Inter-generational transfers: the tax authority limits the application of the inheritance and donations tax exemption

In the Ruling no. 552 of August 25, the Italian Tax Authority has provided an extremely restrictive and detrimental interpretation of the rule contained in art. 3, paragraph 4-ter, of Legislative Decree no. 346/90, which exempts from inheritances and donations taxes, inter alia, the transfers – including those which are carried out through family agreements - "of company shares and stocks”, when such transfers are made in favour of the spouse and the descendants and lead to the acquisition (on a stable and long-term basis, and, in any case, for a period of time of not less than five years) of a controlling share quote of a capital company.

More specifically, according to the Tax Authority, it would not be sufficient for the transfer to meet all the subjective (i.e. being the beneficiary the spouse or descendant of the transferor) and objective (i.e.: acquisition of control pursuant to art. 2359, paragraph 1, of the Italian Civil Code and business to be kept going for a period of not less than five years from the date of the transfer) provided requirements, since it would also be necessary that the object of the transfer is a " trade company", i.e. a "productive entrepreneurial reality", which only would be "worthy of being protected during its generational transition".

In the opinion of the Tax Agency, therefore, the transfers, (even of whole), of shares in holding companies or parent companies, such as the classic family "bank vaults", (which, by their nature, do not directly carry out a productive activity, but instead simply hold, even indirectly, through other vehicles, shares, sometimes with percentages lower than 50%, but still significant, of the operating company or companies), would remain excluded from the scope of application of the special provision in question.

In fact, in the case examined by the Tax Authority, after a complex business reorganisation, the settlor would have made a pro indiviso donation, in favour of his own children, of the entire share capital of the family holding company (in the case in hand, a limited liability company), having, as its only asset, a 20.52% shareholding in an intermediate holding company (also a limited company), which itself holds the entire share capital of the operating corporate.

According to the Administration, in such a case, the deed of disposition, even if it involves the entire quota of shareholdings in a capital company and is made in favour of the descendants, who would have undertaken, through the family agreement, to maintain the control for a period exceeding the five years prescribed by the law, could not be granted the exemption, since it would not bring to the transfer of the ownership of the "family business", but rather facilitate the generational changeover of a company - the holding company - which is considered not operative and not capable of exercising direct control over the productive entity.

The position, however, appears to be poorly supported.

First of all, according to the most authoritative academic literature, as well as the case law and even the practice of the same Tax Authority, the facilitating rules must be interpreted according to their literal content, excluding analogical applications. This point has also been recently confirmed by the Supreme Court, which, with judgment no. 16286 of last June 10, has stated that "the rules of an exceptional nature, such as those that introduce benefits or exemptions, require an application inspired by the criteria of strict interpretation and are not subject to analogical interpretation".

Normally such principle is used not to extend the benefits to cases other than those expressly contemplated by the rule, but the criterion of strict literal interpretation can also apply in the opposite direction.

In this specific case, the provision in question does not indicate that the object of the transfer must be the shareholding in a "trade company" and, therefore, necessarily operative, since, instead, it is exclusively required that the transfer concerns company shares or stocks and that, through this transfer, the beneficiary is able to permanently exercise control, pursuant to art. 2359, first paragraph, no. 1, of the Italian Civil Code, without having to investigate the activity carried out by the company acquired or the composition of its assets.

Otherwise, it would be necessary to conclude that real estate companies, or those "without a business", are excluded from the scope of application of the rule in question, even if they are structured as capital companies and are directly transferred from father to son as part of the generational changeover.

It should also be noted that, although it is agreeable what is stated by the Tax Agency about the ratio of the rule in analysis, which can certainly be identified in a favourable treatment of business inter-generational transmission, in order, among other things, to "maintain employment levels... and avoid that the burden of taxes, at the time of succession, may generate financial difficulties that could compromise the survival of the company", this objective is not at all achieved through a limited use of the facilitating provision, but, instead, through an application of the provision that is more sensitive to the reality.

Consider that a reduced use of the rule, as suggested by the Agency, would exclude from application cases in which the indirect object of the donation (through the transfer of the majority or - as in this case - totalitarian shareholding in the holding or group-head company) would be a minority share, in some cases very significant, but not of control, of a company that is quoted on the regulated markets, whose importance and "weight", also from the point of view of the economic effects and of the general incidence on the community, could be much more significant than that which normally covers the direct transfer of a small factory.

It should also be pointed out that the reduction of the cases eligible for tax relief does not appear to be in line with the provisions of EU Commission Recommendations no. 94/1069/EC of 1994, and no. 98/C 93/02 of 1998, which invited the Members States to reduce the tax burden as much as possible, both with regard to direct transfers of companies and company branches, as well as to indirect transfers of the same, in order not to compromise the going concern of those realities that, when donated or inherited, could have been transferred to third parties, either in whole or in part, or liquidated by the heirs or donees, in order to obtain the necessary funds to meet tax obligations.

Finally, it is important to highlight how the Tax Authority bases its restrictive interpretation on the decision of the Constitutional Court no. 120 of June 23, 2020. This judgment, however, does not concern the requirements for the application of the provision, but rather the constitutional legitimacy of the provision, where it only covered transfers in favor of descendants, excluding the spouses. The Constitutional Court clarified the nature of the facilitating measure introduced by the Legislator, focusing on the objection of unconstitutionality of the exclusion of the spouse, which may appear "excessive compared to the protection offered by "the main constitutional precepts (articles 29 to 31 of the Italian Constitution) intended to protect the family and, in particular, the situations of potential fragility found therein".

However, in this judgment the Constitutional Court did not authorize the Administration to reduce the scope of application of the provision, moreover, on the basis of an exegesis of the provision not inspired by the criterion of strict interpretation, but has sent a recommendation to the Legislator in order to evaluate this situation.

In conclusion, given the doubts regarding the position expressed in the tax ruling in comment, which could discriminate between the organizational choices of the groups, especially those of a family nature, it will be necessary, in the future, to carefully evaluate, in each individual case, the specific concrete situation, if necessary through the presentation of specific request to the Administration, in order to avoid the risk of further disputes by the Tax Authority, with the potential collection of the exempted amounts and the application of the relative sanctions.

Published by: Avv. Iacopo Bissi - Dott. Nicola Pardini 

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