Taxation in Italy of foreign company sale with Italian property by opaque trust

This interpretation applies Article 23 of the Italian Income Tax Code (TUIR), extending taxing rights to non-residents disposing of interests in companies whose value is mainly due to Italian real estate. Legislative Decree No. 461/1997 removes the 26% substitute tax exemption for non-resident sellers in white-listed jurisdictions in these cases. The rules broadly cover foreign individuals, corporations, trusts, and similar entities, but exclude certain investment funds (OICRs). Exemptions apply to European Union (EU) and European Economic Area (EEA) OICRs complying with Directive 2009/65/EC and those managed under Directive 2011/61/EU, if established in jurisdictions that ensure an effective information exchange with Italy.

The ruling involved a US-based opaque trust that sold its interest in a Swiss company owning Italian residential property held for over five years. The Swiss company has no permanent establishment in Italy. Despite the long-held property, Italy ruled the gain on the share sale taxable from fiscal year 2023.

These rules align domestic law with tax treaties allowing Italy to tax gains from its real estate, and aim to prevent tax avoidance through share sales of real estate holding companies instead of direct property sales. Direct property sales enjoy a capital gains tax exemption under Article 67 of the TUIR if held over five years, reflecting non-speculative transactions. However, indirect transfers via company shares remain taxable regardless of holding duration under Article 23 of the TUIR.

When evaluating the application of the double tax treaty, the Agency determined that the US trust meets the criteria to be considered a "person" under Article 3 of the Italy-US tax treaty. Consequently, it may be eligible for residency benefits under Article 4 of the same treaty.

Although the entity sold was Swiss, not Italian, the Revenue Agency applied the treaty provisions due to the underlying Italian real estate. Specifically, Article 13 allows Italy to tax capital gains from the sale of real estate located within its territory. Furthermore, Article 1 of the Protocol to the treaty extends the definition of "immovable property" to include shares or similar interests in entities whose assets consist predominantly of real estate situated in Italy.

This interpretation aligns with the technical explanation accompanying the treaty. It confirms that both treaty partners, Italy and the United States, consider such shareholdings equivalent to direct ownership of immovable property for capital gains tax purposes.

The taxable gain equals the difference between the sale price and the original cost recognised by the seller. This ensures indirect real estate transfers are included in Italy’s tax base, supporting fairness and anti-avoidance.

---

Roberto M. Cagnazzo, Founding Partner, is a chartered accountant and statutory auditor with considerable experience in domestic and international taxation acquired as Head of Tax in some of Italy’s leading multinational groups, and as Professor of Comparative Tax Systems and of Tax Law at the University of Turin.