Italy's Participation Exemption (PEX), governed by Article 87 of the TUIR, allows qualifying shareholders to exclude 95% of capital gains realised on the disposal of shareholdings from the corporate tax base. From 2026, the regime is reported to have been extended to EU/EEA-resident companies that hold at least a 5% participation or a stake worth at least EUR 500,000 in an Italian entity, even without maintaining an Italian permanent establishment. Businesses considering a restructuring involving Italian subsidiaries or investee companies should assess whether these conditions are met before executing any disposal.
| Parameter | Rate / Threshold | Legal Basis |
|---|---|---|
| PEX exemption (qualifying gains) | 95% excluded from taxable income | Art. 87 TUIR |
| IRES (corporate income tax) | 24% | TUIR |
| IRAP (regional production tax) | 3.9% (regional variations apply) | Legislative Decree 446/1997 |
| Withholding tax on dividends – general | 26% | DPR 600/1973 |
| Withholding tax on dividends – EU/EEA corporates subject to corporate tax | 1.2% | DPR 600/1973 |
| Withholding tax on interest | 26% | DPR 600/1973 |
| Withholding tax on royalties (effective rate) | 22.5% (30% on 75% of gross) | DPR 600/1973 |
| EU/EEA extension – minimum participation (reported, 2026) | ≥ 5% or stake worth ≥ EUR 500,000 | Art. 87 TUIR (as reported) |
Legal Framework: What Article 87 TUIR Actually Provides
The PEX regime has long been available to Italian-resident companies and to foreign entities with an Italian permanent establishment. The core rule is straightforward: 95% of a capital gain on a qualifying participation is excluded from the IRES base, leaving only 5% exposed to the standard 24% rate – an effective maximum of 1.2% on the gross gain.
Four cumulative conditions must be satisfied for a participation to qualify under Article 87. First, the shareholding must have been held for an uninterrupted minimum holding period (the specific duration is set out in the TUIR and should be verified against the current text). Second, the shares must be classified as a financial fixed asset in the first financial year in which the stake was held. Third, the investee company must not be resident or domiciled in a low-tax or privileged jurisdiction as defined under Italian anti-avoidance rules. Fourth, the investee must carry on an actual commercial activity – a requirement that the Italian tax authority scrutinises closely in the context of holding structures and that has generated substantial case law, including at the level of the Corte di Cassazione.
The interplay between PEX and Italy's general anti-avoidance rules (the abuso del diritto doctrine codified in Article 10-bis of the Statute of Taxpayers' Rights) is a central area of tax risk management. Structures that lack economic substance or that are designed primarily to access the exemption risk being recharacterised during a tax audit.
The 2026 EU/EEA Extension: Scope and Reported Conditions
According to available reporting, Italy has extended PEX treatment to EU/EEA-resident companies that do not maintain an Italian permanent establishment, provided they hold at least a 5% participation or a stake with a market or book value of at least EUR 500,000 in an Italian company. This development, if confirmed in the final legislative text, represents a significant shift: previously, a non-resident without a permanent establishment had no access to the gain-side exemption and was instead subject to withholding or treaty-reduced rates on any exit proceeds.
It is important to flag that the details of this extension are reported rather than settled at the time of writing. The precise conditions – including which EU/EEA entities qualify, how the EUR 500,000 threshold is measured, and what documentation must be submitted to the Registro delle Imprese or the Italian tax authority – remain subject to implementing guidance. Foreign groups should not rely on the extension without first obtaining a legal opinion based on the final enacted text.
For EU/EEA investors already holding Italian participations, the extension intersects with the favourable 1.2% withholding rate on dividends available to EU/EEA corporate shareholders subject to corporate tax in their home state. A well-advised group will consider both routes – dividend distributions and capital gains disposals – as part of integrated tax structuring for Italian operations, taking into account applicable tax treaty provisions and any limitations imposed by the EU Parent-Subsidiary Directive.
If your group holds or is acquiring a participation in an Italian S.r.l. or S.p.A. and you need to assess whether the reported 2026 extension applies to your structure, we are happy to discuss the relevant conditions. Please contact our team at info@ferrazwhitmore.com or visit our contacts page.
Step-by-Step: Assessing and Applying PEX in Practice
Step 1 – Classify the participation correctly from day one
The requirement that shares be held as a financial fixed asset is assessed at the moment of first classification in the accounts. Italian accounting standards and the applicable IFRS framework both bear on this question. A reclassification after the fact does not cure a failure to meet this condition, and Italian courts – including the Corte di Cassazione – have taken a strict approach on this point.
Step 2 – Monitor the investee's activity throughout the holding period
The commercial activity test is not a one-time assessment. If the investee ceases genuine operations at any point during the holding period, PEX eligibility may be jeopardised. Groups that use Italian holding vehicles should document the investee's business activity each year, including board minutes, financial statements lodged with the Registro delle Imprese, and any relevant CONSOB filings where the company is listed.
