The ex-ante distributional impact of the Italian reform of the participation exemptions regime

Corporate tax microsimulation models are essential tools to estimate tax revenue, assess the impact of tax reforms, and carry out distributional analyses at the firm level.
The microsimulation model for firms currently being developed at the Bank of Italy aims at accurately simulating the effective tax burden on corporations to allow for the routine evaluation of fiscal policies geared towards the corporate sector. The model is the first to exploit information on tax liabilities contained in detailed financial statements to reconstruct the corporate income tax base at the firm level, which is next used for model validation. This represents an innovative approach to carry out micro-based model validation despite the lack of access to tax return microdata. The model can quantify the gap between financial accounting and tax accounting results, thanks to the modelling of major fiscal adjustments, such as participation exemptions, limits on interest deductibility, and tax depreciation, and replicate a few key stylized facts, such as: i) the widespread divergence between accounting and tax profits, with one fifth (one fourth) of firms with negative (positive) accounting profits showing positive (negative) tax profits; ii) the inverse U-shape of effective tax rates in firm size; iii) the greater impact of participation exemptions and interest payment deductions on large firms’ effective tax rates; iv) the countercyclical usage of loss carryforwards; v) the weaker impact on effective tax rates of accelerated depreciation schemes for intangible vs. tangible assets The work proposes an ex-ante evaluation of the most sizeable fiscal policy geared towards firms enacted with the Italian budget law in 2026, namely the introduction of a 5% participation threshold for the eligibility to the participation exemption (PEX) regime. The PEX regime seeks to eschew double taxation of corporate profits by making participation income (in the form of either dividends or capital gains) exempt. The EU “Parent-Subsidiary” Directive establishes that double taxation arises when the parent company holds, directly or indirectly, a participation stake worth at least 10%. Prior to the budget law 2026, the Italian PEX regime exempted all participation income. The newly introduced policy therefore partially aligns the Italian regime with the EU benchmark. The ex-ante distributional impact of the reform is hard to gauge. On the one hand, firms receiving participation income are less than 10% of total firms. On the other, there is a large empirical literature documenting that shareholding portfolio diversification increases with firm size. By exploiting Orbis information on the size of direct and indirect shareholdings, this work calculates the impact of the reform on firm effective tax rates, and tries to understand whether it was overall progressive, namely it redistributed the fiscal burden towards the largest firms. Finally, it discusses how potential endogenous responses in terms of portfolio reallocation might influence the results.