The decision of the Supreme Court on the taxation of capital gains on “significant shareholdings” derived by a French company in Italy

The Supreme Court with the decision No. 21261 of 19 July 2023 has acknowledged the illegitimacy of the Italian tax regime applicable to capital gains deriving from the transfer for consideration of a participation into an Italian entity company by a French company because contrary to the European law on freedom of establishment (under Article 54 TFUE) and on the free movement of capital (under Article 63 TFUE).

Generally, Double Taxation Treaties provide that a relief from taxation is granted by the State of source in respect of capital gains deriving from the transfer of participations. However, art. 8(b) of the Protocol of the DDT between Italy and France attributes to the State of source (i.e., Italy in the present case) the right of a concurrent taxation in case of transfer of “significant shareholdings” (i.e., participations whereby the transferor owns, directly or indirectly, stocks or shares carrying the right to 25% or more of the profits of the transferred company), therefore legitimizing the taxation of the capital gain also in Italy (currently at 26% for foreign taxpayers). Similar provisions have also been included in other DTTs signed by Italy (e.g., China, South Korea, Israel).

The Supreme Court - confirming the previous judgments of the Tax Courts of First and Second Instance - has acknowledged that also foreign entities (i.e., French companies in the present case) are eligible to the domestic tax regime applicable to resident taxpayers and, thus, may benefit from the participation exemption regime (according to which capital gains are exempted up to 95%) provided that all the prescribed requirements are met  (see art. 87 of the Italian Income Tax Code).

The decision implemented the principles already stated in the ECJ’s judgment C-540/07 of 19 November 2009, according to which national rules that treat companies belonging to different States differently constitute unjustified restrictions on the fundamental freedoms established by European Law.
Based on the decision - pending the consolidation of this position - ongoing and future proceedings now have a better chance of obtaining a positive judgement.