What is the participation exemption (PEX) and how does it affect Italian holding structures?

Under Article 87 of the Italian TUIR, 95% of qualifying capital gains on the disposal of shareholdings held through an Italian company are exempt from IRES, meaning that only 5% of the gain is included in the taxable base. This makes the Italian holding company structure commercially significant for groups planning exits or intra-group share transfers. Strict conditions – including minimum holding periods and the requirement that the subsidiary is not located in a low-tax jurisdiction – must be satisfied, and substance within the Italian holding vehicle is essential to sustain the position under Agenzia delle Entrate scrutiny.

How does the Italian interpello (tax ruling) procedure work for cross-border transactions?

The interpello allows a taxpayer to submit a description of a planned transaction to the Agenzia delle Entrate and receive a written ruling on how Italian tax law applies to it. The ruling is binding on the Agenzia provided the facts as presented are accurate and complete, giving the taxpayer a degree of certainty before committing to the structure. Where the Agenzia fails to respond within the applicable time limit, the taxpayer's stated interpretation is generally treated as accepted. Our detailed guide to the process is available at the Advance Tax Rulings in Italy page on this site.

What are the main risks of not documenting transfer pricing positions in Italy?

Italian law requires contemporaneous transfer pricing documentation aligned with OECD standards for transactions between related parties. Without qualifying documentation, the Agenzia delle Entrate can apply enhanced penalties on any transfer pricing adjustment it raises, in addition to the primary tax assessed. Adequate documentation does not prevent a challenge, but it removes the additional penalty layer and demonstrates good faith, which is relevant both in any accertamento con adesione settlement and in court proceedings before the Corte di giustizia tributaria.

Tax Structuring and Tax Risk Management in Italy

Effective tax structuring in Italy requires navigating a layered framework of national corporate tax rules, EU anti-avoidance directives and bilateral treaty obligations – all of which interact directly with how a group holds assets, finances operations and ultimately exits. Ferraz & Whitmore advises international businesses and investors on designing structures that are legally robust, commercially coherent and defensible under Italian and EU scrutiny. This page sets out the instruments, procedures and considerations that shape a sound tax risk strategy in Italy.

When Businesses Typically Need This Service

Cross-border groups encounter Italian tax risk at predictable moments: when entering the Italian market through an acquisition or greenfield investment, when restructuring existing Italian operations, and when planning an exit or redomiciliation. A missed step at any of these stages can create a tax exposure that is disproportionately expensive to unwind. Common triggers include:

Acquiring an Italian S.r.l. or other entity and inheriting undisclosed tax liabilities
Reorganising intra-group financing, royalties or service charges across borders
Establishing or relocating an Italian holding company to access the participation exemption (PEX) or treaty networks
Restructuring intellectual property into or out of Italy to utilise the patent box regime
High-net-worth individuals relocating to Italy and seeking to apply the flat-tax regime for new residents
Responding to a challenge or opening of proceedings by the Agenzia delle Entrate

If any of these situations is familiar, early specialist engagement typically reduces the range of outcomes and the cost of resolution. You are welcome to reach out to our team at info@ferrazwhitmore.com or via our contacts page to discuss your circumstances.

The Italian Tax Framework: Key Rates and Regimes

Italy imposes corporate income tax (IRES) at 24% on the taxable profits of resident companies, alongside the regional production tax (IRAP) at a base rate of 3.9%, with regional variations applying in practice. Both rates are anchored in the Consolidated Income Tax Act (TUIR) and Legislative Decree 446/1997.

Participation Exemption (PEX)

Under Article 87 TUIR, qualifying capital gains on the disposal of shareholdings benefit from a 95% exemption from IRES, leaving only 5% of the gain subject to tax. The PEX is one of Italy's most commercially significant structuring tools for holding companies. According to available reporting, from 2026 the regime is extended to EU and EEA-resident companies without an Italian permanent establishment that hold at least 5% of an Italian company or a participation with a value of at least EUR 500,000; those figures come from a single reported source and should be verified against the enacted legislative text.

