How Italy's 2026 Budget Law and PEX Changes Affect Private Equity Deals: What Funds and Targets Must Know

Last updated: 2 May 2026

The Italy private equity tax changes 2026 represent one of the most consequential shifts in Italian deal economics in over a decade. Italy’s 2026 Budget Law (Law No. 199 of 30 December 2025) introduced new minimum-participation thresholds for accessing the participation-exemption (PEX) and dividend-exemption regimes, thresholds that were then partially rolled back by Decree Law No. 38 of 27 March 2026. The result is a layered, fast-moving regulatory picture that directly affects how funds structure acquisitions, model exits and distribute returns. This guide distils the legal changes, quantifies their commercial impact, and provides actionable mitigation steps for general counsel, CFOs and PE sponsors operating in or targeting Italy.

Executive Summary and Immediate Takeaways

Before examining the detail, the following points capture the core implications of the 2026 changes for private equity practitioners:

• New PEX access thresholds. The 2026 Budget Law restricts access to the 95 % participation exemption under Article 87 of the Italian Tax Code (TUIR) and to the dividend-exemption regime. To qualify, holdings must now represent at least 5 % of the target’s share capital or carry a tax value of at least EUR 500,000.
• Partial rollback via DL 38/2026. Decree Law No. 38 of 27 March 2026 eliminated or softened several of the dimensional thresholds originally imposed by the Budget Law, with retroactive effect from 1 January 2026, but interpretation remains uncertain in certain areas.
• Club deals and co-investment vehicles exposed. Structures that split equity across multiple co-investors, each holding sub-5 % stakes, may now fall outside PEX protection, turning a previously tax-efficient exit into a fully taxable event.
• Waterfall economics under pressure. Where the 95 % capital-gains exemption is lost, the effective corporate tax rate on exit gains jumps from roughly 1.2 % to up to 24 % (full IRES), fundamentally altering LP distributions and sponsor carry calculations.
• Immediate actions required. Funds should re-run exit models, reopen tax due diligence on pending deals, review holdco structures against the new thresholds and update SPA tax indemnity provisions.
• Cross-border complexity. The interaction between the revised PEX rules, EU Parent-Subsidiary Directive protections and bilateral tax treaties adds another layer of analysis for international fund structures.

Industry observers expect that the practical effect of these Italy private equity tax changes 2026 will be felt most acutely in mid-market club deals and minority co-investments, where holdings frequently sit below the new size thresholds.

What Changed in 2026: Budget Law, DL 38/2026 and the PEX/Dividend-Exemption Revisions

Legislative Sources and Effective Dates

Italy’s 2026 Budget Law was definitively approved at the end of December 2025 and entered into force as Law No. 199 of 30 December 2025. The law introduced amendments to the TUIR, specifically to Article 87 (participation exemption on capital gains for IRES taxpayers) and to the parallel provisions governing the 95 % dividend-exemption regime. As confirmed by the Italian Ministry of Economy and Finance, these measures took effect from 1 January 2026.

In a significant follow-up, the Italian government issued Decree Law No. 38 of 27 March 2026, commonly referred to as the “tax decree.” As noted in analysis by RLVT and Andersen Italia, DL 38/2026 partially restored the pre-Budget Law PEX and dividend-exemption framework, applying retroactively from 1 January 2026. The interplay between the Budget Law restrictions and the DL 38/2026 rollback requires careful statutory mapping for every transaction currently in progress.

The New Thresholds and Tests

The 2026 Budget Law limits access to the PEX and dividend-exemption regimes to shareholdings that meet at least one of two dimensional criteria, as confirmed by both the CMS 2026 Tax Forecast Guide and the Lexia analysis:

• Percentage test: the shareholding must represent at least 5 % of the target company’s share capital.
• Value test: the shareholding must have a tax value (valore fiscale) of at least EUR 500,000.

Holdings that fail both tests fall outside the exemption regimes entirely. For IRES taxpayers, this means that capital gains on disposal are no longer 95 % exempt but instead fully subject to corporate income tax at the standard 24 % IRES rate. Dividends received on such holdings similarly lose the benefit of the 95 % exclusion and become substantially taxable.

The remaining PEX conditions under Article 87 TUIR, including the 12-month holding period, classification as a financial fixed asset from the first balance sheet, and the requirement that the target conducts a genuine commercial activity and is not resident in a low-tax jurisdiction, continue to apply alongside the new dimensional thresholds.

