Italy’s Revenue Agency has determined that Serbia’s ten-year corporate income tax exemption for qualifying large investment projects constitutes a privileged tax regime under Italy’s participation-exemption rules, potentially increasing the tax burden on Italian investors exiting Serbian companies that use the incentive.
The decision was issued in Ruling No. 135/2026 and concerns the Italian tax treatment of capital gains generated when an Italian investor sells shares in a Serbian company benefiting from the Serbian tax holiday. Under Serbia’s current investment regime, companies that invest at least RSD 1 billion, or approximately €8.5 million, in fixed assets and create at least 100 permanent jobs may qualify for a corporate income tax exemption lasting up to 10 years. The exemption applies in proportion to the qualifying investment, while the required employment level must be maintained throughout the period in which the tax relief is used.
Italian tax ruling affects share disposals
The Italian Revenue Agency concluded that the Serbian incentive gives qualifying companies preferential tax treatment substantial enough to meet the definition of a privileged tax regime under Italian rules. The classification becomes relevant when an Italian investor disposes of shares in a Serbian company benefiting from the Serbian exemption.
Italy’s participation-exemption regime, commonly referred to as PEX, generally allows qualifying companies to exclude most capital gains from the sale of certain shareholdings from taxable income. One of the conditions for applying the exemption is that the company whose shares are sold must not be subject to a privileged tax regime. As a result, capital gains arising from the sale of shares in Serbian companies benefiting from the ten-year corporate tax exemption will not qualify for the Italian participation exemption. The resulting gains may instead be subject to ordinary taxation in Italy.
Transitional protections do not apply
The Revenue Agency also ruled that transitional protections introduced by Italy’s 2018 Budget Law cannot be used for these transactions. Those provisions, sometimes referred to as grandfathering rules, could otherwise preserve favourable tax treatment for certain investments made under earlier legislation.
The ruling does not remove Serbia’s investment incentive or prevent Serbian companies from qualifying for and using the tax exemption. Its effect is instead on the Italian tax consequences for investors holding shares in companies that benefit from the Serbian scheme.
Implications for Italian investors in Serbia
Italian companies and investment groups with Serbian subsidiaries will need to take the tax status of those subsidiaries into account when considering a sale or restructuring of their holdings. Whether a Serbian subsidiary uses the ten-year corporate tax holiday can affect the Italian tax treatment of a subsequent disposal, with potential consequences for transaction costs, valuations and investment exit strategies.
