Cross-border mergers into Italy can qualify for tax neutrality under the EU Tax Merger Directive (2009/133/EC), deferring recognition of gains at both the transferring entity and shareholder level, provided the structural and anti-avoidance conditions of Italian domestic law and the Directive itself are satisfied. From 2026, reported amendments to Italy's participation exemption regime (PEX, art. 87 TUIR) are said to extend the 95% capital-gain exemption to qualifying EU and EEA-resident companies that hold Italian participations above certain thresholds, even without an Italian permanent establishment – a development with significant implications for merger structuring. Navigating the interaction between the Directive's neutrality rules, domestic anti-avoidance provisions, and the evolving PEX framework requires careful analysis well before a transaction is signed.
The EU Tax Merger Directive and Its Italian Implementation
Directive 2009/133/EC (the Tax Merger Directive, or TMD) obliges EU member states to grant tax-neutral treatment to qualifying cross-border reorganisations – mergers, divisions, transfers of assets and exchanges of shares – where the receiving entity is resident in an EU member state and the transferred assets remain attributable to a permanent establishment in that state. Italy implemented the Directive through amendments to the Testo Unico delle Imposte sui Redditi (TUIR) and related ministerial instruments.
At its core, the Italian implementation preserves the step-up entitlement of the surviving entity: assets and liabilities are carried over at their existing tax values, with latent gains neither recognised nor extinguished. The quid pro quo is strict continuity – the merged entity must maintain a taxable presence in Italy through which those assets remain connected to Italian taxing jurisdiction. Where assets are transferred outside Italy in the same transaction, the neutrality shield falls away and a deemed disposal at market value may be triggered, exposing the transaction to the full weight of IRES at 24% and, where applicable, regional IRAP at 3.9% (with regional variations applying under Legislative Decree 446/1997).
A critical practical point is that tax neutrality under the TMD is not automatic: it must be claimed, documented, and supported by a substance analysis that satisfies both the Agenzia delle Entrate and, in contentious cases, the Italian courts – including the Corte di Cassazione, which has issued rulings touching on the genuine economic substance required to resist anti-avoidance challenge.
The 2026 PEX Extension: What Is Reported and What Remains Open
Italy's participation exemption under art. 87 TUIR has historically applied to Italian-resident companies and to non-resident entities holding participations through an Italian permanent establishment. According to reporting available as at September 2026, the regime is being extended – from 2026 – to EU and EEA-resident companies without an Italian permanent establishment, provided they hold a qualifying Italian participation representing at least 5% of the share capital, or a participation with a value of at least EUR 500,000. Under this reported framework, 95% of qualifying capital gains on the disposal of those participations would be exempt.
Two significant caveats must be stated clearly. First, this extension is tagged as a reported development from a single secondary source; it should not be treated as settled, fully enacted law without independent verification of the legislative text as it stands on the date of any transaction. Second, even if the extension is confirmed, the remaining conditions of art. 87 TUIR – including holding-period requirements, classification of the participation as a non-trading asset, and the requirement that the investee is not resident in a low-tax jurisdiction – continue to apply. Investors and advisers should not assume that satisfying the threshold test alone is sufficient.
For cross-border merger planning, the 2026 PEX extension matters in at least two scenarios. Where a foreign merger leaves a non-resident parent holding Italian shares after a share exchange, the parent's eventual exit from those shares may now benefit from Italian PEX treatment even without a local permanent establishment – potentially eliminating a structural disadvantage that has historically driven the use of Italian holding sub-structures. Conversely, the Italian tax authorities may scrutinise whether the exchange itself was structured to obtain that exemption, engaging anti-avoidance analysis under both domestic law and the TMD's principal purpose test.
If you are assessing how the reported 2026 PEX changes interact with your group's existing shareholding structure, our dedicated guide provides further context: Italy PEX 2026 – Ferraz & Whitmore analytical guide.
Anti-Avoidance Rules: The Principal Purpose Test and Italian GAAR
Both the TMD and Italian domestic law contain anti-avoidance provisions that can deny tax neutrality where the reorganisation is motivated primarily by tax avoidance or evasion rather than valid commercial reasons. Italy's domestic general anti-avoidance rule (GAAR), codified in art. 10-bis of the Statuto dei Diritti del Contribuente (Law 212/2000), grants the Agenzia delle Entrate broad powers to recharacterise transactions that lack economic substance.
In practice, the Italian tax authority looks beyond contractual form to the economic reality of the restructuring: Are the functions, assets and risks genuinely relocated? Does the surviving entity have decision-making capacity in Italy? Are intragroup transfer pricing arrangements consistent with OECD guidelines and documented in accordance with Italian transfer pricing rules? These questions are not merely theoretical – merger transactions have been challenged on anti-avoidance grounds in Italian tax audits, and proceedings before the Corte di Cassazione have addressed the evidentiary burden on taxpayers asserting commercial purpose.
Strategic advice at the structuring stage – including preparation of contemporaneous documentation, a substance memorandum, and, where appropriate, an advance ruling request (interpello) to the Agenzia delle Entrate – substantially reduces the risk of a successful challenge in a later tax audit. Our tax structuring practice in Italy regularly assists groups in building this evidentiary record.
