In a recent ruling (Decision No. 3525, 5 September 2025), the First Instance Tax Court of Milan has sided with an international private equity fund, rejecting the Italian Revenue Agency's attempt to tax capital gain derived from the indirect sale of an Italian company.

Case at issue

The case concerned the sale of a well-known Italian company in the pet care sector. The seller, a private equity fund, held its stake through two Luxembourg-based holding entities (Lux I controlled Lux II, which in turn controlled the Italian company). Lux I had sold its stake in Lux II.

The Italian Revenue Agency challenged the omission of the tax declarations and the failure to report the capital gain in Italy to be taxed at 26%. The Agency argued that the Luxembourg entities were mere conduits, invoking Article 37(3) of Presidential Decree 600/1973, which addresses interposed entities. It claimed the fund was the true beneficiary of the gain and that the structure lacked economic substance, being designed solely to avoid Italian taxation on capital gains.

The Milan Tax Court rejected the Revenue Agency's claims, emphasizing that the

Luxembourg holding companies (Lux I and Lux II) were not fictitious. On the contrary, both structures were genuine and functionally appropriate. The judges focused in particular on the following aspects:

• The entities had their own offices and staff, albeit modest in scale.
• Board meetings and shareholder assemblies were regularly held, involving experienced professionals, some of whom were Luxembourg residents.
• Investment decisions and dividend distributions were made autonomously by the boards of the holding companies during two separate board meetings. (i.e., there was no preestablished automatic mechanism for transferring the proceeds received).

Implications

The ruling reinforces the principle that the mere presence of a light corporate structure (e.g., a small office with one or two employees) does not automatically imply interposition. The economic and operational substance of foreign entities must be assessed concretely and cannot be disregarded. The ruling also reinforces the importance of maintaining genuine operational substance in corporate structures to defend against potential tax challenges, even in case of indirect sales of Italian companies.