Demerger by demerger split – similarities and differences to traditional demergers and contribution in kind

Article 51 of Legislative Decree No. 19/2023 added Article 2506.1 to the Italian Civil Code, which introduced a new version of the demerger into the Italian legal system, called demerger by demerger split, through which the demerged company assigns part of its assets to one or more newly incorporated companies (or also to existing companies, as provided for by the Milan Notary Council’s Maximum No. 209 of 7 November 2023) receiving shares or quotas of the same, continuing its business.

The first new element combared to the traditional demerger transaction is that, as a result of this operation, the assets of the demerged company do not suffer any depletion, since the first-rank assets (the transferred assets) are replaced by second-rank assets represented by the participations in the beneficiary company.

From a tax perspective, the same neutrality and continuity of values regime provided for in Article 173 of the TUIR applies to the demerger by demerger split, given that, from a legal point of view, the operation is attributable to the genus of demerger operations.

However, it should be noted that, unlike in a traditional demerger, for the purpose of determining the nature and tax composition of the beneficiary’s net assets, the principle of proportionality set forth in paragraph 4 of the aforementioned law cannot be applied; therefore, the latter should take on the nature of a capital reserve, except in specific cases.

With respect to the tax value of the shareholdings received by the demerged company as a result of the transaction in question, the only criterion that is in line with the principle of tax neutrality is that contained in Article 176, Paragraph 1, of the TUIR, concerning business contributions. In this regard, it is considered that the shareholding must share not only the same tax values of the first-rank assets being spun-off, but, in compliance with the principle of continuity of values that governs the transaction, also the relevant characteristics for the purposes of the participation exemption regime under article 87 of the TUIR (i.e. period of ownership and classification in the financial statements). For this purpose, in the event of the spin-off of several assets with different classifications in the balance sheet, it is deemed necessary to apply a prevalence criterion, in order to meet the requirement of first-time recognition as financial fixed assets of the investments received, as provided for by the aforementioned regulation.

From the above analysis, it emerges that the demerger by demerger split represents a suitable tool for carrying out corporate reorganisation transactions as an alternative to the contribution in kind and, in certain cases, is more advantageous for tax purposes. It should be noted, in fact, that a demerger by demerger split is always tax neutral, according to aforementioned Article 173 of the TUIR; on the contrary, the tax neutrality regime may be applied to the contribution only in cases where the object of the contribution is a company/business unit (pursuant to Article 176 of the TUIR) or a shareholders with certain requirements (pursuant to Articles 175 and 177, Paragraphs 2 and 2-bis of the TUIR). The same tax advantage is also obtained with regard to registration tax, since the demerger by demerger split is subject to fixed tax, whereas the contribution of assets that do not constitute a company is subject to proportional registration tax. Nonetheless, except in specific cases, no abuse of rights should arise in connection with the mere choice of the institution in question in lieu of the contribution in kind, in accordance with the provisions of Article 10-bis, Paragraph 4 of Law No. 212/2000, which provides that “The taxpayer may choose between different optional regimes offered by the law and between operations entailing a different tax burden”.

In any case, a detailed definition of the tax rules applicable to the case of demerger by demerger split is expected: Article 9, Paragraph 1, letter e) of the Proxy Law for tax reform (Law No. 111 of 9 August 2023) provides, in fact, for the “introduction of the tax rules relating to the partial corporate demerger under Article 2506.1 of the Italian Civil Code, without new or greater burdens on public finance”.

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