A recent decision of the Supreme Court gives the opportunity to examine the conditions for the application of the exemption from succession and donation tax, provided for by Article 3, paragraph 4-ter of Legislative Decree no. 346 of 31 October 1990, in relation to the transfer of shareholdings according to family agreements, pursuant to Article 768 of the Italian Civil Code.
The exemption in question is aimed to facilitate the generational transfer of family businesses. In fact the provision pursues the “tax neutralisation of the generational transfer of any reality or organization directly [i.e. business or one of its branches] or indirectly [i.e. shareholdings] productive, preserving its efficiency, functionality and unity” (1). The Legislator aims to promote the continuity of the business in case of generational change, so that the same family or the descendants of the entrepreneur can continue to run the business.
In particular, Article 3, paragraph 4-ter of Legislative Decree no. 346 of 31 October 1990 recognises the tax exemption in question with reference to transfers, by virtue of family agreement, to the descendants and spouses, of business and relevant branches as well as of shares of companies.
With particular regard to the transfer of shareholdings owned by parties mentioned in Article 73, par. I, letter a) (among which we include companies with share capital) the tax benefit is subject to two different conditions:
- the acquisition or integration of control pursuant to Article 2359, par. 1, no. 1 of the Italian Civil Code (2);
- the continuation of the business or the holding of control for a period of at least five years from the date of the transfer.
With regard to the application held of the exemption in question, it is worth mentioning the recent judgment no. 6591 filed on 10 March 2021, concerning the case of allocation of the controlling interest from the transferring party to several descendants.
In the case dealt with by the Court of Cassation, a person who owned 99% of the shares of the company allocated, according to a family agreement, 25% of the share capital of a joint stock company separately and in equal parts to his three children.
On the day following the conclusion of the family agreement, the three beneficiaries entered into an ancillary shareholders' agreement by which they agreed:
- that any act of ordinary and/or extraordinary administration as well as of any decision in the hareholder meetings and administrative bodies were subject to the unanimous decision among the beneficiaries;
- the commitment to not withdraw from the agreement for its entire duration, set at the maximum of five years provided for by law, with the right for the parties to renew the agreement, after its expiry;
- the prohibition to dispose of all or part of the shares for the entire duration of the shareholders' agreement;
- the mutual right of first refusal in the event of a sale of shares within five years from the termination of the shareholders' agreement.
At the end of the proceedings, the Italian Supreme Court excluded the application of the exemption from donation tax provided for by Article 3, paragraph 4-ter of Legislative Decree 346/90, without recognizing relevance to the subsequent and ancillary shareholders' agreement entered into by the beneficiaries.
In particular, the Italian Supreme Court upheld the appeal of the Italian Tax Authority on the basis of the following arguments.
- With regard to the requirement of control, the exemption under Article 3, paragraph 4-ter recognizes the benefit in case of transfer of legal control to the beneficiary pursuant to Article 2359, par. 1, no.1 Italian Civil Code. On the other hand, in the present case none of the beneficiaries acquired the requirement of control as a result of the family agreement;
- The execution of a shareholders' agreement does not allow to benefit from the exemption, because the transfer of control does not take place by virtue of the family agreement but as a result of the subsequent and ancillary shareholders' agreement between the beneficiaries. Moreover, the Italian Supreme Court established that shareholders' agreements are binding only between the parties and therefore they have not a direct impact on the company's business;
- Regarding the broad interpretation of the exemptions or tax benefits (such as the one set out in Article 3, par. 4-ter), they are subject to a restrictive interpretation pursuant to Article 14 of the preliminary provisions of the Italian Civil Code, which provides that "analogy is not allowed for criminal laws and for laws that establishes exceptions to general rules or other laws".
The alignment of the Court of Cassation with the thesis supported by the Italian Tax Authority (3) did not convince all the jurists (4), who underlined the unreasonableness of the restrictive interpretation of the exemption in question, noting that, in other cases, the Italian Tax Authority recognize relevance to the cumulation of shareholdings owned by family members, in particular if bound by a shareholders' agreement (for example, with regard to the requirement of control for the application of the CFC regime, pursuant to Article 166 Italian Tax Consolidated Text).That said, it is possible to ensure the generational transfer of a company to more beneficiaries benefiting from the exemption under Article 3 par. 4-ter without the risk of incurring any charges by the Italian Tax Authority, by allocating a majority shareholding in co-ownership to the beneficiaries. In fact, in such case the Italian Supreme Court has recognised that "the benefit must always be recognised, provided that the rights of the co-owners are exercised by a common representative who has a majority of the votes in the ordinary shareholders' meeting".
In the same direction, the Italian Tax Authority issued the Circular no. 3E of 22 January 2008, as well as the Circular no. 11E of 16 February 2017.
Lastly, in its answer to ruling no. 37 of 7 February 2020, the Italian Tax Authority stated that the exemption from succession and donation tax is applicable to a family agreement by which 100% of the shares of the family holding company, 33% of which were jointly owned by the three beneficiaries, were donated by said beneficiaries to their respective sons as undivided shares, as follows: full ownership of 18% of the shareholding, bare ownership of 82% of the shareholding, assigning the usufruct to the settlors, but granting the voting rights to the beneficiaries of the agreement.
All of the above applies to the transfer of controlling interest in companies with share capital, whereas for the transfer of partnerships’ partecipations, including ordinary partnerships that act as holding companies, with shareholders' agreements directly included in the instrument of incorporation, the situation would be completely different and the transfer of control would take place regardless of the percentage of the stake transferred, given the different governance regime of partnerships.
Therefore attention must be paid in relation to the construction of family groups and to the choices concerning generational transfers, and it is necessary the support of professionals experienced in the matter in order to benefit from the tax advantages and/or to avoid disputes.
Published by: Dott. Nicola Pardini
Ph: Designed by Rawpixel
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(1) Studio n. 43-2007/T, Tassazione dei patti di famiglia e dei trasferimenti di cui all’art. 1 comma 78 legge 27 dicembre 2007 n. 296 (cd Finanziaria 2007), in CNN Notizie del 14 maggio 2008, est. Basilavecchia-Pischetola.
(2) Article 2359, par. I, no. 1, Italian Civil Code defines the legal control which occurs when a person or a company “holds the majority of the votes in the ordinary shareholders’ meeting”, i.e. holds 50% of the quotas or the shares of the companies, with voting rights in the ordinary shareholders’ meeting.
(3) Circular no. 11/E dated 16 February 2007.
(4) STEVANATO, L’agevolazione delle trasmissioni d’impresa nel tributo successorio, in Dialoghi Dir. Trib., 2007; ZIZZO, I trasferimenti di azienda e di partecipazioni sociali per successione o donazione, in Corr. Trib., 17/2007.
