The Participation exemption (Pex), governed by Article 87 of the Italian Tax Code (Tuir), is one of the most important tools for tax planning and optimization available to Italian companies, to be taken into consideration – along with others – even when considering the establishment of a holding company.
Thanks to the partial exemption of capital gains generated by the sale of qualified shareholdings, the regime allows companies subject to IRES (corporate income tax) and, to a more limited extent, IRPEF (personal income tax) entities operating under a business regime, to significantly reduce their tax burden, with significant effects on investment strategies and the implementation of extraordinary corporate reorganization operations.
Participation exemption: beneficiaries and facilitated transactions
Pex applies exclusively to entities for which capital gains are considered business income. Therefore, the scope of application of the regime includes corporations, cooperatives and mutual insurance companies; commercial and non-commercial entities, limited to shareholdings held as part of their business activities, non-resident companies and entities with a permanent establishment in Italy, as well as partnerships, with the exception of simple partnerships, and individuals with business income under ordinary accounting.
In addition to transfers for consideration, which are the most common scenario, the Pex regime also covers, pursuant to paragraph 3 of Article 87 of the Tuir, a series of equivalent transactions, including capital gains deriving from allocations to shareholders, from the allocation of shareholdings for purposes unrelated to business activities, as well as from transactions involving the distribution of capital reserves in excess of the fiscally recognized cost of the shareholding or from transactions involving the withdrawal, exclusion, or liquidation of the shareholder.
Pex exemption measure and requirements for access to the regime
Exemptions for IRES taxpayers
Article 87 of the TUIR establishes that capital gains realized by IRES taxpayers on qualified shareholdings are 95% exempt, provided that the following requirements are met jointly:
- a) Holding period: the shareholding must have been held since the beginning of the twelfth month prior to the month of sale, applying the LIFO criterion, i.e., “considering the most recently acquired shares or quotas as sold first”;
- b) Recognition in the financial statements: the shareholding must be recognized as a financial fixed asset in the first financial statements following the acquisition;
- c) Tax residence requirement: the investee company must not be based in territories with preferential tax regimes, pursuant to Article 47 bis of the Italian Tax Code. In this case, we refer to countries not included in the “white list,” i.e., countries that do not belong to the EU or EEA, or countries with which the Italian State has not signed agreements on the exchange of information;
- d) Commerciality requirement: the investee company must carry out a commercial activity pursuant to Article 55 of the Italian Tax Code (Tuir).
For shareholdings held in holding companies, paragraph 5 of Article 87 of the Italian Tax Code also specifies that the requirements referred to in letters c) and d) relating to the tax residence of the investee company and commercial activity refer to indirectly held companies and must be verified for investee companies that represent the majority of the value of the investor’s assets.
If all the requirements are met, the capital gain contributes to the formation of taxable income only to the extent of 5%, with an effective tax rate reduced to approximately 1.2%.
Exemptions for IRPEF taxpayers
With regard to entities operating in the field of business activities subject to IRPEF, capital gains meeting the above requirements are exempt to the extent of 41.86%, and therefore taxable at 58.14%, if realized by sole proprietorships, while for partnerships, the exemption is 50.28%, with a consequent taxability of 49.72%.
In the absence of PEX requirements, the capital gain contributes in full to the formation of the income of the person to whom it is realized.
Capital loss regime and participation exemption: limits on deductibility
In parallel with the tax relief on capital gains on shareholdings, the Pex regime provides for a specific regime for capital losses.
For IRES taxpayers, capital losses relating to shareholdings that meet the requirements of the Participation Exemption are in fact totally non-deductible for the purposes of determining the tax base.
For IRPEF taxpayers, on the other hand, the regime is less rigid: non-deductibility is applied according to the same percentages as those provided for the exemption of capital gains, ensuring symmetry of treatment.
Capital losses on shareholdings that do not meet the PEX requirements remain, on the other hand, generally fully deductible.
Participation exemption: strategic assessments and impact on tax planning
Participation exemption remains a key tool in corporate taxation, capable of promoting the efficiency of the tax system and encouraging stable investments in the capital of investee companies, as well as contributing to the overall efficiency of corporate taxation.
However, the beneficial nature of the regime, given the partial exemption of capital gains, is balanced by strict requirements and particularly restrictive treatment of capital losses. This balance implies the need for very accurate preliminary assessments, taking into account both the tax position of the company and the organizational structure of the group to which it belongs.
The correct application of Pex also takes on strategic value as a complement to corporate reorganization operations such as contributions, mergers, or demergers, determining one of the central elements in governance and tax planning decisions for companies and corporate groups, both in the short and long term.
Possible changes in the 2026 Budget Bill
The text of the 2026 Budget Bill, currently being examined by Parliament, provides, with specific amendments to Article 87 of the Consolidated Income Tax Law (Tuir), that the capital gains exemption regime is linked to the possession of a minimum shareholding (5% in terms of share capital, or €500,000.00 in tax value).
This new requirement would be added to the ‘historical’ requirements mentioned above, referred to in Article 87(1) of the Italian Tax Code (period of ownership of the shareholding, first registration of the shareholding among financial fixed assets, residence of the investee company and the latter’s exercise of commercial activities).
In the absence of this additional requirement related to the size of the shareholding, the capital gains realized will contribute in full to the company’s income.
The new provisions should apply to capital gains realized in relation to the sale of shares or quotas acquired from January 1, 2026; if the shareholdings were acquired by December 31, 2025, the related capital gains may benefit from the exemption regardless of whether they are above or below the thresholds of 5% or €500,000.00.
(Article written in collaboration with Dr. Asia Zaltron, collaborator at Studio Righini)
