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How US private equity sponsors can structure an Italian SPV leveraged buyout without triggering an Agenzia delle Entrate abuse-of-law challenge
The Italian tax authority challenged roughly 60 percent of all merger leveraged buyout structures audited between 2012 and 2023, according to data compiled by the Italian Revenue Agency's own litigation statistics published by the Ministry of Economy and Finance. For US private equity funds investing in Italian mid-market businesses — where deal values commonly range between EUR 20 million and EUR 150 million — that exposure was deal-breaking. On 20 June 2025, the Italian Court of Cassation, Tax Division, issued rulings nos. 16559 and 16567 of 2025 (Cass. civ., Sez. Trib., sent. 20 giugno 2025, nn. 16559 e 16567) and decisively shifted the ground / settled the matter. The issue is no longer… The issue is whether your deal documents prove a real change of control.
The abuse-of-law doctrine in Italian tax law is codified in Article 10-bis of Law 212/2000, known as the Statuto dei Diritti del Contribuente — Italy's Taxpayer Rights Act, broadly analogous to the US Taxpayer Bill of Rights, though with significantly wider scope. The provision disallows any transaction that, while formally lawful, lacks economic substance and is carried out principally to obtain an undue tax advantage.
For years, the Agenzia delle Entrate applied this standard to MLBOs by running a simple circularity test: if retained an interest in the target following completion — even as minority holders — the agency treated the entire structure as circular. The theory was that the debt serviced by the merged entity ultimately benefited parties who had already owned the company. Interest deductions claimed by the SPV were stripped out. Tax assessments followed, often three to four years after closing, when the structure had already worked its way through post-closing integration.
Unlike in most common-law jurisdictions, Italian tax law places the economic-substance burden partly on the taxpayer from the outset. In the United States, the IRS economic-substance doctrine under IRC Section 7701(o) is applied transaction by transaction, and a fully documented business purpose generally shifts the burden to the government. Italian practice before 2025 was harsher: split into two sentences; remove 'independently artificial'.
This is where most English-language commentary stops, and where the real structuring work begins.
Ruling 16567/2025 arose from an acquisition in the Italian energy sector. Pre-deal, two shareholders each held 50 percent of the target. Post-deal, through an SPV merger, each original shareholder held approximately 25 percent of the merged entity, with the incoming private equity fund holding the remaining 50 percent. The Agenzia delle Entrate argued that because the original shareholders were still present, the transaction was circular. The Court of Cassation rejected that argument and articulated why.
The Court's analysis distilled to four factors / turned on four factors that together establish a genuine change of control. First, the original shareholders must lose exclusive decision-making power — not merely dilute economically. The test is not about percentage dilution; it is about the loss of the ability to determine corporate strategy unilaterally. Second, the incoming investor must acquire a decisive governance position, whether through majority holding, casting vote mechanisms, or reserved-matters veto provisions / reserved matters regime that effectively shifts operational control. Third, the merger must produce a structural reorganisation, not merely a refinancing of pre-existing equity at a higher leverage multiple. Fourth, the transaction must be supported by a documented non-tax business reason that pre-dates the deal: industrial integration, new capital for growth, a management buyout with succession rationale, or private equity entry into a fragmented sector.
In the 16567 facts, the Court found all four factors present. The 50/50 pre-deal governance — where each historic shareholder effectively had veto power over everything — became a structure where neither historic shareholder could act without the PE fund's agreement. That is a genuine control shift. Residual minority presence alone does not undo it.
Verba volant, scripta manent — spoken words fly away, written words remain. The Court made clear that the non-tax business reason must be traceable in documents that pre-date closing, not constructed retrospectively in litigation.
For a US deal team, this means the paper trail starts at the letter of intent stage. The LOI should state explicitly why an MLBO structure was selected: the industrial logic of the merger, the PE fund's operational value-add thesis, the capital need of the target, or the succession dynamic in a family-owned mid-market company. That narrative should carry through to the board resolutions authorising the merger under Article 2501-bis of the Italian Civil Code (codice civile), which already requires disclosure of the financial resources used to repay acquisition debt — effectively a built-in disclosure obligation the deal team should use to its advantage, not treat as a formality.
The SPV's articles of association, shareholder agreement, and board composition must all reflect the control-shift narrative. If the PE fund holds 50 percent but the shareholder agreement gives historic shareholders a veto on all significant decisions, the structure is vulnerable regardless of what the LOI says. The documentation must be internally consistent.
