Participation Exemption and Foreign Entities: How Far Can Judicial Interpretation Go?

The Italian taxation of capital gains realized by a company resident in France that has a 100% participation in an Italian company involves an application of the participation exemption regime that differs in comparison to that applicable to Italian companies. This distinction is grounded in the unique rules applicable to the computation of taxable income: capital gains realized by foreign entities are treated, for tax purposes, as “other income” (redditi diversi), whereas those realized by Italian resident entities are computed as “business income”.
The Italian Regional Tax Court of Abruzzo considered this difference to be in violation of the EU freedom of establishment and, as such, extended, by way of interpretation, the more favourable national tax regime to capital gains realized by a French companY.

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