Transfers made, including through family pacts, in favor of descendants and spouses, of businesses or branches thereof, company shares, and shares are not subject to tax
The family pact is established to facilitate the generational transfer as a function of inheritance of productive assets
Family covenant: what is it?
According to Article 768 bis of the Civil Code, the family pact is the contract by which, consistent with the provisions on family business and in compliance with the different types of companies, the entrepreneur transfers, in whole or in part, the business, and the owner of corporate shareholdings transfers, in whole or in part, their shares, to one or more descendants.
In essence, as can be understood from a reading of the provision, with the institution under consideration, the legislature intended to facilitate the generational transfer of business entities either directly (by transferring all or part of the business or business branch) or indirectly (by transferring corporate shareholdings).
From this, the rationale of the institution can be understood: in the context of the Italian entrepreneurial fabric, which is mostly made up of small and medium-sized family-owned businesses, the covenant responds to the need to transfer a business entity, or the corporate shareholdings of the same, to a relative capable of continuing the entrepreneurial projects.
The family covenant (as an exception to the prohibition of inheritance pacts in Article 458 of the Civil Code) constitutes a contract of a complex nature that makes it possible to transmit by deed inter vivos the company or the control of the enterprise to preserve, using a managerial continuity, its uniqueness and productive potential; conversely, to avoid a fragmentation of corporate control.
Said institution, whose matrix is of European derivation, therefore, allows:
- To ensure the stability and continuity of a company already operating in the market in order not to compromise its stability and potential as a result of succession events
- To provide the entrepreneur with an appropriate legal tool to plan for his company’s generational transition and future functionality.
The subjects of the family covenant
The family covenant involves several subjects. Among them, the roles of the:
- Disposer, i.e. the person who disposes of their business or corporate holdings, transferring, free of charge, the ownership thereof
- assignee, i.e., the person who receives ownership of the company, business unit, or shareholdings to continue the management of the business;
- the spouse and any legitimizing parties.
Tax implications of the family covenant
The legislature to favor the generational transition through the family pact has also provided for a particular tax regime for this specific institution to avoid the need to find resources to fulfill tax burdens (the inheritance and gift tax due at the time of the donation of the corporate shareholdings) may force the beneficiaries to resort to indebtedness.
On this point, as the Internal Revenue Agency has had the opportunity to specify (among other occasions, in interpellation No. 38 of 2020) transfers made, including through family pacts in favor of descendants and spouses, of companies or branches thereof, company shares and shares are not subject to the tax.
In the case of business units and shares, the benefit is limited to holdings through which control is acquired or supplemented under Article 2359, first paragraph, number 1) of the Civil Code.
The benefit applies on condition that the successors continue to carry on the business activity or hold control for a period of not less than five years from the date of the transfer, making, at the same time as filing the declaration of inheritance or deed of gift, a special declaration to that effect.
Failure to comply with the condition referred to in the preceding period shall result in forfeiture of the benefit, payment of the tax in the ordinary amount, the administrative penalty provided for in Article 13 of Legislative Decree Dec. 18, 1997, No. 471, and interest on arrears from the date on which the said tax should have been paid.
Therefore, the aforementioned facilitative treatment is only applicable to the beneficiaries who are descendants or spouses of the settlor, provided that they make at the same time as submitting the declaration of inheritance or the deed of gift, a special declaration that they continue to carry on the business activity or hold the control of the business activity.
