The recent decision by the Cgt of Trentino-Alto Adige has brought to light the critical 'commerciality' requirement for the participation exemption (Pex) regime under the Italian tax code.
The case in question involved a startup established in December 2008, with the goal of developing a prototype for industrial wastewater purification.
Despite initial efforts, the prototype failed to pass necessary technical tests, and the lack of additional capital led to the startup's liquidation.
Consequently, the founding company faced a capital loss, which the tax authorities deemed non-deductible as it related to a Pex participation.
The court's ruling emphasized that for a participation to qualify for Pex, the company must not only complete preparatory phases but also commence the business activity it was established for.
The judges highlighted that the Pex regime aims to facilitate the transfer of business assets that are functional enterprises.
Therefore, a causal link between preparatory activities and actual commercial operations is essential.
In this case, the startup's activities were deemed insufficiently developed to meet market demands, thus failing to satisfy the Pex criteria.
This ruling serves as a reminder for startups to ensure a clear transition from preparation to commercial activity to qualify for tax benefits.