What Was Rolled Back Versus What Was Restored

According to Clifford Chance’s March 2026 briefing, DL 38/2026 effectively eliminated the dimensional restrictions that the Budget Law had introduced, restoring access to PEX and dividend exemptions without the 5 % or EUR 500,000 floors. The decree applies retroactively from 1 January 2026. However, as RLVT’s analysis notes, the legislative situation remains fluid: the decree law must be converted into statute by Parliament within 60 days of publication, and amendments during the conversion process are possible. Early indications suggest that the core restoration will survive conversion, but practitioners should monitor the parliamentary proceedings closely before treating the rollback as settled law.

Who Is Affected: Funds, Held Companies, and Deal Types

Direct Investors (IRES Taxpayers) Versus Individual Investors

The PEX regime under Article 87 TUIR applies to IRES taxpayers, essentially Italian corporate entities and permanent establishments of non-resident companies. For these entities, qualifying capital gains are 95 % exempt, leaving an effective tax rate of roughly 1.2 % (5 % × 24 % IRES). The 2026 Budget Law’s dimensional thresholds primarily targeted this corporate-investor category.

Individual investors (subject to IRPEF) are taxed on capital gains and dividends through a separate regime (typically a 26 % substitute tax on financial income). The Budget Law changes to PEX had no direct impact on IRPEF taxation, but they are relevant where individuals hold stakes through Italian corporate vehicles, a common structure in fund formation and family-office investments.

Club Deals and Minority Holdings

The threshold changes hit club deals hardest. In a typical Italian club deal, a lead sponsor acquires a controlling stake while co-investors each take slices, often between 1 % and 4 % of equity. Under the Budget Law’s original rules, these co-investors would have failed both the 5 % and the EUR 500,000 tests, stripping them of PEX benefits at exit. While DL 38/2026 aims to restore protection, the conversion uncertainty means that clubs structured during Q1 2026 should have contingency plans for full taxation on minority positions.

The table below summarises how different entity types and holding sizes are affected under the evolving 2026 framework:

Impact on Deal Economics: Exits, Dividends, and Waterfall Modelling

Exit Scenario Modelling

The tax impact on PE exits in Italy can be illustrated with a simplified worked example. Consider a fund vehicle (an Italian S.r.l.) that acquired a 3 % co-investment stake in a target for EUR 300,000 and exits at EUR 1,300,000, realising a capital gain of EUR 1,000,000.

Pre-2026 / DL 38/2026 restored scenario (PEX available):

• Taxable portion of gain: 5 % × EUR 1,000,000 = EUR 50,000
• IRES at 24 %: EUR 12,000
• Effective tax rate on the gain: 1.2 %
• Net proceeds to the fund vehicle: EUR 1,288,000

Budget Law scenario (PEX denied, thresholds not met):

• Taxable portion of gain: 100 % × EUR 1,000,000 = EUR 1,000,000
• IRES at 24 %: EUR 240,000
• Effective tax rate on the gain: 24 %
• Net proceeds to the fund vehicle: EUR 1,060,000

The difference, EUR 228,000 on a single EUR 1 million gain, translates directly into reduced LP distributions and compressed sponsor carry. On a portfolio-wide basis, industry observers expect this to reduce gross IRRs by 150 to 300 basis points for funds heavily exposed to minority Italian co-investments, assuming PEX denial were to remain in force.

Dividend Distribution and Upstreaming Profits

The dividend exemption rollback in Italy mirrors the capital-gains impact. Where a holding company receives dividends from a target in which it holds a sub-threshold stake, the 95 % exclusion is denied, and the full dividend amount becomes part of the holdco’s taxable base for both IRES and IRAP purposes. The 2026 Budget Law did, however, introduce a 95 % IRAP exemption for intra-EU dividends, a concession confirmed by EY’s tax alert on the draft Budget Law, which partially offsets the damage for cross-border structures relying on EU subsidiary distributions.

For domestic upstreaming chains (target → holdco → fund), the compounding effect of losing the dividend exemption at one level and then facing further taxation upon distribution to LPs can reduce net cash-on-cash returns materially. Funds should model each level of the distribution waterfall to understand the cumulative tax drag.

