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The Italian 2020 Budget Law has provided also for 2020 the possibility to opt for the revaluation of the tax cost of qualified and non-qualified participations in Italian and non-Italian companies not listed on regulated markets.

The revaluation allows individuals acting out of the course of business, non-commercial entities (such as simple partnership, foundations) tax resident in Italy to rebase the tax cost of non-listed participation held as at 1 January 2020 up to the fair market value resulting from a dedicated sworn appraisal, by the payment of an 11% substitutive tax applied on the whole amount of the fair market value of the participations, determined as at 1 January 2020. The substitute tax shall be paid in one or three installments of equal amount, by 30 June 202 (interest at 3% is due for installments following the first one).

In a cross-border scenario, the possibility to opt for the revaluation could be particularly interesting for Italian new-residents under the optional Italian non-dom regime provided by art. 24-bis, Italian tax code (available from 2017): indeed the only exception to the yearly euro 100.000 lump-sum taxation of non-Italian income is provided in case of sale of non-Italian “qualified” participations (i.e. participations that entitles to more than 20% of voting right or more than 25% of the share capital of a company, reduced to 2% and 5% in case of listed companies) realized in the first 5-years from the application of the regime, subject to Italian ordinary taxation rules. For non-Italian non-listed participation, the possibility to proceed with the revaluation of participations to be sold in the course of 2020 could constitute an interesting possibility.

That revaluation can be opted for also by non-Italian tax resident companies without a permanent establishment in Italy and by non-Italian tax resident individuals, for which the capital gains on non-listed Italian shares is in general subject to 26% taxation under Italian domestic tax law. A specific exemption is provided in this respect by Italian domestic tax law in case of sale of “non-qualified” participations made by investors tax resident in Countries allowing the exchange of tax information with Italy (included in the so-called “white list” contained in DM 4.9.1996).

The evaluation about the application of the tax cost revaluation should in any case consider the provisions contained in the Double Tax Treaties entered by Italy. Indeed, the distributive rule provided by article 13 of the Double Tax Treaties (where drafted in line with the OECD Model tax Convention) in general attributes the taxing rights in case of sale of participations exclusively to the State of tax residence of the seller, in line with the classic principles of the “theory of economic allegiance”.

Nonetheless, certain specific exceptions to the standard rule of the Double Tax Treaties should be duly considered by non-resident investors, that could render appealing the revaluation provided by the Italian 2020 Budget law.

In particular, it should be evaluated the presence of any “land rich clause” in the Double Tax Treaty, aimed at counteracting any improper use of real estate companies to skip source taxation and reflecting the outcome of Action 6 of BEPS Project, incorporated in art. 9 of the Multilateral instrument (MLI) and enshrined in the paragraph 4 of article 13 of the OECD Model Tax Convention. This provision is contained in a number of Double Tax Treaties entered by Italy, such as Armenia (art. 13(4), Azerbaijan (art. 13(3)), Barbados (art. 13(4)), Canada (art. 13(4)), China (art. 13(4) of the DTT in force, that is going to be replaced by the one signed on 23.3.2019), Estonia (art. 13(1)), Finland (art. 13(2)), France (art. 8(a) of the Protocol), Hana (art. 13(4)), Hong Kong (art. 13(4)), India (art. 14(4)), Israel (art. 13(4)), Kenya (art. 13(3)), Mexico (art. 13(2)), New Zealand (art. 13(3), Pakistan (art. 13(3)), Panama (art. 13(4)), Philippines (art. 13(3)), Romania (art. 13(4), Saudi Arabia (art. 13(5)), Sweden (art. 13(5)), Ukraine (art. 13(2).

Furthermore, a number of DTCs entered by Italy reports the provision according to which the primary taxing right is allocated to Italy, as the source Country, in case of alienation of “substantial” participations, regardless the application of the land rich clause. This provision was historically reported in the UN Model tax Convention since 1980, as a practical compromise to allow the source Country to tax the capital gain deriving from the transfer of substantial participations and is contained in a number of Double Tax Treaties entered by Italy, such as the one with China (art. 13(6) of the DTT currently in force), Congo (art. 13(5), that refers to participations over 25% stake), Egypt (art. 13(3)), France (art. 8(b) of the Protocol, that refers to participations over 25% stake), India (art. 14(4)), Pakistan (art. 13(4) and lett. h of additional Protocol, that refers to participations over 25% stake) and South Korea (art. 13(4) that refers to participations over 25% stake with a 2 years observation period).

In this respect, it should be duly considered that a participation is considered as sourced in Italy if such participations refers to investments in the equity of an Italian tax resident entity carrying out a business activity, as defined by Italian corporate law, or in case the participation is held in Italy, e.g. in case of shares issued by non-Italian companies entrusted by the owner in custody, administration or management to Italian intermediaries, regardless of the place where the intermediaries deposited them.

A final assessment of opportunities to carry out the revaluation should be made considering the recognition of the possibility to benefit from the credit of taxes paid in Italy in the Country of residence of the seller: the 11% substitute tax paid in Italy to execute the revaluation could not be recognized as a foreign tax credit therefore making the procedure less attractive.

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