Withholding Tax

Outbound payments are subject to statutory withholding tax rates under DPR 600/1973: 26% on dividends (reduced to 1.2% for EU/EEA companies subject to corporate tax in their jurisdiction), 26% on interest, and 30% on 75% of the gross amount of royalties, producing an effective rate of 22.5% on royalties. Treaty rates and EU directives (the Interest & Royalties Directive and the Parent-Subsidiary Directive) may reduce or eliminate these charges, but substance and beneficial ownership conditions must be met.

Patent Box

Italy's current patent box regime, introduced by Legislative Decree 146/2021, operates as a 110% super-deduction of qualifying research and development costs linked to protected intangible assets. Unlike income-exemption models common elsewhere, the Italian mechanism acts on the cost side of the profit and loss account, which has significant implications for how the benefit is modelled in a group structure.

Flat Tax for New Residents

Article 24-bis TUIR provides a substitute tax on foreign-source income for individuals transferring tax residence to Italy. Following the Budget Law 2026 (Law No. 199 of 30 December 2025), the annual substitute tax was raised from EUR 200,000 to EUR 300,000 for the primary applicant, and from EUR 25,000 to EUR 50,000 per qualifying family member, for transfers of residence from 1 January 2026 onwards. Individuals who entered the regime before that date retain the charge in force at their entry. The regime is available for up to 15 years, provided the applicant was not resident in Italy for at least 9 of the 10 years preceding the transfer.

EU Anti-Avoidance Rules and Their Interaction with Italian Law

Italy has transposed the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD), incorporating an interest limitation rule, exit taxation, a general anti-abuse rule (GAAR) and controlled foreign company (CFC) rules into national law. Hybrid mismatch rules were subsequently extended by Directive (EU) 2017/952. These measures operate alongside Italy's own domestic anti-avoidance provisions and the Agenzia delle Entrate's established practice of challenging structures it regards as lacking genuine economic substance.

Practically, this means that any structuring involving Italian entities must be tested not only for formal compliance with Italian corporate tax rules but also for compatibility with ATAD's GAAR – which is broadly framed and capable of overriding arrangements that, whilst technically lawful, are not regarded as reflecting economic reality. The Corte di Cassazione has developed a body of case law on abuse of law in the tax context (abuso del diritto) that predates and informs the transposed EU standard.

DAC6 Mandatory Disclosure

Directive (EU) 2018/822 (DAC6) requires intermediaries and, in certain circumstances, taxpayers to report cross-border arrangements that exhibit specified hallmarks potentially indicative of tax avoidance. Italy has implemented DAC6, and national penalty regimes apply to non-compliant disclosures. Any cross-border transaction with an Italian element – financing, IP licensing, restructuring, or the use of certain holding structures – should be assessed at the outset for reportability.

Advance Certainty: Interpello and Ruling Procedures

Italy provides a formal mechanism by which taxpayers can obtain a binding ruling from the Agenzia delle Entrate before implementing a transaction. The interpello procedure allows a company to present the relevant facts and its proposed tax interpretation for written confirmation. Where the Agenzia does not respond within the applicable time limit, the taxpayer's interpretation is generally deemed accepted.

Obtaining an advance ruling is particularly valuable for novel structures, cross-border reorganisations and any transaction where the line between legitimate planning and potential abuse is arguable. Our detailed guide to the process is available at Advance Tax Rulings in Italy.

Tax Risk Management: Due Diligence, Transfer Pricing and Cooperative Compliance

For groups with ongoing Italian operations, tax risk management is a continuous discipline rather than a pre-transaction exercise. The principal instruments are:

Tax due diligence – systematic review of an Italian target's or existing entity's historic compliance, open assessments, transfer pricing documentation and dispute exposure
Transfer pricing documentation – Italy requires contemporaneous transfer pricing files that comply with OECD standards; the absence of documentation removes the penalty protection available to compliant taxpayers
Tax Control Framework (TCF) – larger groups can adopt a structured internal tax governance model aligned with the Agenzia delle Entrate's expectations
Adempimento collaborativo (cooperative compliance) – Italy's cooperative compliance programme allows qualifying large taxpayers to engage in real-time dialogue with the Agenzia delle Entrate, reducing uncertainty and potentially shortening audit cycles

Maintaining robust substance in Italian entities – real management, genuine economic activity, adequate staffing – remains the most effective single mitigation against challenge. Substance is assessed both under domestic law and as a condition for treaty and directive benefits.

