The recent one judgment no. 16248 of 11 June 2024 of the Court of Cassation has established an important principle regarding the sale of residential properties to newly established companies.
The Court stated that such an operation may constitute an abuse of law if it is aimed solely at maintaining tax benefits, thus imposing the application of the registration tax at the ordinary rate.
But what are the details of this decision? And how does it affect future real estate transactions?
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The regulatory framework and tax relief
The case in question concerns a relief provided for by article 1 of the Tariff, part one, attached to the Consolidated Law on the registration tax (Presidential Decree no. 131/1986). Until 31 December 2013, this provision allowed the application of aregistration tax reduced to 1% for transfers of residential buildings exempt from VAT, provided that the purchasing company undertakes to resell the properties within three years of purchase.
This relief was intended to facilitate the resale of real estate by businesses.
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The concrete case
In 2010, an LLC had purchased residential properties for over 6 million euros, taking advantage of the above-mentioned relief. According to the provisions, the company had committed to resell the properties within three years.
A few days before the expiry of the three-year period, the same company sold these assets to a new company, established a few months earlier, belonging to the same business group.
The sale, therefore, formally respected the commitment made in 2010. However, the Territorial Revenue Office initiated an audit on the entitlement to the relief, contesting the transaction as lacking real economic substance and aimed exclusively at maintaining the tax benefit.
In particular, the Office noted that both companies involved in the transaction were owned by the same parent company.
The Office found several anomalies that indicated the lack of economic substance in the transaction. The purchasing company had not carried out any commercial activity after the purchase, did not have a website, nor did it have any electricity, telephone or water utilities. Furthermore, the company’s capital was completely insufficient compared to the expenditure necessary for the purchase of the properties, which exceeded 7 million euros.
These elements led the Office to conclude that the 2013 real estate transfer was aimed exclusively at maintaining the tax benefits obtained during the purchase phase, without any valid economic, organizational or management reason.
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The legislation on abuse of rights
Article 10-bis of the Taxpayer Statute, Law No. 212/2000, regulates theabuse of rightdefining it as operations devoid of economic substance that create undue tax advantages.
According to this legislation, operations which, while formally complying with tax rules, essentially aim to obtain undue tax advantages are not enforceable against the Financial Administration, which can disavow the benefits and apply the evaded rules.
This provision was the basis of the Administration’s claim to revoke the tax breaks in the case at hand.
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The judges’ decisions
After the notification of the act aimed at revoking the benefits, the Provincial Tax Commission (CTP) of Milan had initially accepted the appeal of the company receiving the act, considering that the operation was formally correct. However, during the appeal, the Regional Tax Commission (CTR) of Lombardy overturned the decision, sharing the thesis of the Financial Administration.
The CTR argued that the contributing company had committed tax evasion through the resale of the properties to a newly established company, belonging to the same business group. In fact, both companies were wholly owned by a third company.
Furthermore, the CTR underlined that the purchasing company had not carried out any significant economic activity after the purchase and that the transfer had taken place a few days before the expiry of the three-year term, thus confirming the absence of economic substance in the operation and the sole purpose of maintaining the tax benefits.