Practical Deal-Structuring Options and Mitigation for Italy Private Equity Tax Changes 2026

Pre-Transaction Steps

Before signing, fund teams should undertake targeted diligence to quantify the exposure:

• Map every holding against the thresholds. For each entity in the acquisition structure, confirm whether it meets the 5 % percentage test or the EUR 500,000 value test (or both), and document the analysis.
• Assess the DL 38/2026 conversion risk. Until the decree law is converted into statute, there is a residual risk that Parliament amends or narrows the rollback. Deal models should carry two scenarios: PEX available and PEX denied.
• Review holdco classification. Verify that existing Italian holding companies still meet Article 87 TUIR’s operational requirements, genuine commercial activity, proper booking as a fixed asset from day one, and residence in a non-blacklisted jurisdiction.

Structural Options

Where the analysis reveals PEX risk, several structural remedies are available:

• Top-up equity to clear the threshold. If a co-investor’s stake is close to 5 %, consider increasing the commitment to cross the line. The cost of additional equity may be substantially less than the tax payable on an unexempted gain.
• Consolidate co-investment through a pooling vehicle. Rather than holding individually, co-investors can pool into a single S.r.l. or S.p.A. that holds a qualifying stake, provided this does not create adverse regulatory or governance consequences. This approach is particularly relevant for structuring exit strategies in complex multi-party arrangements.
• Use earnout or deferred-consideration mechanics. Structuring part of the exit price as a deferred or contingent payment can allow time for the legislative picture to clarify and for holdings to be reorganised if necessary.

Contractual Mitigations

On the documentation side, private equity deal structuring in Italy now demands enhanced tax-risk allocation clauses:

• Tax indemnities. Buyers should seek indemnification for any tax cost arising from a loss of PEX eligibility that traces back to pre-closing facts (for example, incorrect booking of a participation or failure to meet substance requirements).
• Purchase-price holdbacks and escrows. A dedicated tax escrow can protect against the risk that PEX benefits are denied on assessment, with release conditions tied to the expiry of the relevant statute of limitations.
• Tax gross-up clauses. Where withholding taxes or additional direct taxes materialise as a result of the 2026 changes, gross-up provisions ensure the economic burden is allocated as the parties intended.
• Specific PEX representations. Sellers should be asked to warrant that all conditions for PEX eligibility (including the new dimensional tests) were satisfied throughout the holding period. As with any M&A transaction, disclosure letters should expressly address PEX qualification status.

Cross-Border Considerations: Treaties, EU Parent-Subsidiary, and Anti-Abuse Rules

Treaty Relief Interaction and Documentation

For international fund structures, the PEX changes interact with Italy’s extensive treaty network. Where a non-resident corporate seller disposes of shares in an Italian target, the applicable double-taxation agreement may allocate taxing rights to the seller’s residence state, potentially overriding Italian domestic tax claims on the gain. However, treaty relief typically requires the seller to provide a valid certificate of tax residence and to demonstrate beneficial ownership.

Withholding Tax Exposure and Reclaim Procedures

Dividend distributions from Italian targets to non-resident parent companies are subject to Italian withholding tax (standard rate of 26 %, reducible under treaties or under the EU Parent-Subsidiary Directive to as low as 0 % for qualifying EU parents holding at least 10 % for 12 months). The 2026 Budget Law changes do not alter the withholding-tax framework directly, but they increase the importance of securing treaty or Directive benefits, because the loss of PEX at the Italian holdco level makes the domestic tax on dividends a binding constraint rather than a residual one.

Substance and Anti-Abuse Implications for Holdcos

Italy’s anti-abuse provisions (Article 10-bis of Law No. 212/2000) give the tax authorities the power to disregard arrangements that lack genuine economic substance and are implemented primarily to obtain a tax advantage. Restructuring a holding chain solely to clear the PEX dimensional thresholds, for example, by merging co-investment vehicles into a single entity with no operational rationale, could attract scrutiny. Practitioners should ensure that any restructuring has sound commercial justification beyond the tax benefit and is documented accordingly.

Fund-Level and Sponsor Implications

The 2026 changes carry knock-on effects for fund formation in Italy and for the economics of the GP/LP relationship.

Carried-interest taxation. Italian tax law provides a favourable regime for carried interest received by fund managers, generally taxing it at 26 % (capital-income rate) rather than as employment income, provided certain conditions are met. The Budget Law and DL 38/2026 do not directly amend the carried-interest provisions, but they affect the quantum of carry available: if a fund’s exit proceeds are reduced by higher taxes at the portfolio-company or holdco level, the carry pool shrinks correspondingly. LP reporting and clawback provisions may also need updating to reflect the revised after-tax waterfall.