Dispute Resolution and Pre-Litigation Settlement

When a tax challenge does arise, Italy offers structured routes to resolution before litigation becomes necessary. The accertamento con adesione is a pre-litigation settlement procedure that allows taxpayers and the Agenzia delle Entrate to negotiate and agree a tax assessment, typically with a reduction in penalties. This mechanism is widely used and is often a more proportionate response to an assessment than proceeding directly to the courts.

Where settlement is not achievable, disputes proceed through the first-instance tax courts (Corte di giustizia tributaria di primo grado), then to the second-instance courts (Corte di giustizia tributaria di secondo grado), with a further appeal on points of law to the Corte di Cassazione. The Ferraz & Whitmore tax disputes team can advise on the full litigation pathway; further information is available at Tax Disputes in Italy.

Corporate Law and Registry Considerations

Tax structuring in Italy cannot be assessed in isolation from corporate law requirements. The choice of entity – S.r.l., S.p.A. or branch – has direct tax consequences as well as regulatory ones. Corporate reorganisations, including mergers, demergers and redomiciliations, are recorded through the Registro delle Imprese and must satisfy both civil and tax law conditions to achieve the intended treatment. Regulatory approvals from bodies such as CONSOB may also be relevant in transactions involving listed entities or financial instruments.

Our corporate law team works alongside the tax practice on the structural and procedural dimensions of transactions. An overview of the Italian corporate legal framework is available at Corporate Law in Italy.

Self-Assessment Checklist

The following questions can help identify whether your Italian tax position warrants a structured review:

Does your Italian holding or operating company have adequate local substance to sustain its treaty and directive positions?
Is your intra-group transfer pricing documented in a way that removes the enhanced penalty exposure?
Have your cross-border arrangements been assessed for DAC6 reportability?
Are dividends, interest or royalty flows structured to access available exemptions and reduced rates?
Has an interpello been considered for any significant transaction that carries interpretive uncertainty?
Is there an open assessment or audit by the Agenzia delle Entrate that has not been formally addressed?
Does your group's Italian IP strategy align with the patent box conditions for cost deductibility?

How Ferraz & Whitmore Approaches This Work

Our approach combines analysis of the Italian statutory position with assessment of treaty networks, EU directive conditions and the published positions of the Agenzia delle Entrate and the courts. We focus on structures that can be maintained coherently over time, that are consistent with the substance of the client's activities, and that are documented to support any future challenge. Where a ruling is appropriate, we manage the interpello process. Where a dispute has already arisen, we work with our tax disputes specialists to identify the most proportionate resolution route.

We do not treat tax structuring as a one-time advisory engagement. For groups with material Italian operations, periodic reviews – particularly following changes in Italian budget legislation, EU directives or shifts in Corte di Cassazione jurisprudence – are part of sound governance.

If you are reviewing your Italian tax position or approaching a transaction with a material Italian dimension, we are glad to discuss the issues without obligation. Please contact us at info@ferrazwhitmore.com or through our contacts page.

Sources

PwC Tax Summaries – Italy: taxsummaries.pwc.com
DLA Piper Global Expansion Guide (Italy): intelligence.dlapiper.com
Taxing.it – Budget Law 2026 updates: taxing.it

Facts last verified: 22 September 2026. Tax legislation changes frequently; please confirm current rates, thresholds and procedural rules with qualified advisers before relying on any figures cited here.

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.

Reviewed by

Daniel Ferreira

Legal Analyst · Western Europe