2026 Budget Bill: tightening of dividend taxation
The 2026 Budget Bill (approved by the Council of Ministers on October 17, 2025), in the part where it changes the taxation regime for dividends received by IRES taxpayers under Article 89 of the Italian Tax Code (as well as that for dividends received by IRPEF taxpayers who are entrepreneurs, pursuant to Article 59 of the Italian Tax Code), could have a significant impact on ‘illiquid’ investments made by family offices and HNWIs.
The draft bill currently being approved provides for the exclusion of the so-called dividend exemption – a regime introduced by the Tremonti Reform in 2003, which provides that dividends and reserves distributed to companies or commercial entities are taxed only on 5% of their amount, with 95% being excluded from taxation if a certain percentage of share capital is not exceeded (10% in the first version of the law: a threshold that, upon conversion, could be lowered to 5%, possibly as an alternative to a tax value of the shareholding of at least €2.5 million and/or with the additional requirement of compliance with a three-year holding period).
What changes without dividend exemption: risks and impacts
In any case, full ordinary taxation of profits in the event of non-compliance with the new requirements would result in an economic burden that could profoundly alter the net return on the originally expected investment.
The decision to invest in an unlisted company depends, as is well known, on the weighing of several factors:
- the riskiness of the underlying business,
- the expected time horizon (and the related unavailability of the sums during that period),
- and, above all, the expected return. Often, when considering the latter factor, a key aspect is the fact that, if the investment is made by a company (often a single family office), it relies on the fact that the profit distributed by the vehicle at the time of exit (i.e., when the vehicle sells its stake in the operating company and then distributes the proceeds in the form of dividends to its shareholders) will be subject to modest taxation.
Effects on illiquid investments and large assets
It is clear that the erosion of this return could profoundly alter the balance between the factors outlined above: while it is undeniable that illiquid investments will continue to play a significant role in large assets, it is also foreseeable that they will generally be weighted more carefully, with preference given, where possible, to those with the possibility of holding a ‘above-threshold’ stake (which, however, due to its size, must first be compatible with the overall asset allocation of the portfolio).
Certainly, those promoting a co-investment transaction will not always be able to establish a cap table limited to a few “above-threshold” investors, and will likely attempt to intervene in the structure of the transaction itself, preferring corporate structures that allow investors to benefit from the (ongoing) participation exemption regime (1.2% taxation, i.e., 5% of the 24% rate, on capital gains accrued following the sale of shareholdings).
Club deals and governance: what could change
To do this, however, there must be direct investments in the target company, which would then find itself owned by multiple shareholders (a possibility that, in club deal transactions, is usually avoided by bringing all investors together under a single corporate umbrella, in order to allow for the unified exercise of administrative rights and thus stabilize the governance of the target).
Not to mention the fact that, in this case, it would no longer be possible to grant certain shareholders (such as the promoters of the club deal) – through the attribution of a special economic right or the allocation of ‘class’ shares – a preferential distribution of profits following the exit.
Alternative strategies: funds, PE, and direct investments
If the regulation is approved, we could see, on the one hand, a change in the structure of co-investment transactions, which would be useful in maintaining the tax advantages for the investor-company, and, on the other hand, a substantial rethinking of the strategy of the investor regarding how to operate in illiquid markets.
In cases where it is not possible to benefit from the dividend exemption or participation exemption regime, other instruments, such as investment in private equity funds, could regain appeal; or asset classes with a perceived better risk/return profile could sometimes be preferred.
As for direct investments in unlisted companies, in some cases, the possibility of investing directly as a natural person (possibly benefiting from the possibility of revaluing the holdings before exit) could also be reconsidered, including through Pir “alternative” mandates.
