On August 18, 2009 Italy’s tax administration issued resolution n. 226/E (published only on December 6, 2009), which concerns the application of the Italian participation exemption rules to gains from sale of stock of an intellectual property holding company (Rul_ 226_E – Aug_ 18, 2009.PDF).
Italy operates a very favorable participation exemption regime, pursuant to which 95 percent of the amount of gains realized from the sale or exchange of stock is exempt from tax. The remaining 5 percent is taxed at the corporate tax rate of 27.5 percent (equivalent to an effective tax rate of 1.375 percent). The exemption applies also to gains from the sale of partnership interests or participating financial instruments that are treated as stock for tax purposes (for an analysis of Italy’s participation exemption rules, see Italy’s Participation Exemption Rules.PDF).
One of the requirements of the participation exemption is that the company whose stock is sold is engaged in the conduct of a commercial enterprise (as defined in the commercial code). The commercial code definition of commercial enterprise is very wide in scope. Under the tax code, any activity conducted by a commercial company is deemed to be a commercial activity generating business income.
Under the facts of the resolution, an Italian company owns 50 percent of stock of a Dutch B.V., who holds intangible properties (trademarks and trade names). The Dutch holding company is responsible for the registration and legal protection of the intangible properties and licenses those properties to other affiliated companies and third parties in exchange for royalties.
In the resolution n. 226/E, the tax administration clarified that the active business requirement for the participation exemption must be interpreted strictly and is not met when the activity of a company is limited to the mere holding of the legal title to intellectual property and licensing of that property to affiliated companies. To benefit from the exemption the company must be engaged in an active licensing business, which includes actively managing and developing the intangibles by way of research and development activities and its active licensing to third parties.
The distinction between passive intellectual property holding activity, which does not qualify for the exemption, and active licensing business, which qualifies for the exemption, depends of the facts and circumstances of each specific case. For this reason, the tax administration, after clarifying the general principle that applies to the matter, refused to rule on the specific case submitted by the taxpayer.