Yes. The 2025 rulings do not grant a blanket exemption. They establish that an MLBO is not inherently abusive — a negative proposition. The Agenzia delle Entrate retains full authority to challenge any specific deal where the four-factor test is not met, where documentation is absent, or where the deal economics suggest that the principal purpose of the structure was the creation of deductible interest on debt that effectively refinanced an internal transfer.
Two risks remain specifically live. The first is the VAT deductibility question for SPV costs. The Italian Court of Cassation, Tax Division, in rulings nos. 22608 to 22649 of 2024 (Cass. civ., Sez. Trib., sentt. 2024, nn. 22608–22649) confirmed that an SPV may deduct VAT on advisory and financing costs on a prospective basis — meaning from the point at which it begins carrying out taxable transactions — but not on a retrospective basis for costs incurred before the merger becomes operative. Deal teams that book structuring fees to the SPV pre-merger and claim immediate VAT recovery remain exposed. The two ruling sets must be read together.
The second live risk is interest deductibility under Article 96 of the Italian Consolidated Income Tax Act (Testo Unico delle Imposte sui Redditi, TUIR). Interest deductibility is capped at 30 percent of EBITDA at the level of the merged entity. The MLBO ruling removes the abuse-of-law overlay, but it does not affect the TUIR cap. A PE fund financing 65 to 70 percent of acquisition value through SPV debt needs to model the EBITDA cover at the merged-company level from the outset, not as a post-closing reconciliation.
Post-merger, the SPV ceases to exist as a separate entity: it merges into the target under Italian law. Interest expense migrates to the surviving entity. Subject to the 30 percent EBITDA cap under Article 96 TUIR and provided the 2025 control-shift test is met, that interest is deductible. The ruling removes the prior risk that the Agenzia delle Entrate would re-characterise the entire debt service as an undue advantage and disallow it wholesale.
For US tax attorneys accustomed to the check-the-box election and the US interest limitation rules under IRC Section 163(j) — also a 30 percent EBITDA cap, notably — the mechanics are familiar. The difference is that Italian law offers no consolidated group interest relief equivalent to the US consolidated return rules: each Italian entity is analysed on a standalone basis unless it has elected the Italian tax consolidation regime (consolidato fiscale) under Articles 117 to 142 TUIR. A PE fund that owns a portfolio of Italian companies should assess whether consolidation is available and beneficial across the group before finalising SPV-level leverage.
In files involving PE-led acquisitions of Italian mid-market companies, the most common error is a LOI that describes the transaction purely in financial terms — enterprise value, EBITDA multiple, working capital mechanism — without a single sentence explaining why the deal is structured as an MLBO rather than a direct share acquisition. That absence creates a document gap that the Agenzia delle Entrate will exploit three years later when it issues a tax assessment (called an avviso di accertamento). Bridging that gap in litigation is expensive and uncertain. Putting two paragraphs in the LOI costs nothing.
Does the Cassazione 16559/2025 ruling apply to all Italian MLBOs, including non-PE transactions?
The ruling is a statement of principle applicable to all Article 10-bis challenges against MLBO structures, regardless of whether the acquirer is a PE fund or a corporate buyer. The four-factor control-shift test applies across deal types, though the documentation requirements will look different in a management buyout or a corporate carve-out than in a classic PE entry.
How long does an Agenzia delle Entrate audit of an MLBO typically take, and what does it cost to defend?
Italian tax assessments for MLBO structures are typically issued within five years of the tax period in question. Defence costs at first-instance level before the Tax Court (Corte di Giustizia Tributaria) range from approximately EUR 50,000 to EUR 200,000 in attorney fees depending on complexity, before any settlement or penalty payment. Early documentation reduces that exposure materially: a structured tax opinion prepared at closing costs a fraction of that figure.
Can former shareholders retain a board seat after an Italian MLBO without triggering an abuse-of-law challenge?
Yes, provided the shareholder agreement and articles of association make clear that board decisions require the incoming investor's consent on all matters of substance. A historic shareholder serving as a non-executive director alongside a PE-appointed majority board is consistent with the Cassazione 16567 control-shift analysis. A historic shareholder with a casting vote or a veto on reserved matters is not.
HREFLANG BLOCK:
Editorial Team — Panato Law Firm Staff
