With its ruling n. 25219 of October 11, 2018, the Italian Supreme Court held that the capital gain realized by a German company from the sale of its shares of stock of an Italian company is exempt from corporate income tax in Italy, pursuant to Article 13, paragraph 4 of the Tax Treaty between Italy and Germany, except in the case the German holding company has engaged in tax evasion by way of abuse of the Treaty.


Under articles 23 and 151 of the Italian Tax Code, the gain from the sale of stock of an Italian company is Italian source income, and is subject to corporate income tax in Italy to the foreign corporate seller.

However, Article 13, paragraph 4 of the Tax Treaty between Germany and Italy exempts such gain from tax, and allocates the power to tax the gain to the contracting State of which the seller is a resident.


A German company owning all of the stock of an Italian company sold the stock and realized a gain. Pursuant to an exchange of information request to the German tax authority, the Italian tax agency ascertained that the gain had not been reported on the German company’s financial statement or corporate tax return in Germany and had not been subject to tax there. As a consequence, in the absence of any actual double taxation, the Italian tax agency asserted a tax on the gain due in Italy. The Tax Court in the first instance and the Appellate Court on appeal ruled in favor of the Tax Agency.

Supreme Court’s Holding

Based on the ruling, the fact that the German company is a resident of Germany and qualifies for the benefits of the German-Italy Tax Treaty is not in dispute. According to the Court, the absence of tax on the gain in Germany does not, in and on itself, and without further evidence of abuse, authorize Italy to apply its own tax, considering that the German-Italy Tax Treaty (at paragraphed 4 of Article 13) reserves the taxing power on the gain to the country of residence of the seller.

However, the Court added that the conclusion might be different (and Italy may have a case in asserting its own taxing power on the gain) if, pursuant also to the exchange of information between the taxing authorities of the two Contracting States, it appears that the German company is an artificial arrangement that engaged in tax evasion by abusing the benefits of the Treaty.

Unfortunately, the ruling is extremely brief and does not provide any further detail. Most likely, the Italian Tax Agency did not advance the tax evasion or treaty abuse argument and based its claim solely on the absence of double taxation due to the non taxation of the gain in Germany.


A reasonable takeaway from the ruling is that the exemption of the gain from tax in the country of residence is not sufficient to prevent the application of the Treaty and allow the taxation of the income in the country of source (Italy), unless the stock holding company in the country of residence is abusive and set up solely for the purpose of getting the benefit of the tax exemption under the Treaty.

The ruling is not entirely consistent with two other rulings from the Supreme Court, which – in a different legal context – held that the withholding tax exemption for EU inter company dividends does not apply when the dividends are not tax in the country of residence of the recipient.