Corporate Law Mechanics: Registration, Approval, and Regulatory Clearances
Cross-border mergers into Italy require compliance with both the corporate law of the transferring entity's home jurisdiction and Italian company law under the Codice Civile. Where the surviving entity is or becomes an Italian S.r.l. or S.p.A., the merger must be approved by the shareholders, filed with the Registro delle Imprese, and notarised in accordance with Italian formalities. The effective date of the merger for Italian law purposes is determined by the registration at the Registro delle Imprese, which also marks the moment at which the tax neutrality election takes effect.
Where the transaction involves a company subject to financial-market regulation or whose securities are admitted to trading in Italy, CONSOB oversight may be relevant, particularly where the merger triggers mandatory offer thresholds or disclosure obligations. These procedural layers sit alongside – and can affect the timing of – the tax structuring decisions described above.
For debt recovery in the context of intragroup reorganisations, including the enforcement of intercompany claims that are restructured or novated as part of a merger, the Italian decreto ingiuntivo (injunction for payment) procedure may be relevant where a creditor entity is being absorbed into the Italian surviving entity. Proper legal analysis of these claims before the merger is completed avoids inadvertent extinguishment of cross-border receivables.
Our corporate law team in Italy advises on the full transaction mechanics, from board resolutions and shareholder approvals through to post-merger integration and registry filings.
Treaty Considerations and Withholding Exposure
Even where the merger itself qualifies for tax neutrality, the transaction may generate withholding tax exposure at shareholder level – for example, where a deemed distribution or constructive dividend arises under the laws of the transferring entity's jurisdiction. Italy's tax treaty network is extensive, and the applicable treaty will determine whether withholding is reduced or eliminated. However, treaty benefits at the Italian source are subject to anti-treaty-shopping provisions, and the beneficial ownership standard has been applied strictly in Italian case law.
Where the merger involves an entity outside the EU – for example, where a non-EU parent contributes an EU subsidiary into an Italian vehicle – the TMD does not apply, and the analysis falls entirely on domestic Italian rules and the relevant bilateral tax treaty. In these cases, transfer pricing documentation for any asset transfers forming part of the consideration is particularly important, since the Agenzia delle Entrate has consistently applied OECD transfer pricing principles to cross-border restructurings involving non-EU counterparties.
Practical Risk Management Before and After Closing
Effective tax risk management in a cross-border merger into Italy involves several interconnected steps that should be addressed sequentially rather than in parallel:
- Pre-signing due diligence: Identify existing Italian tax exposures of the target or transferring entity – including open tax audit periods, transfer pricing adjustments, and any disputed positions before the Italian tax courts – that will survive the merger and vest in the surviving entity.
- Structural analysis under the TMD and art. 87 TUIR: Confirm whether each leg of the transaction qualifies for neutrality and PEX treatment respectively, including the reported 2026 threshold conditions where a non-resident post-merger shareholder is involved.
- Interpello and advance ruling: Where the transaction is novel or the anti-avoidance risk is material, consider filing an interpello with the Agenzia delle Entrate before closing. The advance ruling process, while not binding in the same way as a formal ruling in some other jurisdictions, provides significant procedural protection in subsequent audits.
- Transfer pricing documentation: Prepare contemporaneous documentation for any intragroup transfers of assets, functions or risks forming part of the merger consideration, aligned with OECD guidelines and Italian domestic requirements.
- Post-merger compliance: Ensure that the surviving Italian entity files the required disclosures in its first post-merger tax return, maintains the asset continuity records required to support the neutrality election, and registers any necessary updates with the Registro delle Imprese.
If you would like to discuss the specific risk profile of a contemplated transaction, the team at Ferraz & Whitmore is available to assist. You are welcome to reach out at info@ferrazwhitmore.com or visit our contacts page to arrange an initial discussion.
Strategic Considerations for Inbound Groups
The combination of the TMD's neutrality regime and the reported 2026 PEX extension creates a structuring environment that is, on its face, more favourable for inbound investment than the pre-2026 position. A non-resident EU or EEA parent that receives Italian shares as merger consideration may now have a credible basis for claiming Italian PEX on a future exit from those shares – without needing to interpose an Italian holding company solely for that purpose.
However, this apparent simplification raises its own questions. The anti-avoidance interaction between the TMD's principal purpose test and the conditions for the reported PEX extension has not yet been tested extensively in Italian proceedings. Groups that restructure primarily to benefit from the extended PEX threshold – rather than for genuine commercial reasons – face meaningful risk that the Agenzia delle Entrate will characterise the merger as lacking valid economic purpose, thereby denying both neutrality on the merger and the PEX benefit on exit.
The more sustainable approach is to ensure that the merger is driven by genuine operational rationale – consolidation of management, elimination of intermediate holding layers, operational integration – with the PEX benefit treated as a consequence of a commercially justified structure rather than its purpose. This distinction, while conceptually clear, requires careful articulation in transaction documentation and in any submission to the Italian tax authority.
For groups considering a cross-border merger into Italy in the near term, the window before full regulatory certainty on the 2026 PEX extension is confirmed creates both opportunity and uncertainty. Early engagement with specialist counsel – to model the tax outcomes under both the confirmed and the reported legal positions – is a sound risk management measure. The Ferraz & Whitmore team is available to assist: please contact us at info@ferrazwhitmore.com or through our contacts page.
Sources
- DLA Piper Global Expansion Guide (Italy) – intelligence.dlapiper.com
- PwC Tax Summaries (Italy, Corporate) – taxsummaries.pwc.com
Facts last verified: 22 September 2026.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.