Fund vehicle domicile. Sponsors evaluating whether to domicile a new fund in Italy versus an alternative jurisdiction (Luxembourg SCSp, Cayman ELP, or Irish ICAV) should factor in the increased uncertainty around Italian-level tax benefits. The likely practical effect will be that some managers tilt toward non-Italian fund vehicles while maintaining Italian management substance, a trade-off that requires bespoke structuring advice.

LP reporting. Tax-sensitive institutional LPs, particularly those from jurisdictions that offer credit for underlying foreign taxes, will need updated K-1 equivalents reflecting the new Italian tax charges. Fund administrators should build flexibility into their reporting templates for the 2026 fiscal year.

SPA and Tax Covenant Checklist for Buyers and Sellers

The following clauses should be addressed in every Italian M&A transaction closed during 2026:

• PEX eligibility representation. Seller warrants that all participation-exemption conditions under Article 87 TUIR (including any applicable dimensional thresholds) are satisfied as at completion.
• Tax-basis warranty. Seller confirms the tax cost base (valore fiscale) of each participation, enabling the buyer to verify compliance with the EUR 500,000 value test.
• Indemnity for PEX denial. A specific indemnity covering any additional tax liability (including interest and penalties) arising from a denial of PEX on gains accrued during the seller’s ownership period.
• Tax completion accounts. Mechanism for computing and settling interim-period tax liabilities, including any liability arising from the Budget Law / DL 38/2026 transition.
• Escrow provisions. Retention of a portion of the purchase price (typically 5–10 %) in escrow to cover contested tax assessments, with release conditions linked to the statute of limitations.
• DL 38/2026 conversion clause. A bespoke provision allocating the risk that the decree law is not converted or is materially amended during parliamentary proceedings.

Timeline and Next Steps for Funds

The legislative timeline is tight, and fund teams should act now:

• 30 December 2025: Law No. 199/2025 (2026 Budget Law) published in the Official Gazette and enters into force.
• 1 January 2026: New PEX dimensional thresholds take effect. All qualifying conditions must be tested from this date.
• 27 March 2026: Decree Law No. 38/2026 issued, rolling back the dimensional thresholds with retroactive effect from 1 January 2026.
• Late May 2026 (expected): Parliamentary conversion deadline for DL 38/2026. Amendments possible during the conversion process.

Urgent actions: Re-price any deal currently in diligence or pre-signing against both a PEX-available and PEX-denied scenario. Reopen tax due diligence workstreams to verify threshold compliance. Update waterfall models and LP reporting assumptions. Brief investment committees on the residual conversion risk.

Conclusion

Italy’s 2026 Budget Law and the subsequent DL 38/2026 have created a period of genuine uncertainty for private equity participants. Even with the partial rollback, the episode underscores three priorities that every fund should act on immediately: first, stress-test every Italian holding against both the Budget Law thresholds and the DL 38/2026 restoration, do not assume the rollback is final until parliamentary conversion is complete. Second, embed dual-scenario tax modelling into exit planning and LP reporting for any Italian portfolio company. Third, upgrade transactional documentation with PEX-specific representations, indemnities and escrow mechanics that allocate the risk of legislative change where the parties intend it to fall.

The Italy private equity tax changes 2026 are a reminder that tax efficiency in Italian deals must be actively maintained, not assumed, and that early engagement with experienced Italian private equity counsel is the most reliable way to protect deal economics through a shifting regulatory landscape.

Sources

1. Italian Ministry of Economy and Finance, Main Measures of the 2026 Budget Law
2. RLVT, Restoration of the Dividend Exclusion Regime and the PEX Regime
3. Andersen Italia, DL 38/2026: Novità Fiscali su PEX, Dividendi e Incentivi
4. CMS, 2026 Tax Forecast Guide in Italy
5. Clifford Chance, Italian Government Rollback of Capital Gains and Dividend Exemption Restrictions
6. Lexia, 2026 Finance Bill: Limits on PEX Regime and Impacts on Club Deals
7. EY, Italy Approves Draft 2026 Budget Law with Tax Measures
8. KPMG, 2026 Budget Law (Italy)