Step 3 – Verify the tax residence of the investee
The low-tax jurisdiction exclusion requires a jurisdiction-by-jurisdiction analysis each time the list of non-cooperative or privileged jurisdictions is updated under Italian law. Transfer pricing considerations may also arise where the investee is part of a multinational group, particularly if intercompany transactions affect the value of the participation.
Step 4 – Prepare contemporaneous documentation for any disposal
When a disposal is executed, the taxpayer should compile a file demonstrating that each of the four conditions was met continuously. This file – which will be the first document requested in any tax audit – should include share certificates or register extracts, accounting classifications, financial statements, and evidence of the investee's commercial activities. For EU/EEA entities relying on the reported 2026 extension, additional documentation proving EU/EEA residency and corporate tax status will be required.
Step 5 – Report the gain correctly in the IRES return
Only 5% of the qualifying gain is included in taxable income. The method of computation, the relevant lines in the tax return form, and the treatment of any loss on a PEX-eligible participation (where losses are generally not deductible) should all be reviewed by a qualified adviser before filing. Where a decreto ingiuntivo or other enforcement proceedings are pending against the company, the interaction with the gain computation may also require specific advice.
Cost Drivers and Realistic Timelines
The direct tax cost of a PEX-qualifying disposal is the effective rate on 5% of the gain at the IRES rate of 24% – a relatively modest figure. However, the indirect costs of getting the qualification wrong can be substantial: a disallowed PEX treatment results in 100% of the gain becoming taxable at 24%, plus IRAP where applicable, together with interest and any applicable penalties.
Timeline considerations depend largely on the complexity of the structure. A straightforward disposal by an Italian-resident corporate shareholder, where all four conditions are clearly met, can be documented and reported within the normal corporate tax filing cycle. By contrast, an EU/EEA entity seeking to rely on the reported 2026 extension should allow additional time to obtain a formal legal opinion, gather cross-border documentation, and – where there is any uncertainty – consider requesting a preliminary ruling (interpello) from the Italian Revenue Agency (Agenzia delle Entrate). Such rulings typically take several months to obtain and do not guarantee a particular outcome, but they provide valuable procedural protection in the event of a subsequent audit.
Common Errors by Foreign Clients
International groups frequently encounter difficulties with PEX for a number of recurring reasons.
- Incorrect accounting classification. Shares held as current assets (trading book) do not qualify, even if the economic intent was always long-term. Foreign parent companies sometimes apply their home-country accounting logic to Italian subsidiaries without adapting it to Italian requirements.
- Overlooking the commercial activity test. Holding companies or real-estate vehicles held through Italian intermediaries are common targets for challenge. The Italian tax authority has consistently argued that passive income-generating entities do not satisfy the test, and the Corte di Cassazione has produced conflicting lines of authority on borderline cases.
- Assuming treaty protection is sufficient. A favourable tax treaty between Italy and the investor's home state may reduce Italian withholding on dividends or gains, but treaty benefits and PEX operate under different legal logics. Relying solely on the treaty without assessing PEX eligibility – or vice versa – can result in suboptimal outcomes.
- Failing to account for IRAP. Even where PEX applies for IRES purposes, the regional IRAP at 3.9% (subject to regional variation) applies on a different base. The interaction is not always intuitive and should be modelled separately.
- Underestimating the EU/EEA extension's uncertainty. The reported 2026 extension is not yet confirmed in all its details. Acting on incomplete information before the implementing rules are finalised is a significant tax risk management concern.
For a fuller picture of how Italian corporate law interacts with tax structuring decisions – including the choice between an S.r.l. and other legal forms – our team can assist through our Italian corporate law practice.
Decision Checklist: Is PEX Available for Your Disposal?
- Is the disposing entity an Italian-resident company, or – from 2026 – an EU/EEA-resident company meeting the reported participation thresholds?
- Were the shares classified as financial fixed assets in the first year they were held?
- Has the minimum holding period been satisfied continuously without interruption?
- Is the investee resident in a jurisdiction that is not on Italy's list of privileged or low-tax territories?
- Does the investee carry on a genuine commercial activity (not merely passive asset-holding)?
- Has the tax and accounting file been prepared to evidence each of the above points?
- Have IRAP implications been modelled separately from the IRES analysis?
- Has the structure been reviewed for abuso del diritto risk under Article 10-bis?
Groups with complex cross-border structures may also find it useful to review recent developments on global minimum taxation and their interaction with Italian PEX through our analysis on Pillar Two and territorial tax incentives.
Sources
- DLA Piper Global Expansion Guide (Italy): intelligence.dlapiper.com
- PwC Tax Summaries – Italy: taxsummaries.pwc.com
- Facts last verified: 22 September 2026.
If you would like to discuss how these rules apply to a specific transaction or structure, please reach out to Ferraz & Whitmore at info@ferrazwhitmore.com or through our contacts page. Our team works with international clients on Italian tax and corporate matters and can help you assess risk before committing to a structure.
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.