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  • ARTICLE - Italy

    Supreme Court’s Judgment: Non-residents and the PEX regime

    27 Jul


    In a landmark ruling on 19th July, the Italian Supreme Court shook up the taxation landscape by declaring that non-resident companies without an Italian permanent establishment (PE) can now benefit from the Italian 95% participation exemption (PEX) regime.

    This ruling opens up new possibilities for foreign investors looking to divest their stakes in Italian resident companies. The Court's decision was based on the grounds of safeguarding fundamental freedoms enshrined in the Treaty on the Functioning of the European Union (EU).

    Let's delve deeper into the implications of this judgment and its potential impact on cross-border investments.

    The 95% Participation Exemption (PEX) Regime Explained

    The PEX regime in Italy provides a significant tax advantage to qualifying investors. Under this regime, a company can be exempted from paying taxes on 95% of the capital gains realized upon selling its participation in an Italian resident company.

    This effectively results in an effective tax rate of only 1.2% on the capital gain (calculated using the 24% corporate income tax rate applied to 5% of the capital gain).

    Non-Resident Companies Entitled to PEX

    Before this judgment, only Italian companies and non-resident companies with an Italian permanent establishment were eligible to benefit from the PEX regime.

    However, the Supreme Court's ruling has expanded the scope of eligibility, allowing non-resident companies without an Italian PE to also take advantage of the PEX regime if they fulfill the necessary requirements.

    The EU Fundamental Freedoms and the Ruling's Implications

    The Supreme Court justified its decision by invoking the fundamental freedoms enshrined in the EU treaty. The ruling ensures that non-resident companies are not subject to discrimination, which is essential for the free movement of capital across EU member states.

    The case in question involved a French parent company holding a substantial participation (25% or more) in an Italian subsidiary. Although Art. 8, let. b) of the Italy-France Double Tax Convention permits Italy to tax such capital gains, the Court upheld the application of the PEX regime for the French parent company as it fulfilled all the requirements set by Italian tax law.

    The Court reasoned that the limited tax credit provided under the Double Tax Convention was insufficient to eliminate the discriminatory effect.

    What it Means for Foreign Investors

    Foreign investors, particularly French parent companies, can now leverage this ruling to apply the PEX regime on capital gains arising from substantial participations in Italian companies.

    While the possibility of an audit by the Italian Tax Authorities remains, the robust legal foundation for the application of the PEX regime and the support from CJEU case law on discrimination and restrictions strengthen the position of foreign investors.

    Next Steps and Potential Legislative Changes

    In response to this judgment, the Italian legislature is expected to take action soon by adopting provisions that explicitly extend the PEX regime's applicability to capital gains realized by non-resident companies without an Italian PE.

    This move is in line with past experiences concerning dividends distributed by Italian subsidiaries to EU resident parent companies.

    Furthermore, there's a possibility that the PEX regime could be extended to EU resident parent companies and parent companies resident in States of the European Economic Area (EEA) that have adequate tax information exchange agreements with Italy.

    Opportunities Beyond EU Borders

    While the Supreme Court's judgment refers to EU fundamental freedoms, recent CJEU jurisprudence suggests that rules like the PEX regime should be tested against the provisions on the free movement of capital.

    Leveraging on this interpretation, it could be argued that the PEX regime should also be extended to non-EU parent companies holding participations in Italian companies.

    For example, countries like China, South Korea, Israel, and the United States might benefit from such an extension, depending on the specifics of their tax treaties with Italy.


    The Italian Supreme Court's judgment on the application of the PEX regime to non-resident companies marks a significant development in cross-border taxation.

    Foreign investors now have an opportunity to optimize their tax position when divesting their interests in Italian companies.

    As the legislative response unfolds and potential extensions of the PEX regime come into play, businesses must stay informed to capitalize on these new tax opportunities.

    The ruling is undoubtedly a step towards fostering a more favorable investment environment and encouraging economic growth in Italy.

    If you have any queries relating to this article or Italian tax matters more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

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