Abuse of law in M&A transactions

Every extraordinary transaction has tax consequences. A leveraged acquisition generates interest expense, a reorganisation moves shareholdings and dividend flows, and the choice between a share deal and an asset deal changes the registration tax. Choosing the most tax-efficient structure is legitimate, and the law says so expressly.

The boundary lies elsewhere. The tax authorities may disregard the tax benefits of transactions lacking economic substance, designed essentially to obtain a tax saving that the system does not intend to grant. This is the prohibition on abuse of law, and for years it cast uncertainty over precisely the structures most widely used in private equity and family reorganisations.

Between 2025 and 2026 the Court of Cassation and administrative practice gave important guidance on four fronts: the merger leveraged buy-out, the leveraged cash-out, registration tax on share and business transfers, and VAT on transaction costs. The resulting picture is more favourable to market participants, on one condition: that the economic reasons for the transaction are real and documented.

The rule: art. 10-bis of the Taxpayers' Statute

The general rule is art. 10-bis of Law 212/2000 (the Taxpayers' Statute). There is abuse when three elements are present together:

1. transactions lacking economic substance, that is, incapable of producing significant effects other than tax benefits;
2. an undue tax advantage, contrary to the purpose of the rules or to the principles of the legal system;
3. that advantage being the essential effect of the transaction.

The same provision sets two limits. A transaction is not abusive if it is justified by sound, non-marginal non-tax reasons, including organisational or managerial ones, aimed at improving the structure or functioning of the business. And taxpayers remain free to choose between optional regimes or between transactions carrying different tax burdens.

The procedural rules also matter:

• the burden of proving abusive conduct lies with the tax authorities, while the taxpayer must demonstrate the non-tax reasons;
• the assessment must be preceded, on pain of nullity, by a request for clarification addressed to the taxpayer;
• before carrying out the transaction, an anti-abuse ruling may be requested from the Revenue Agency.

On 27 February 2025 the Ministry of Economy and Finance also issued a policy guidance document on the application of art. 10-bis, reaffirming its requirements ten years after the rule was introduced.

Merger leveraged buy-out: change of control is what counts

In a merger leveraged buy-out, a vehicle company borrows to acquire the target and then merges with it. The acquisition debt thus ends up in the company that generates the cash flows to repay it, and the interest expense becomes deductible within the limits of art. 96 of the Consolidated Income Tax Act (TUIR). Under civil law the transaction is specifically regulated by art. 2501-bis of the Civil Code.

As early as 2016 the Revenue Agency acknowledged, in Circular no. 6/E, that the structure is not abusive in itself. Challenges nonetheless continued, especially where the sellers remained shareholders after the transaction.

In two twin judgments of 20 June 2025 (Cass. nos. 16559 and 16567/2025) the Court of Cassation identified the decisive criterion: a substantial change in the control structure of the target company. In the case decided, two 50% shareholders had dropped to 25% each and a new shareholder had acquired the other half. The continued presence of the original shareholders was not held sufficient to found abuse, because their exclusive control had ceased and the transaction formed part of a broader reorganisation project. The interest expense was therefore held to be deductible.

The risk remains for circular structures, in which the control structure is substantially unchanged and the only concrete effect is to move the debt into the operating company.

On the civil law side, a ruling of July 2026 (Cass. no. 22585/2026) clarified that the prohibition on financial assistance applicable to an S.r.l. (art. 2474 of the Civil Code) does not in itself make unlawful a leveraged buy-out carried out through a merger governed by art. 2501-bis, provided that its safeguards are respected.

Leveraged cash-out: a case-by-case assessment

The leveraged cash-out is more delicate. In its typical form, individual shareholders sell their shares, often after stepping up their tax base, to a vehicle company they themselves control, which borrows to pay the price. The debt is then repaid out of the profits of the company sold, possibly after a merger.

The Revenue Agency has often seen this as a distribution of reserves disguised as a sale: the shareholders extract the company's cash taxed as a capital gain, or untaxed thanks to the step-up, rather than as a dividend.

The Supreme Court case law has not given a single answer, but it has set a method. In order no. 6741 of 14 March 2025 the Court of Cassation ruled out abuse in a transaction underpinned by a genuine reorganisation purpose, held capable of giving economic substance to the series of transactions as a whole. Other rulings in the same year, however, confirmed the abusive nature of reorganisations in which the reasons put forward were neither concrete nor proven.

