Historic judgement no. 158 of July 21, 2020, of the Constitutional Court
The Constitutional Court, by means of the historic judgment no. 158 issued on July 21, 2020, rendered in a litigation followed by our firm, has dismissed the question of constitutional legitimacy of Article 20 of Presidential Decree 131/1986 (Tur), raised by the Supreme Court with Ordinance no. 23549 of September 23, 2019, definitively establishing the legitimacy of taxation at a fixed amount (EUR200,00) and not of proportional taxation in so-called share deals.
The consequences of the decision are significant both for the future, in terms of legal certainty for the whole M&A world, and for the past, since the Italian Tax Authorities will be forced to abandon existing litigation for a total value of about EUR1 billion.
The Supreme Court had raised doubts of constitutional legitimacy, on the basis of Articles 3 and 53 of the Constitution, in relation to the changes introduced to the aforementioned provision by paragraph 87 of Art. 1 of the 2018 Budget Law and paragraph 1084 of Art. 1 of the 2019 Budget Law, as a result of which it was clarified that when applying the registration tax according to the intrinsic nature and legal effects of the deed submitted for registration, only the elements inferable from the deed itself must be taken into consideration, regardless of the extraneous ones and the acts connected to it, even if the title or form does not correspond to it.
The main argument used by the judges of the Supreme Court focused on the grounds that “in the regulation of the registration tax that of the prevalence of substance over form is an essential principle and also historically rooted.” According to the Supreme Court, this principle would be unjustifiably compressed by the new Article 20, where the legislator, denying the relevance of the connection with other deeds, as well as any other element extraneous to the text of the deeds, would have made misuse of its discretion in contravention of the need to tax the economic strength and the ability to contribute expressed by the transaction.
In rejecting the defect reported, the Constitutional Court fully acknowledged our defensive arguments, noting that the legislator has wide discretion in identifying what the taxable events are. In this context, according to the Constitutional Court, the legislator could decide to apply indirect taxes individually in respect of each step in a multi-step transaction without considering a possible connection with other steps or extraneous elements.
In addition, the Constitutional Court highlighted the arbitrary and illogical effects that the evolutionary interpretation of Article 20, endorsed by the Supreme Court, could produce within the legal system, especially in light of the introduction of Article 10-bis of law no. 212 of 2000.
This interpretation would allow the Tax Authorities to apply an anti-avoidance rule without ensuring the procedural guarantees established in favor of the taxpayer, and without proving the existence of undue tax advantages and lack of economic substance, thus denying the taxpayer the possibility of legitimate tax planning (which is admitted in both national and European tax law).
On the contrary, according to the Constitutional Court, the new wording of Article 20 would not be affected by any defect of constitutional legitimacy as:
- with it, the legislator would have reaffirmed the nature of “deed tax” of the registration tax, specifying the subject of the taxation in line with the juridical effects of the deed presented for registration; and
- the Tax Authorities could take into account elements extraneous to the text of the deeds and the economic effects stemming from the connection between the deeds lodged and other deeds only to tackle tax avoidance schemes under Article 10-bis of Law 212/2000.
The Constitutional Court concluded that the new wording of Article 20 is not in conflict with the constitutional principles of ability to pay and equality and, consequently, the issues raised by the Supreme Court are groundless.
The effects of the judgment issued by the Constitutional Court
The historic decision puts an end to one of the most controversial issues in the field of registration tax and in tax law in general. This is a topic which for decades had been the source of interpretative and applicative uncertainties, which had effects, on the one hand, on the relationships between Article 20 and the issue of the abuse of rights and on the other hand, on taxpayers’ legitimate tax planning. All this is to the detriment of legal certainty and to the proper functioning of the judicial system.
Thanks to the decision issued by the Constitutional Court, Article 20 finally regains its historical identity and the uncertainties and many contradictions that revolved around its scope of application are definitively eliminated. From now on, the “real cause” and the “connection with other deeds,” as well as any other “element extraneous to the text of the deeds,” will be able to take on relevance exclusively to apply the general anti-abuse discipline today enclosed within Article 10-bis of Law 212/2000.
With its decision the Constitutional Court has also restored confidence to the many investors who over the years had been affected or even intimidated by the operational practice of the Tax Authorities, which were increasingly accustomed to requalifying, based on an alleged “concrete cause,” the corporate M&A (paradigmatic in the case of the contribution of part of a going concern into a newco and subsequent disposal of the shares), in terms of a unitary “business sale.” In these cases, the Tax Authorities were used to applying 3% proportional registration tax instead of a fixed registration tax of EUR200.
Developments and actions to be taken
In summary, these are the developments and possible actions to be taken in light of the decision:
- corporate reorganization and M&A operations will enjoy greater legal certainty;
- the anti-abuse legislation, now contained in art. 10-bis of Law 212/2000, must always be applied with the guarantees provided therein, first of all by ensuring the prearranged consultation (contraddittorio preventive);
- tax planning is legitimate and the anti-abuse rules: (i) do not apply to indirect taxes outside the cases provided for; (ii) in case of assessment, the Tax Authorities cannot exempt themselves from the specific identification of undue tax advantages; and
- the Tax Authorities will have to abandon all existing litigation on Article 20 in which their position is in conflict with the precise principles expressed by the Court; while waiting for this to happen autonomously, as it should, the taxpayers, to accelerate the conclusion of the dispute, may submit instances for annulment in self-protection (istanze di annullamento in autotutela) of the challenged assessments and request reimbursement of the sums paid during the litigation.