Italy: “Commercial activity” requirement for participation exemption (Supreme Court decision)
Preparatory activities deemed insufficient to meet commercial activity requirement.
The Italian Supreme Court (Corte di Cassazione) on March 20, 2026, issued Order No. 6732/2026, clarifying the “commercial activity” requirement under the participation exemption regime of Article 87 of the Italian Income Tax Code (TUIR).
Summary
The taxpayer recognized capital gains on the disposal of a shareholding in a subsidiary involved in a real estate redevelopment project. The subsidiary had carried out preparatory activities, including urban planning procedures, administrative steps to obtain building rights, and the arrangement of financing. However, the shares were sold before the project entered an operational phase. The tax authorities denied the application of the participation exemption, arguing that the subsidiary did not perform genuine commercial activity.
While the lower tax courts held in favor of the taxpayer, the Supreme Court overturned those decisions. The court held that the commercial activity requirement presupposes the effective and continuous exercise of a business activity and cannot be satisfied by activities limited to preparatory or organizational phases, even when they are substantial or economically relevant. The mere existence of a structure potentially capable of carrying out a business activity is insufficient.
The court further clarified that the commerciality requirement must be met throughout the statutory holding period preceding the disposal and that preparatory activities, such as obtaining authorizations or arranging financing, do not qualify, unless followed by the effective commencement of business operations.
Read an April 2026 report prepared by KPMG’s EU Tax Centre