By judgment No. 6591 of March 10th, 2021, the Court of Cassation ruled on an iconic case concerning a family business succession agreement ("Patto di Famiglia") pursuant to Sec. 768-bis of the Italian Civil Code ("ICC"), whereby the controlling shareholder had transferred to his three sons equal shareholdings of roughly 25% each, who then entered into a shareholders' agreement mainly aimed at ensuring a unanimous governance of the company and a lock-up obligation for the following five years.
After alternate rulings of the lower Tax Courts, the Court of Cassation finally ruled that a unanimous governance of a company by virtue of a shareholders' agreement amongst the assignees of minority shareholdings, transferred under a family business succession agreement, does not qualify as legal control for gift tax exemption purposes under Sec. 3, Par. 4-ter of Inheritance and Gift Tax Act No. 346/1990
The main argument put forward by the Italian Revenue Agency to maintain the violation of the above mentioned tax regulations and to support the corresponding gift tax assessment, consisted in the lack of the legal requirements triggering said tax exemption, as this should apply only to transfers of shareholdings by which legal control over the company is acquired or integrated pursuant to Sec. 2359, Par. 1, No. 1, ICC.
Failing a consistent series of court precedents and considering the still heated debate among leading scholars, the three main pillars of the reasoning set forth by the Court of Cassation may be summed up as follows:
(a)gift tax is to be assimilated, by common principles, to the registration tax as a "deed tax"; therefore, in order to assess the requirements and criteria to levy said tax, only the contents and effects of the deed itself should be considered (see Sec. 20 of Pres. Decree No. 131/1986)
(), with no reference or relevance of any separate, although ancillary, agreements;
(b)only those transfers of shareholdings, which entail the acquisition or integration of control over the company within the meaning of Sec. 2359, Par. 1, No. 1, ICC (i.e. assigning the majority of votes to be cast at ordinary shareholders' meetings) qualify for the above mentioned gift tax exemption;
(c)in tax matters, rules laying down exemptions and exceptions are to be interpreted strictly in accordance with Sec. 14 of the General Provisions of Law ("Preleggi"), so that no resorting is allowed to analogy or extensive interpretation of such rules beyond the cases and conditions expressly provided for therein;
(d)shareholders' agreements are not enforceable
erga omnes and the parties, as well as the company,
() might not be interested to enforce their provisions, thus undermining that kind of control, which the law requires as the essential prerequisite for granting a gift tax exemption.
In the case at hand, the family business succession agreement did not provide for a transfer of control over the company, since each of the three assignees received full and separate ownership of a minority stake instead of a share of a
pro indiviso joint ownership over the entire majority participation (pursuant to Sec. 2347 ICC, co-owners' rights are exercised by their common representative, who is entitled to cast the majority of the votes at the ordinary shareholders' meeting).
The latter mentioned provision of a "transfer of a majority shareholding in favour of a joint ownership
pro indiviso" (introduced by consolidated interpretation and operation of the Revenue Agency, as also indicated by the Court of Cassation) does constitute an exception to a strict interpretation of the regulations underpinning the gift tax exemption.
As a matter of fact, the prevailing interpretation of the notion of control under Sec. 2359 ICC does not contemplate a "joint control", but only the control exercised by one company over another. At first glance, it would seem questionable to admit an exception to Sec. 2359 ICC in case the control is exercised through the joint ownership of a majority stake and on the other side to reject the exception where such "joint control" is exercised through a shareholders' agreement.
However, a remarkable difference in the two approaches mentioned above justifies a different treatment.
Indeed the reference made by the Inheritance and Gift Tax Act to Sec. 2359, Par. 1, No. (1) ICC is already spurious by itself, because Sec. 2359, Par. 1, No. (1), ICC only refers to control exercised by a corporate entity, while the Inheritance and Gift Tax Act concerns control exercised by individuals.
This indicates that the focus of the cross reference is not so much on the nature of the controlling entity (corporate entity, individual, or joint ownership by individuals) as on the size of the participation ensuring legal control over a company.
The control exercised by means of a shareholding agreement, instead, does not ensure "legal control" pursuant to Sec. 2359, Par. 1, No. (1), ICC, but merely a "de facto control" pursuant to Sec. 2359, Par. 1, No. (2), ICC, as confirmed by leading literature and case law.
Van Berings has recently assisted an important industrial group in structuring the major generational transition between the founding shareholder and his sons through a family business succession agreement shortly before the Court of Cassation decided on the case at stake.
The transaction has nevertheless been structured in compliance with the above mentioned principles eventually laid down by the Court of Cassation, entrusting to the clear provisions of the family business succession agreement a transfer of control adequate and sufficient to qualify for gift tax exemption purposes.
()"The Transfers, including those made through family business succession agreement as per articles 768-bis et seq. of the Civil Code, in favour of descendants and spouses, companies or branches thereof, company shares and shares are not subject to taxation […]. The benefit is limited to shareholdings through which control is acquired or integrated pursuant to article 2359, paragraph 1, number 1) of the Civil Code. The benefit applies on condition that the assignees continue to carry out the business activity or hold control for a period of no less than five years from the date of the transfer."
()The tax shall be levied according to the intrinsic nature and legal effects of the instrument submitted for registration, even if it does not correspond to the title or the apparent form, on the basis of the elements that can be inferred from the instrument itself, without taking into account the extra-textual elements and the acts linked to it, except as provided for in the following articles.
()Obligations arising under Shareholders' agreement may be construed as also in favour of the company they refer to when the latter has an interest in their performance, as third beneficiary pursuant to Sec. 1411 ICC (Court of Cassation, Decision No. 9846/2014). No such interest has been found in the case at hand by the Court Cassation with respect to the provisions of the shareholding agreement on unanimous governance.