Tax neutrality of mergers between non-resident companies

by Guido Pampaloni

A merger between two non-resident companies, one of which holds a shareholding in an Italian company, does not trigger any capital gain taxation in Italy because of the tax neutrality of the merger under Italian law. Such principle, which was already affirmed in the past, has been recently confirmed by the Italian Tax Authority (“ITA”) in its ruling No. 294/2023.

The case examined by ITA involved the merger between two Israel resident joint stock companies, Delta, the absorbing company, and Alfa, the absorbed company. Both companies were wholly owned by Beta (which was resident in Israel as well) and did not have a permanent establishment in Italy. Alfa held the 95% of the shares of Gamma, a limited liability company resident for tax purposes in Italy. The residual part of Gamma’s shares was owned by Delta. As a result of the merger at stake, Delta owned the totality of Gamma's shares. 

Alfa asked ITA whether the merger transaction at stake could benefit from the tax neutrality regime ordinarily provided by Art. 172 of the Italian Tax Code (“ITC”). 

If so, the transfer to Delta of Gamma’s shares will not trigger the taxation of the correspondent capital gain. 

If not, such capital gain would be taxable in Italy pursuant to Articles 23 c. 1 lett. f) of the ITC and 13, par. 5 of the Italy-Israel Convention. Indeed, pursuant to Art. 23, c. 1 lett. f) of the ITC, "capital gains from the sale of shareholdings in resident companies are considered to be produced in the territory of the State [...]". Pursuant to the domestic rules, therefore, Italy can tax the capital gains related to shareholdings in Italian resident companies. Such taxing power is be confirmed, in the case at stake, by Article 13(5) of the Italy-Israel Convention. As known such rule gives the power to tax also to the source State where the company whose shares are sold is located.

According to ITA, in order to ascertain if the merger at stake is neutral for tax purposes, it is necessary to assess the nature of the operation. 

Indeed, the regime laid out under Art. 172, of the ITC, provides for the tax neutrality of the merger transactions, regardless of the residence of the companies involved, provided that the following requisites are met (see also ruling No. 470/E of December 3, 2008):

  • the transaction qualifies as a merger under Italian civil law;
  • the legal form of the companies involved is equivalent to the legal forms provided by Italian law;
  • the transaction triggers tax effects in the hands of at least one of entities involved.

According to ITA, in the case at stake, the aforementioned conditions are met. Therefore, the tax neutrality regime under Article 172 of the ITC applies. Consequently, the merger will not trigger the taxation of any capital gain on Gamma’ shares.

In conclusion, a merger involving non-resident companies is subject to the tax-neutrality regime laid down under Art. 172 of the ITC if the effects of the merger in the foreign State are similar to the effects that would have been generated by a merger between Italian companies. As a result, in such cases, no taxable capital gain will be realized as for the shares in Italian resident companies held by the merging entities.