Shareholder withdrawal, revaluation and transfer of shareholdings, the fine line between legitimate tax saving and tax avoidance.

The recent ruling of the Italian Tax Authority no. 89 of 8.2.2021 brings to light an issue that, for years now, has seen taxpayers and the Italian Tax Authorities facing each other about the freedom of choice in relation to capital transactions.

Since the early 2000s (1), the Italian Legislator, for economic reason, has allowed shareholders to revalue the tax cost of their participations (for the sole purpose of the determination of the accrued capital gains, in the event of sale), upon payment of a substitute tax (currently at a rate of 11%) calculated on the value of the participations determined through a specific appraisal.

The advantage of this revaluation is clear. If a shareholder sells his shares, the difference between tax cost and sale price generates a capital gain. This capital gain is included in the category of financial “other incomes” (i.e. “Redditi Diversi” as set out by art. 67 of Italian Consolidated IncomeTax Act) and is taxed at a rate of 26%, which is higher than the 11% rate of the aforesaid substitute tax, usually applied on a value equal to the sale price (in order to avoid the future generation of capital gains).

As regards to the possibility of revaluation, it is undisputed (also for the Italian Tax Authority) that a transfer of shares, immediately preceded by a revaluation, has no elusive nature. This operation represents the typical possibility, for the taxpayer, to legitimately choose between different tax regimes offered by the law, even if entailing a different tax burden (see par. 4 of Art. 10-bis od Law no. 212/2000).

In this context, the problem has arisen regarding the application of the revaluation in case of shareholder withdrawal. The issue arose because there are two different hypothesis of withdrawal, subject to different tax regimes:

• the so-called typical withdrawal, which occurs if the company proceeds to the purchase of its own shares and to their subsequent cancellation, with the consequent reduction in share capital. In this case, the amounts received by the shareholder are considered capital income pursuant to art. 47, paragraph 7 of Italian Consolidated IncomeTax Act and, as such, cannot benefit from the previous revaluation;
• ​the so-called atypical withdrawal, which occurs if the shares are acquired by other shareholders, by third parties commissioned by the company, or, by the company itself, which then does not proceed to their subsequent cancellation (a condition required by Art. 47, paragraph 7 of the Italian Consolidated Income Tax Act to consider the revenue a capital income). In this case, the sale may generate a capital gain, falling within the category of different incomes, and, therefore, the taxpayer has an interest to use the revaluation.

The Italian Tax Authority is used to deem elusive the revaluation of the shares, followed by the subsequent transfer to the company (operation theoretically capable to accrue a capital gain, usually avoided through the revaluation). In fact, as stated in the abovementioned ruling, this kind of operations is often considered as having the sole purpose to obtain an undue tax saving, through various operations without a valid economic reason (since the same "civil" result, but with a higher tax burden, may be obtain through the typical withdrawal of the shareholder).

Nevertheless the Italian Tax Authority, trying to justify its thesis, makes a not unusual mistake, it confuses the undue tax advantage with the legitimate tax saving, obtained by choosing between legitimate alternatives provided by the legal system. In this case, the Legislator itself provides different possibilities (both legitimate) that entail different tax burdens. In particular, it does not seem possible to identify the simple revaluation of shareholdings, followed by their sale, as the sequence of unnatural and/or unnecessarily acts which could justify the idea of an artificial construction and, as such, the presence of tax avoidance. The tax saving, if allowed by law, must be pursuable and only its illegitimate nature justify the contestation of the abuse, that must be motivated and proved with an unnatural operativity, at such point complex to make it inexplicable and artificial.

Various judgements of the lower courts (in the absence of decisions by the Supreme Court regarding this specific matter) have cancelled tax assessments based on the above interpretation. In this regard, the position of the Italian Tax Authority, recently reiterated, suggests that the risk of litigation is still present and, therefore, every possible defense in the conception and implementation of similar transactions must be considered.

 Published by: Dott. Paolo Visconti

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(1) Lastly with the 2021 Budget Law.