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Legislative Decree No. 358 of October 8 1997 outlines a favourable tax regime for transfers and contributions of businesses and exchanges of participations in companies.

Capital gains from transfers of businesses which have been owned for at least three years will be subject to the favourable tax regime. This will be a substitutive tax at the rate of 27% applied instead of income tax. Businesses must apply for this substitutive tax in the same financial year in which the capital gains have been obtained. A 27% substitutive tax may also apply to transfers of participations of control or in affiliated companies.

Article 3 of the Decree refers to the taxable amount when it comes from a contribution of a business or of participations of control or in an affiliated company. It will be the value attributed to the participation appearing in the books of the transferor. If the value of the taxable amount is higher than this, that higher value is attributed in the books of the transferee. This criterion applies not only to transactions between resident companies, but also if the transferor or the transferee is a non-resident company.

Article 5 regulates the exchange of participations in companies. If limited company A acquires a participation of control in limited company B, assigning its own shares to the shareholders of company B, the transaction would not involve any income component. This means the cost of the purchased shares is the same as that of the exchanged shares. In the event of a differential in the value of the exchanged shares, the differential amount would be subject to the substitutive tax. The criterion of evaluation for the taxable income of the transferor is the value indicated in the corresponding item of the net assets of the transferee as a consequence of the transfer.

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