Non-circular MLBO operations are not abusive

In judgment no. 111/2025, the Tax Court of Reggio Emilia states that a merger leveraged buy-out (MLBO) operation involving a change of control of the target company is not an abusive transaction if it is supported by valid, non-tax-related economic reasons. In this case, the transaction was deemed to fulfil legitimate requirements for corporate restructuring and improvements to the company's economic and management structure, thus ruling out any abusive intent.

The case

The dispute originates from a typical MLBO operation in 2018 involving a change of control of the company Alfa. Specifically, two individual Alfa shareholders (the target company) each subscribed to 22.05% of Beta's share capital, while another company, Gamma (owned by institutional investors), subscribed to the remaining 55.9%. The two shareholders simultaneously transferred all their revalued Alfa holdings to Beta. Beta then resolved to reverse merger with Alfa, resulting in the target being owned by the same parties in the same percentages as in Beta.

The Italian Revenue Agency issued a tax assessment notice against Alfa, rather than the two individual shareholders, arguing that the transaction had no real economic substance and was carried out solely to obtain an unfair tax advantage. This advantage consisted of more favourable tax treatment than would have resulted from the ordinary distribution of company profits. According to the Office, Alfa's shareholders had evaded taxation on profits by revaluing and then disposing of their shareholdings.

Alfa contested the tax assessment on the grounds that the disputed transaction was based on valid economic reasons unrelated to tax considerations. Specifically, it was necessary to transfer control of the company to an entity owned by institutional investors with greater financial strength and liquidity.

The decision

The Court rightly upheld the company's appeal on the basis that the transaction in question was fully consistent with legitimate and rational business logic.

In particular, in the grounds for their ruling, the judges of first instance highlighted how the change of control – carried out by institutional investors through an MLBO transaction – was clearly aimed at strengthening the company's capital structure. This constitutes a strategy consistent with management improvement and enhancement.

In support of its decision, the Tax Court referred to established case law. According to this, extraordinary transactions that result in changes to the share capital structure are not considered to be tax avoidance or an abuse of the law. This applies provided that the transactions are supported by concrete, significant, non-tax reasons (including organizational, managerial or structural reasons) and are aimed at improving the overall corporate structure rather than attaining an undue tax advantage.

The ruling in question forms part of a more recent interpretative development regarding the abuse of rights, as set out in the guidelines issued by the Ministry of Economy and Finance on 27 February 2025.

Based on the clarifications contained in the ministerial document and some more recent court rulings, only purely circular transactions may be subject to tax disputes. This means transactions that, despite being divided into several contractual acts, do not have a significant legal or financial impact on the taxpayer compared to the previous situation.

It is therefore desirable — and now essential — that the tax authorities align their preliminary investigation and assessment activities with the objective criteria set out in ministerial practice documents and consolidated in case law. This will help to avoid the initiation of disruptive tax proceedings, such as the one in question, in the absence of concrete, documented evidence that can prove the existence of an abusive scheme.