarified that, since the deed by which the spouses provide for the division of properties has a declaratory nature, the paid amount is not relevant to income tax purposes, as they concern private legal events between the spouses and, therefore, cannot be classified in any of the income categories provided by the Italian Tax Consolidated Text.

The Italian Tax Administration adopted these conclusions in accordance with the decision of the Italian Supreme Court (3). In fact, the Supreme Court clarified that, in the event of the transition in the property regime, since the assets and the profits of the business included in the communion of residue have been previously taxed, at the time of their maturation, on account of the spouse-entrepreneur, they do not assume income relevance whenever they are attributed to the other spouse, because that transfer has financial nature only.

From the point of view of indirect taxation, the deed of division, because of its declaratory nature, is subject to proportional registration tax at rate of 1% pursuant to Article 3 of the Tariff, Part 1, annexed to “TUR”.

In conclusion, the Italian tax Administration, in line with orientation already expressed by the courts’ decisions, recognized that the family owned business and the communion of properties regime between the spouses can be terminated without the application of heavy direct taxes, and with the sole registration tax due on the deeds necessary to formalize the dissolution of these relationships, which, howThe Italian Supreme Court, n. 25415 of November 2020. ever, in order to benefit from this treatment and to avoid the risk of “abuse of law” contestation, must be setup, developed and concluded in compliance with the rules governing these institutions.

Published by: Dott.ssa Giorgia Di Cosmo

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(1) The article 230 bis of the Italian Civil Code provided that the family-owned company exists “unless a different relationship is configurable”.

(2) See article 5, par. 4, of the Italian Tax Consolidated Text.

(3) The Italian Supreme Court, n. 25415 of November 2020.