The Five-Year Rule: Selling a Qualifying Shareholding Under Italy's Flat Tax
Gains on qualifying shareholdings sold in the first five years of Italy's flat tax are taxed at 26%. The thresholds, how the years are counted, holding structures and how to plan the exit.
The flat tax for new residents covers almost all foreign income for a fixed €300,000 a year: dividends, interest, rents, and gains on the sale of foreign assets. Almost. The law makes one deliberate exception, aimed at people who might otherwise move to Italy for a year or two just to sell a company tax-free.
For the first five years of the regime, gains on qualifying shareholdings stay outside the flat tax and are taxed at ordinary Italian rates. For an entrepreneur planning an exit, this single rule can be worth more than the flat tax itself. This article explains what counts as a qualifying shareholding, how the five years are counted, how indirect holdings are treated and how to plan around the rule.
What the Rule Says
Article 24-bis of the Income Tax Code excludes from the flat tax the capital gains on qualifying shareholdings, as defined by article 67(1)(c), realised in the first five tax years of the option. Those gains are taxed under the ordinary rules, which for individuals today means a substitute tax of 26% on the gain. All other foreign gains, including gains on non-qualifying holdings and on foreign real estate, remain covered by the flat tax from the first day.
The Revenue Agency confirmed in circular 17/E of 2017 that the exclusion applies also to qualifying shareholdings in companies resident in low-tax jurisdictions. Being in a tax haven does not take a holding outside the rule.
Two technical points matter. Rights and instruments that give the right to acquire shares count towards the thresholds. And the thresholds are measured over a rolling twelve-month window: a series of small sales can add up to the sale of a qualifying stake.
How the Five Years Are Counted
The five years are the first five tax years of validity of the option. If you opt from the year of your move, they are years one to five. If you opt from the following year, the Revenue Agency counts the first year of residence as well: the clock starts when you become resident, not when the option begins. In both cases, a sale in year six or later is fully covered by the flat tax.
In the year of the move, the calendar matters too. If you arrive after 2 July, you are not Italian resident that year, and a sale completed in that year is outside Italian taxation altogether, subject to the rules of the country you are leaving. We explain the 2 July line in our article on the timing of the move.
Indirect Holdings: Trusts and Holding Companies
Many entrepreneurs hold their companies through a foreign holding company or a trust. Under the flat tax, foreign companies are not taxed as controlled foreign companies, and their dividends are covered by the fixed amount. That makes a sale at holding level tempting: the holding sells the operating company, then distributes the proceeds as a dividend covered by the flat tax.
The difficulty is substance. The Revenue Agency applies the principle of interposition: income received through an entity that is a mere screen is attributed directly to the individual. A trust that you control, or a holding company with no real activity, may be looked through, and the sale treated as if you had sold the shares yourself, within the five-year exclusion. A holding company with genuine management, staff and a real investment activity is in a much stronger position. This is a question of facts, to be documented before the sale, not argued after it.
Reporting During the Five Years
Holders of the flat tax are generally exempt from reporting foreign assets. Qualifying shareholdings are the exception: because they can produce taxable gains, they must still be reported in your Italian tax return, with their value, for the first five years. Omitting them exposes you to the penalties that apply to foreign asset reporting, even though no tax may be due that year. We cover the full picture of what remains reported in your Italian tax return under the flat tax in a separate article.
How to Plan Around the Rule
Can a Ruling Help?
An advance ruling cannot change the law: if a qualifying shareholding is sold in the first five years, the exclusion applies. Where a ruling helps is on the questions around it: whether a holding is qualifying, whether an interposed entity has enough substance to be respected, which year a deferred payment falls into, or whether you were non-resident in the year of a sale. For large exits, that certainty is often worth obtaining before signing.
Our View
The five-year rule is not a trap, but it is the most expensive detail of the flat tax for business owners. Map your shareholdings against the thresholds, put the expected exit dates next to the move date, and test any holding structure for substance before relying on it. Then decide whether the flat tax is right for you on the whole picture, as we explain in our article on who the flat tax really suits, and build it into your entry strategy.
Frequently Asked Questions
Are capital gains covered by Italy's flat tax?
Yes, with one exception: gains on qualifying shareholdings realised in the first five years of the regime are taxed at ordinary rates, currently 26%.
What is a qualifying shareholding in Italy?
More than 2% of the votes or 5% of the capital of a listed company, or more than 20% of the votes or 25% of the capital of an unlisted company.
When does the five-year period start?
From the first year of the option, and in any case from the first year of Italian residence if the option starts in the second year.
Does holding shares through a foreign company avoid the rule?
Not automatically. Entities without real substance can be looked through and the gain attributed to you. A holding with genuine activity is in a stronger position.
Do I have to report qualifying shareholdings under the flat tax?
Yes. During the five years they must be reported in the foreign assets section of the Italian tax return.
What if I sell before moving to Italy?
A sale in a year in which you are not Italian resident is outside Italian tax, though the country you are leaving may tax it.
Avv. Marco Mesina
Founder, Move to Dolce Vita · Avvocato, Milan Bar (Ordine degli Avvocati di Milano)
Marco is an Italian tax lawyer who advises individuals and families relocating to Italy on tax regimes, residency, citizenship, real estate and succession planning. Before founding Move to Dolce Vita he worked at Watson Farley & Williams, Withers and Deloitte in Milan.
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