Inheritance and donation tax: the exemption is limited to the transfer of share that allows to exercise control of a limited liability company.

In the Ruling no. 262 of 13 May 2022, the Italian Tax Agency addressed an issue concerning the application of the exemption from the inheritance and donation tax provided by the Art. 3, paragraph 4-ter, of the Legislative Decree no. 346/1990. More specifically, the case submitted to the Authority concerned the possible transfer by deed inter vivos or mortis causa of categories of shares of a limited liability company (S.r.l.), which attribute different rights to the beneficiary

As is well known, Art. 3, paragraph 4-ter, of Legislative Decree 346/1990 provides that certain transfers (made also through family pacts, pursuant to Art. 768 bis et seq. of the Italian Civil Code, in favor of descendants and spouse, of companies or branches thereof, of company shares and stocks) are not subject to inheritance and donation tax. In the case of company shares, as referred to the Art. 73, paragraph 1, letter a) of TUIR (Italian Tax Consolidated Text), the benefit is limited to the shareholdings by which control is acquired or integratedunder Art. 2359, paragraph 1, no. 1) of the Italian Civil Code. The benefit also applies on condition that the beneficiaries continue to carry on the business activity or hold control for a period of not less than five years from the date of the transfer by providing an appropriate declaration. Failure to comply with this condition implies the for loss of the benefit, which leads to the payment of the tax at the ordinary rate, of the administrative penalty provided for in Art. 13 of Legislative Decree no. 471/1997 and interest on late payment from the date on which the tax was to be paid. The facilitation treatment is exclusively for the beneficiaries (descendants or spouse of the settlor) and is granted only following the presentation of the inheritance declaration or, in the event of a donation, of a specific statement in which they claim that they wish to continue their business or maintain the control of the business.

As we have already seen in our previous publication, “Inter-generational transfers: the tax authority limits the application of the inheritance and donations tax exemption”, through the aforementioned provision, the legislator intended to simplify the generational transfer of family companies, introducing, however, a restriction under which the beneficiaries of the transfer have the obligation to continue the business or to maintain control of the company for a period of not less than five years from the date of the transfer. This aim of the provision has also been shared by the Italian Constitutional Court, in its recent judgment of 23 June 2020, no. 120, where it has been clarified that the ratio of the rule is to facilitate the generational continuity of the business within the family’s descendants, when occurs the succession for mortis causa. Specifically, according to the Court’s Judgment, the benefit is aimed at guaranteeing continuity in favor of the donor's descendants and ensuring the preservation of the value of the company (consisting in a multitude of goods and connections, of various kinds). The rule, therefore, should be intended to reduce the burden of taxation, when the succession take place, which can, of course, generate financial difficulties that may endanger the very survival of the company, with the consequent loss of jobs and further repercussions on the economic structure. 

In this regard, the case submitted to the Tax Authority concerned a particular but not uncommon situation of company shares’ transfer which would have abstractly allowed to exercise the control over the company, as required by the law, although not in practice, due to the particular rights attributed to such shares in this case by the Article of Association.

In fact, it was a transfer, in favor of the descendants, of the 97,50% of the shares of a limited liability company, of which only the 1.5% (Category A) would have given the beneficiaries the right to vote at shareholder’s meeting, while the remaining 96% (Category C) would not have allowed them to exercise that right.

This is not an irrelevant matter.

Since, thanks to the reform carried out by the Italian Legislative Decree no. 50/2017, it was allowed to the limited liability company (which can be classified as SMEs) (1), to divide their share capital into categories of shares which: (i) do not grant voting rights; (ii) attribute voting rights in a non-proportional way to the amount of the share; (iii) grant voting rights limited to particular matters or upon to the occurrence of particular conditions, on several occasions has been raised the problem on how to deal with the transfer of these categories of shares for the purposes of applying the tax exemption in question.

In this regard, the Ruling under examination has expressly stated that in the event of transfer, by donation or inheritance, of a limited liability company’s share, that, in part, is endowed with voting rights and, in part, is devoid of them, in any case, the tax is due for the latter part, unlike the part with the voting rights,for which the exemption may apply – in accordance with Art. 3, paragraph 4-ter, Legislative Decree 346/1990 – provided that such voting rights allows to exercise control over the company.

Contrary to the claim made by the taxpayer, who requested the application of the exemption in relation to the entire shareholding transferred (amounting to 97,50% of the shares), to be considered as a unit, according to the principle of uniqueness of the share of limited liability company, according to the Tax Authority, therefore, the exemption from the inheritance and donation tax, in accordance with the rule under consideration, operates only for the shares which actually allow the beneficiaries to acquire or integrate the control, to be understood as a majority of the votes that can be exercised in the shareholders’ meeting.

As a result, where the transferor’s shareholding (in this instance, equal to 97,50% of the shares) is constituted by shares that only give the right to vote in a small percentage, the exemption will be applicable only to that last percentage, while it cannot be applied to the share which do not grant that right.

In conclusion, the position of the Italian Tax Agency, based also on the principles expressed in the recent Judgment of the Constitutional Court, does not appear unreasonable, since the purpose of protecting the generational transition is only pursued when the transfer of shares involves an effective passage of control from the transferor to the beneficiary. On the other hand, the mere transfer of economic rights – instead of voting rights– does not guarantee any effective managerial power to the recipient and, therefore, does not appear worthy of protection through the application of the benefit in question.

Dott.ssa Martina Tinarelli

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[1] It is qualified as Small-Medium Enterprise, under the Italian law, a limited liability company that meets the following requirements:

1) has in its object any economic activity, including non-commercial and non-business activity;

2) for two consecutive years, it has fewer than 250 employees and a turnover not exceeding EUR 50 million or a total annual budget not exceeding EUR 43 million;

3) does not belong to groups of undertakings whose economic power exceeds the one set for SME.