On 29 December 2022 the Italian Parliament issued Law No. 197 of December 2022 (hereinafter also “2023 Italian Budget Law”).

The Italian Budget Law introduces a new territoriality rule – laid down by paragraph (1-bis) of Article 23 of the Italian Consolidated Act (“ITCA”) – according to which capital gain taxation is also foreseen in the case of indirect transfer of Italian real estate by non-Italian resident[1]. More specifically, taxation will apply to gains derived from the sale of the participation in a foreign company or entity owning – directly or indirectly – Italian real estate.

In order to trigger the taxation in Italy, the value of the participation in the non-resident vehicle shall derive at any time during the 365 days preceding the sale, for more than 50% from the value of real estate assets located in Italy.

This new rule, starting from 1st January 2023, lines up Italian domestic tax legislation with Article 13(4)[2] of the OECD Tax Model Convention and Article 9(4) of the OECD Multilateral Convention to Implement Tax Treaty Related to Measures to Prevent Base Erotion and Profit Shifting (“MLI”).

Under the new paragraph (1-bis) of Article 23 ITCA, gains realized by non-Italian resident from the disposal of participations, are subject to tax in Italy at the rate of 26% pursuant to the provisions laid down by Article 5(2) of Legislative Decree no. 461/1997.

The Italian substitutive income tax (e.g., 26%) would be triggered if:

  • the participation in foreign entities is transferred in exchange for consideration;
  • such participation value is represented – directly or indirectly – by more than 50% by Italian real estate;
  • at any time during the 365 days preceding the sale. 

In making this computation, immovable property in which a business is carried on directly by the owner as well as those to whose construction or sale is aimed the business of the owner, should not be considered.

Such new regime does not apply with reference to:

  • the transfer of shares listed in regulated market or in multilateral trading facilities;
  • capital gains derived by investment funds compliant with Directive 2009/65/EC (UCITS IV Directive), or funds not compliant with the above-mentioned Directive but whose management company is subject to forms of supervision in the country of establishment in accordance with AIFMD (2011/61/EU), to the extent that they are established in EU Member States and EEA States allowing for an adequate exchange of information with Italy.

In addition to the above-mentioned new sourcing rule the 2023 Italian Budget Law – by introducing par. 5 – bis Article 5 of the Legislative Decree No. 461/1997 – partially withdrew the exemption set out for certain non-resident investors. More precisely, the exemption at stake – laid down by Article 5(5) of the Legislative Decree No. 461/1997[3] – will no longer apply to the sale of interest in entities deriving more than a half of their value – directly or indirectly – from real estate located in Italy.

Cross border implications – Interaction between the New Italian Provisions and DTT

This new provision may have a relevant impact for foreign entities located in Countries without a Double Tax Treaty (“DTT”) with Italy or which are not protected by an existing DTT either for lacking treaty entitlement prerequisites (e.g., the person deriving the relevant capital gain is resident in a Country which have a tax treaty in place with Italy but such person is not entitled to treaty benefits because it is not considered to be liable to tax therein).

In all other cases, in order to ascertain whether or not the new Italian Provisions may actually be applied, a specific analysis of the Treaty between Italy and the State of Residence of the seller need to be carried out.

In this regard it is worth noting that 24 existing Treaties already have a wording similar to the one contained in Art. 13(4) of the OECD Tax Model Convention. In this case the new Italian Provisions should immediately be applicable.

However, the specific wording on the relevant Treaty need to be carefully assessed as they do not always identically overlap with the new Italian Provisions.

It is therefore essential to check whether the applicable Treaty includes or not a rule based on Article 13(4) of the OECD Tax Model Convention. 

Because only some Treaties with Italy include such rule – that allow the taxation of the above-mentioned gains – the other Treaties will be amended to add such rule by opting for the Multilateral Instrument (“MLI”) (Article 9(4) on the taxation of gains from the disposal of participation in “real estate vehicles”)[4].

In this regard it should be pointed out that Italy has not yet ratified the MLI.

Edited by Giulia Sorci


[1] Non-Italian residents could generally include both individuals and companies (without Permanent Establishment in Italy) and other entities (e.g., Trusts).

[2] Article 13(4) states that: “Gain derived by a resident of a Contracting State from the alienation of shares or comparable interest, such as interests in a partnership or trust, may be taxed in the other Contracting State if, any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in that other State.

[3] Article 5(5) of the Legislative Decree No. 461/1997 provides that capital gains derived by Italian non-resident persons from the disposal of portfolio participations held in Italian entities are not subject to tax in Italy to the extent that such non-resident persons qualify as:

  • white-listed resident entities;
  • international bodies set-up pursuant to international agreement ratified in Italy;
  • white listed foreign institutional investors, even if not liable to tax;
  • central banks and other bodies managing State’s reserves.

[4] Provided that even the other Country involved ratifies the MLI provisions and opts for the application of Article 9 (4) of the MLI.