Wealth tax risk and defence instruments to be handled with attention.

The new coverage needs for the growing cash requirements, induced by the current pandemic, has led the Italian government to introduce a new or higher forms of taxation on assets. In particular, it has been introduced, in the budget law, a new substitute tax on so-called "large assets" (1), or it has been rumored the possibility of increasing the incisiveness of inheritance taxation.

Regarding this last aspect, it should be noted that Italy, unlike other European Countries, still has a fairly low taxation of inheritance, with lower rates and higher deductibles than the average of more developed Countries.

In this case, Italian families, especially those with a business vocation, get scared and consider the possibility of transferring abroad their residence and/or all or part of their assets (2). In particular, if the assets are largely made up of shareholdings in companies, they evaluate the possibility of intervening in the organization of their assets, so as to prevent a hypothetically higher taxation at the time of succession.

When these issues are faced, the problems are extremely delicate and multifaceted. First of all, any intervention on the assets, if it leads to a real transfer of ownership (either full or bare, with the consequent dispossession of the asset or of the rights deriving from its ownership), has immediate consequences in terms of tax burdens (except for the application of certain institutions as discussed below).

Secondly, the possible effects that such transactions may have in terms of the distribution of inheritance are significant. In particular, a not precise allocation of the assets could lead to infringements of reserved shares, giving raise to disputes and actions for reduction and/or collation.
In order to face such concerns, in the Italian legal system, there is a number of well-known instruments, including:

• free transfers of companies or controlling shareholdings in companies;
• the family pact, under Articles 768-bis et seq. of the Italian Civil Code.

Regarding the first type of transaction, Article 3, para. 4-ter of Legislative Decree no. 346/1990, exempts from inheritance and gift tax free transfers of shareholdings or companies or branchesThe conditions for the application of the above exemption are the following:

• the beneficiary, through the transfer of the shareholdings, must buy or integrate the control of limited companies (this specific condition is always met in case of transfers of partnership interests);
• the beneficiaries must keep the ownership of the shareholdings for at least five years. In case of company transfers, the business activity must be continued for a period not less than five years (3).

The family pact is a contract to be entered into in solemn form and having as objective to facilitate the generational transfer of the company. In particular, the specific legislative regulation of this contract has the purpose to balance the needs of business continuity and the protection of the legal heirs, other than the assignee descendants, to whom the entrepreneur transfers, in whole or in part, the company (or the shareholdings).

For the effective formation of the contract, all those who would be legitimized, if the succession of the disponer opened at that time, must participate. Moreover, those who are not assignees of the business asset must necessarily receive an amounts of money, or a liquidation in kind, equal to the value of their reserved share.

The purpose of the family pact is to set the generational transfer wanted by the disponer. This is clear from the Article 768-quater of the Italian Civil Code, which expressly provides that the allocations made with this agreement cannot be subject to collation and/or reduction actions at the time of the succession. Therefore, the descendant identified as the company owner will not risk of having his status contested when the succession will open.

For tax purposes, the assignment of the company will be exempt from the above mentioned gift tax, while the amounts paid to non-assignees, as a result of their respective inheritance rights, will be subject to tax, according to the ordinary deductibles and rates set out in Legislative Decree 346/1990 (4).

Both of the above-mentioned instruments are attractive for a prudent preparation of the succession(especially when a family company is involved) , but they require the entrepreneur to have a clear opinion about the best destination of his business assets (the transfer of which may not be immediate, in case of transfer of the bare ownership of the assets) and presuppose a careful analysis of the specific family dynamics, not being possible to draw universally and effective solutions.  

Published by: Dott. Paolo Visconti

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(1) We refer to an amendment to the 2020 Budget law, signed by Fratoianni-Orfini, that provided the taxation, at progressive rates, for assets in excess of 500,000.00 euros, but that was judged inadmissible by the Budget Commission.

(2) This hypothesis is to be considered with attention as regards both tax profiles (including the possible application of exit tax and the implications in terms of inheritance tax), and civil succession profiles.

(3) Beneficiaries must make a declaration to this effect, when declaring their inheritance or making a gift.

(4) The descendants who benefit from the transfer of the business asset must pay the abovementioned sum to the non-assignees. This situation led to doubts about the correct taxation of these amounts for the purposes of gift tax. In particular, two different interpretation arose
- these amounts must be considered as "donations" made by the assignee of the business (with consequent application of lower deductibles and higher rates, because of the different degree of family relationship among the legal heirs than between the legal heirs and the disponer;
- these amounts, as well as for the modal donation, must be considered as coming from the entrepreneur, even if paid by a different person in execution of the family pact.
Lastly, the Supreme Court, departing from its own previous position, in judgment no. 29506/2020, upheld the second interpretation of the above-mentioned rule.