Italy is a country highly characterized by a high presence of small and medium-sized enterprises (SME’s).
Most of them are family businesses and, according to the statistics, a quarter of their leaders are over 70 years old, with a steady trend over the last few years.
This aging leadership, combined with longer life expectancy and a lack of external succession options, has made generational handover a pressing issue.
Also, high inheritance and gift taxes create significant financial burdens for heirs and donee, potentially forcing them to sell or break up businesses to pay these taxes.
But, currently, business transfers to the next generations are increasing: one of the main factors driving that increase is the demographic shift among business owners.
In fact, many founders and leaders of Italian SMEs, particularly those established in the post-war economic boom, are now reaching retirement age.
In Italy, there is a tax law provision very pleasant to those transfers thank to EU suggestion.
In fact, EU Commission Recommendations No. 94/1069/EC of 1994, and No. 98/C 93/02 of 1998 invited the members States to reduce the tax burden as much as possible, both with regard to direct transfers of companies and company branches, as well as to indirect transfers of the same, in order not to compromise the going concern of those realities that, when donated or inherited, could have been transferred to third parties, either in whole or in part, or liquidated by the heirs or donees, in order to obtain the necessary funds to meet tax obligation.
So, Italy introduced the Article No. 3, paragraph 4-ter of Legislative Decree No. 346/1990 that provides exemption from inheritance and gift tax to transfers of certain business assets to descendants and the spouse.
The exemption applies to the transfer, through inheritance or donation, of businesses, business branches, shareholdings in companies (i.e.: limited liability company) or in partnerships and it must be made in favor of the deceased’s or donor’s descendants (children, grandchildren, etc.) or spouse.
In particular:
- in case of shares or equity interests in corporations – the transferee (heir or donee) must acquire control of the company (i.e. acquisition of control of the company pursuant to Article No. 2359, paragraph 1, of the Italian Civil Code) or consolidate control already held, and is further required to undertake to maintain such control for a period of five years from the date of the transfer;
- in the case of other equity interests (i.e., holdings in partnerships) – the transferee (heir or donee) must undertake to retain ownership of the interests for a period of no less than five years from the date of the transfer; and
- for businesses – the recipient (heir or donee) must commit to continue the business activity for five years following the transfer.
In addition, it is worth noting that several interpretative and practical issues have arisen in relation to the nature of business activity that can be transferred. In particular, if shareholdings in “holding” companies (such as companies owning only passive investments – e.g., real estate, securities, shareholdings in other companies – without active management or business operations) may benefit from the tax exemption or not.
From one side, it is believed that they are generally excluded from the exemption, requiring that the transferred business must be engaged in an actual commercial or productive activity: for example, the exemption does not apply to the transfer of mere shareholdings in holding companies unless the holding company itself carries out an effective business activity (such as providing management or coordination services to subsidiaries).
On the other hand, Legislative Decree No. 139/2024 has introduced significant clarifications and changes regarding the inheritance and gift tax exemption provided by Article No. 3, paragraph 4-ter of Legislative Decree No. 346/1990.
Among the others, the new version of Article No. 3, paragraph 4-ter of Legislative Decree No. 346/1990 has introduced the above-mentioned differentiation on the requirements needed so to benefit from the tax exemption.
Remaining faithful to the literal wording of the law provision, it is only requested that in case of shares or equity interests in corporations, the transferee must acquire control of the company or consolidate control already held, and is further required to undertake to maintain such control for a period of five years from the date of the transfer, without any further requirement in respect of the nature of business that must be carried out so to get access to the tax benefit.
So, it is believed from another point of view, that any kind of business can be transferred to heirs or done with no inheritance and gift tax.
In addition, a new step has been taken by the Italian legislator because now such inheritance and gift tax such exemption also applies to cases involving shareholdings and transfers of companies that are resident in the EU member States or in the European Economic Area States or in jurisdictions that guarantee adequate exchange of information, under the same conditions as those applicable to transfers of shareholdings of Italian resident companies.
This change brings Italian law into closer alignment with the fundamental principles of the European Union, particularly the freedom of establishment and the free movement of capital.
By ensuring that the same tax benefits apply to cross-border transfers within the EU and EEA, Italy removes a significant barrier that previously discouraged Italian families and entrepreneurs from holding or transferring business interests in other member States and encourages the internationalization of its businesses.
Entrepreneurs and investors are no longer penalized for expanding or holding interests abroad, which supports the growth and competitiveness of Italian business groups on a global scale: this is particularly important in a modern economy where cross-border corporate structures are very common. At the same time, it is underlined in the provision of law that only transfers involving companies in countries that cooperate with Italian tax authorities are eligible: the aim is to maintain the integrity of the tax system while still promoting cross-border business continuity.
So, for example, if a son holds 60% of shares in the capital of an Italian limited liability company active in the manufacturing sector and his father who is 70 years old donates to him the remaining 40% of shares in the capital of the same company, the transfer will be exempt from Italian gift tax.
It is also required that the son formally undertakes in the deed of gift to maintain control of the company for at least five years from the date of the gift.
It is reminded that, pursuant to Article No. 2359, paragraph 1, number 1, of the Italian Civil Code, a company is under the control of another company when the latter holds more than 50% of the voting rights that can be exercised at the ordinary shareholders’ meeting.
This majority allows the controlling party to unilaterally make decisions regarding the management and direction of the company, such as appointing directors and approving financial statements.
For sake of completeness, it also worth mentioning that also if the son would have hold 40% of shares in the capital of an Italian limited liability company active in the manufacturing sector and his father who is 70 years old would donate to him the remaining 60% of shares in the capital of the same company, the transfer would still be exempt from Italian gift tax, provided that the son formally undertakes in the deed of gift to maintain control of the company for at least five years from the date of the gift.
In any case, if the beneficiaries fail to comply with the above-mentioned five-year requirement, the exemption is revoked, and the taxes that would have been due at the time of the transfer become payable, along with any applicable penalties and interest.
As a final consideration, it is clear that such tax exemption represents a very favorable provision aimed at facilitating the family business transfers not only in Italian resident companies, but also in EU and EEA ones.