The variables that count are therefore:

• the existence of real organisational reasons, such as generational succession, the exit of some shareholders or the creation of a holding company that genuinely manages the group;
• the make-up of the shareholder base before and after the transaction;
• the sustainability of the debt and its relationship to the distributable reserves of the company sold;
• the sequence of the steps and the consistency of the supporting documentation.

Registration tax: share deal or asset deal?

The choice between a share deal and an asset deal has a significant impact on registration tax. A transfer of shares or quotas attracts a fixed tax, a transfer of a business attracts proportional tax.

For years the tax authorities recharacterised two recurring structures as transfers of a business: the sale of 100% of the quotas, and the contribution of a business to a company followed by the sale of its shares. The tool was art. 20 of Presidential Decree 131/1986, read as allowing the authorities to look at the economic effects of the transaction as a whole.

The legislature intervened in 2017 and 2018: a deed must be taxed on the basis of what can be inferred from the deed itself, without regard to external elements or linked deeds. The Constitutional Court upheld this choice, and the Court of Cassation drew the consequences. Throughout 2025 numerous rulings (including Cass. nos. 18357 and 18374/2025) excluded that a sale of 100% of the quotas, even if preceded by a contribution of a business, could be recharacterised as a transfer of a business.

One point of caution remains. Art. 20 is no longer an anti-avoidance tool, but the authorities can still challenge a sequence of deeds under art. 10-bis, with the procedural safeguards and burden of proof that provision entails. In this area too, documenting the non-tax reasons for the transaction remains decisive.

VAT on transaction costs: recovery and new deadlines

In an acquisition the vehicle company incurs significant costs: legal, tax and financial advice, due diligence, notarial fees. For a long time practice denied the deduction of VAT on these costs, because the vehicle was regarded as a passive holding company without taxable person status.

In two judgments of 9 August 2024 (Cass. nos. 22608 and 22649/2024) the Court of Cassation recognised, subject to certain conditions, the deductibility of VAT incurred by the vehicle company on the preparatory costs of a merger leveraged buy-out.

The problem remains for transactions already completed, in which the deduction had not been claimed out of caution. In ruling no. 58 of 2 March 2026 the Revenue Agency ruled out an amended return, because the failure to deduct resulted from a deliberate choice rather than an error. It did, however, allow a refund under art. 30-ter of Presidential Decree 633/1972, with the two-year time limit running from the judgments of 9 August 2024. The taxpayer must show that it recorded the invoices, did not deduct the tax and, if the VAT had been booked as a cost, that it added it back for tax purposes.

On this reading the two-year deadline expired in August 2026. Those who did not file a claim should check with their adviser whether any room remains, also in light of the circumstances of the case.

For future transactions the picture is more favourable. From 12 August 2026, Legislative Decree 148/2026 allows the deduction to be claimed up to the tax return for the second year following the year in which the right arose. It remains essential to structure the vehicle so that it genuinely manages the target and so that the costs are consistent with taxable transactions.

Safeguards to adopt

The 2025-2026 rulings shift the debate with the tax authorities from the form of the transaction to its substance. Anyone structuring an extraordinary transaction must therefore be able to demonstrate its economic reasons years later. A few precautions help.

1. Document the project before carrying it out. Business plan, corporate resolutions, advisers' memoranda: the non-tax reasons should be put in writing when the transaction is decided, not reconstructed during a tax audit.
2. Record the control structure. In leveraged acquisitions it is worth keeping a record of the shareholder base before and after the transaction, because change of control is the first thing the tax office and the court will examine.
3. Test the sustainability of the debt. The economic and financial plan required by art. 2501-bis of the Civil Code also serves a tax purpose, because it shows that the borrowing follows a business rationale.
4. Consider an anti-abuse ruling for the most exposed transactions, such as leveraged cash-outs or family reorganisations involving cash going out to shareholders.
5. Allocate the risk in the contract. In acquisitions, the seller's tax warranties, indemnity clauses and any W&I policy should be coordinated with the risks identified in due diligence.
6. Respond carefully to the request for clarification. This is when the taxpayer can make its case before the assessment, and the answers given will carry weight in any subsequent litigation.

Tax planning remains legitimate, but it requires method: a well-reasoned, well-documented transaction is the most effective defence against a challenge for abuse of law.