Important changes planned for Italy's real estate tax framework

The first draft of Italy's 2023 Budget Law contains a provision that – if approved without material changes – may seriously impact the legal structures of non-nationals holding real estate and investments in Italy.

Capital gains resulting from the disposal of companies or other entities, wherever they are located, which hold Italian property may become taxable in Italy. 

Current exemptions

Under current rules, and where certain conditions are met, a non-Italian resident can use Italian or foreign corporate vehicles or entities to invest in real estate in Italy without facing any Italian capital gains tax (CGT) exposure on the sale of their corporate interests.

Indeed, Italy currently offers a CGT exemption for non-resident investors located in white-listed jurisdictions and establishing an Italian investment vehicle, if their ownership of the investment vehicle qualifies as a portfolio participation (i.e. holding less than 20% of the voting rights or less than 25% of the capital) (“Domestic RE Exemption”).

Even where an investment vehicle does not qualify for this exemption, most of Italy's tax treaties still grant exclusive tax rights to the investor's resident state, and Italy will not levy taxes.

In addition, where a foreign investor's property investment is structured through a foreign entity which directly holds the Italian property, no Italian tax will be levied on the sale of the foreign entity.

Budget Law 2023

The draft of the 2023 Budget Law changes this scenario. Under the new provision:

• the capital gains of non-Italian entities owned by non-Italian residents and which derive more than 50% of their value from Italian real estate will be considered to be taxable in Italy; and
• the Domestic RE Exemption will no longer apply to gains realized from the sale of entities (wherever located) which derive more than 50% of their value (even indirectly) from Italian real estate. 

In other words, every gain realized by non-Italian residents from the sale of entities – Italian or foreign – deriving more than half of their value (even indirectly) from Italian real estate will potentially be subject to Italian CGT.

It is worth noting that this provision will need to be tested against the Italian tax treaty network, which might be affected by the way Italy and its treaty partners ratify (or already have ratified) the OECD's Multilateral Convention (so called MLI) on international tax rules.

In conclusion, the approval of the 2023 Italian Budget Law (expected before the year-end) and Italy's (and its treaty partners) ratification of the MLI should be closely followed in light of their potential impact on the exit strategies of foreign investors in Italian real estate. Nonetheless, with adequate pre-planning and proper advice it will remain possible to guarantee the tax efficiency of investments in Italian real estate.