The demerger by demerger split as a worthwhile alternative to the transformation of a permanent business establishment in Italy into a subsidiary

As already discussed in a previous article (ed. March 5, 2024), with the introduction of Article 2506.1 into the Civil Code, a new form of partial corporate split-up known as demerger by demerger split has been included in our legal system, through which the demerged company assigns part of its assets to one or more newly established companies (or even for the benefit of pre-existing companies, as provided by Bill No. 209 of November 7, 2023 of the Milan Notary Council) receiving in exchange shares or quotas of said company.

While waiting for clarifications on the tax treatment applicable to this new form of demerger, an analysis of the very code shows how it can be a valid alternative to the transfer of a permanent establishment, present in Italian territory, by a nonresident company in favor of an Italian company: the operation, for the latter, often being used in practice to arrive at the transformation of the permanent establishment into a subsidiary. 

Through the use of a cross-border spin-off, the foreign company could, in fact, transfer its permanent establishment located on Italian territory to a newly established Italian company, receiving in exchange the latter company’s shareholdings.

At this point it is necessary to ask how the principle of neutrality pertaining to demerger operations can be coordinated with the principle according to which the exit of an asset from the Italian state determines the application of the so-called exit tax on the surplus value of that asset.

In the case of contribution of a permanent establishment, located in the Italian territory, by a nonresident company in favor of an Italian company, the Revenue Agency in fact subordinates the tax neutrality of such a transaction, in deference to the provision of paragraph 4 of art. 176 of the TUIR, to the recognition of the shareholding in the financial statements of the entity from which the transferred assets originate (i.e., in the financial statements of the contributing permanent establishment). This is, evidently, an interpretation that ties the failure to realize the capital gain on the equity investment to the fact that a permanent establishment in Italy of the nonresident entity remains in place (ed. the contribution must therefore have as its object only a branch of the business of that permanent establishment) and that this equity investment is functionally connected with the permanent establishment.

If, in fact, the shareholdings in the transferee are assigned directly to the foreign parent company, because the permanent establishment ceases to exist at the same time as the contribution or are subsequently transferred to said company, these shareholdings must be considered realized, with determination of the relative capital gain (or capital loss) to which the participation exemption regime must be applied, if the conditions exist.

This constraint, in the case of a demerger by spin-off, should be eliminated in application of the principle of neutrality typical of this type of operation. As a matter of fact, tax neutrality, along with the assignment of the shareholding to the demerged company, represents an inseparable element of the institution of the demerger.

In any case, we continue to wait for a ministerial clarification in this regard.

Finally, it is worth remembering that Assonime, in Circular No. 14 of 2023, commenting on the new form of demerger, confirmed how the alternative under consideration (contribution versus demerger by demerger split in the case of “transformation of permanent establishment”) cannot give rise to the emergence of cases of abuse of law by the Revenue Agency, since these are operations placed on the same level.

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