Holding companies and undistributed profits: can tax deferral constitute an abuse of law?
The Policy Guidance issued by the Italian Ministry of Economy and Finance (MEF) on 27 February 2025 1 recognised that tax deferral may qualify as a tax advantage under the abuse of law rules where it is not merely temporary. This guidance has become relevant to holding companies that receive dividends from their investee companies and retain them without distributing them to their individual shareholders. The question is whether retaining those profits amounts to an undue deferral of tax, or whether the tax assumption has simply not arisen, so that Article 10-bis of the Charter of Taxpayers’ Rights does not apply.
Tax deferral in the MEF’s Policy Guidance and tax audits of holding companies
Under Article 10-bis of Law No. 212/2000 (Charter of Taxpayers’ Rights) an abuse of law arises where transactions lack economic substance and, although formally complying with tax provisions, essentially secure undue tax advantages. These are benefits, wheter immediate or otherwise, obtained contrary to the purposes of tax provisions or the principles of the tax system.
According to the MEF, the reference to benefits “that are not necessarily immediate” allows tax advantages to include tax deferrals that give the taxpayer a financial benefit, provided that taxation is deferred indefinitely or substantially postponed, rather than merely deffered temporarily.
The Guidance itself specifies that the undue nature of the advantage must be assessed indipendently.
The typical case concerns an individual who holds an interest in a holding company which, in turn, controls an operating company. Under Article 89 of the Italian Tax Consolidated Text (TUIR), dividends distributed by the operating company to the holding company are ordinarily included in the latter’s taxable income to the extent of 5%: applying the 24% Italian Tax on Corporate Income (IRES) rate, the effective tax charge is 1.2%.
This regime limits the double taxation of profits as they pass between entities subject to IRES. If the individual held the interest directly, the same dividends, received outside the course of a business activity, would ordinarily be subject to a final withholding tax of 26%.
In a holding company structure, the shareholder is generally taxed when they receive the profits distributed by the holding company. As long as the holding company retains those profits, the funds remain at its disposal and the tax assumption does not arise for the individual shareholder.
The retention of profits by holding companies has been the focus of some reported tax audits.
These examine whether retaining profits gives rise to an undue tax advantage, on the basis that cash is kept at company level to defer the tax that the individual shareholder would pay if the profits were distributed.
Each case must, however, be assessed on its own merits. The guidance does not specifically address dividends retained by holding companies and draws no automatic conclusions about them.
The retention of profits and the removal of the tax assumption
The first question is whether the tax deferral qualifes as a relevant tax advantage under Article 10-bis. In the case of a mere postponement, the benefit lies in having the funds available in the meantime and is, in that respect, purely financial.
The difference between 26% and 1.2% rates does not, in itself, represent a permanent tax saving for the individual shareholder. If the holding company subsequently distributes the entire remaining amount, the combined effective tax rate across both stages is approximately 26.9%, assuming that those rates apply and that no other factors affect the calculation. A distinction must also be drawn between postponing tax on an event that has already occurred (i.e. a dividend distribution) and the event giving rise to the tax obligation not occurring at all because no dividend is distributed. The latter situation may be described as “avoiding the tax assumption” 2: the taxpayer does not, at least in the immediate term, engage in the conduct that would give rise to taxation.
The retention of profits exhibits the characteristics of this second scenario, since taxation of the shareholder presupposes their distribution. Even if tax deferral is accepted as a potentially relevant advantage, its undue nature must still be established. It is not sufficient to observe that an immediate distribution would have resulted in higher taxation: the provision or principle whose purpose has allegedly been circumvented must be identified. Otherwise, the anti-abuse rule would effectively introduce a general obligation to distribute profits, which tax law does not provide for.
The statutory framework supports this approach. Article 10-bis(4) of the Charter of Taxpayers’ Rights recognises the taxpayer’s freedom to choose between transactions involving different fiscal charges.
The MEF’s Guidance accordingly states that the test for abuse “cannot be based on the rationale of the more onerous tax regime that was not adopted”.
As regards evidential requirements, paragraph 8 further requires the tax assessment to state specific reasons concerning, among other things, the abusive conduct, the provisions or principles circumvented and the undue advantages. Paragraph 9 places the burden on the tax authorities to establish abuse by reference to the elements set out in paragraphs 1 and 2, including the existence of a tax advantage and its “undue” nature, whereas the taxpayer must establish the existence of any non-marginal non-tax reasons relied upon.
The holding company’s role is also relevant: holding and managing equity interests may themselves constitute the company’s economic function, even in the absence of direct operating activities, and may serve organisational and managerial purposes, such as unified asset management, investment financing, family governance and the implementation of intergenerational succession.
This does not preclude a broader reorganisation from being examined under Article 10-bis, taking account of its specific features and any provisions that may have been circumvented.
Assessing the transaction as a whole must, however, be distinguished from a challenge based solely on the failure to distribute profits, which does not in itself establish either the undue nature of the advantage or the structure’s lack of economic substance.
Contemporaneous resolutions and documents may help establish any investment plans, self-financing needs, or family governance and intergenerational succession objectives, particularly where the tax audit concerns a broader reorganisation.
The manner in which cash is used may also be relevant to the overall assessment, for example where loans are made to shareholders without adequate justification or funds are used for personal purposes. Such circumstances must nevertheless be examined in light of the specific facts.
For proposed transactions that have not yet been implemented, it also remains possible to submit a request for an advance tax ruling on the application of the anti-abuse rule under Article 10-bis(5). Finally, it remains unclear what constitutes a substantial postponement of tax. In the absence of more precise criteria, there is a risk that the lawfulness of the choice will be assessed retrospectively, on the basis of the time elapsed, making the tax consequences of decisions to retain profits difficult to predict.
[1] Ministry of Economy and Finance (MEF), Department of Finance, Policy Guidance, ref. No. 7 of 27 February 2025, adopted by the Deputy Minister acting under delegated authority pursuant to Article 10-septies (3) of Law No. 212 of 27 July 2000.
[2] A. Contrino, “Tax deferral” as an advantage falling outside the scope of the abuse of law rule, in Riv. tel. dir. trib., 8 September 2026.