Italy 2026 Budget Law, Dividend Tax and IRAP: What Investee Companies, Foundations and Municipalities Must Do

Italy’s 2026 Budget Law (Law No. 199 of 30 December 2025) introduced sweeping Italy 2026 dividend tax and IRAP changes that directly affect the compliance obligations of investee companies, foundations and municipalities. The legislation raises the IRAP exclusion for qualifying dividends to 95 %, revises dividend taxation at shareholder level, and imposes new documentation and reporting requirements, with most measures effective from 1 January 2026 and certain rate adjustments taking effect on 6 April 2026. This practical guide sets out the scope of each reform, identifies which entities qualify, and provides entity-specific checklists, worked examples and template language so that CFOs, tax directors, trustees and municipal finance officers can act immediately.

What the 2026 Budget Law Changed: Quick Legislative Timeline

The 2026 Budget Law Italy enacted through Law No. 199 of 30 December 2025 was published in the Gazzetta Ufficiale on the same date and contains more than sixty articles covering taxation, investment incentives and public finance. The Ministero dell’Economia e delle Finanze (MEF) official summary groups the tax provisions into three clusters: corporate-level measures (IRAP and IRES), shareholder-level dividend taxation, and sector-specific adjustments for banks and financial intermediaries. The timeline below summarises the key effectivity dates that every affected entity should diarise.

Industry observers expect the staggered timeline to create a compliance bottleneck between now and the first annual-return filing cycle in late 2026, making early preparation essential.

IRAP and Dividends, the 95 % Exclusion: Scope and Mechanics of the Italy 2026 Dividend Tax and IRAP Changes

Under the reformed IRAP rules, 95 % of qualifying dividends received by a resident entity may now be excluded from the IRAP taxable base, a significant increase from the previous exclusion percentage. The change aligns IRAP treatment more closely with the existing 95 % participation exemption (PEX) available under IRES, reducing the effective double-layer tax burden on intra-group distributions. However, claiming the IRAP dividends exclusion 95 % is not automatic: it requires the receiving entity to satisfy specific conditions relating to the nature of the investee, the jurisdiction of incorporation and the holding period.

Which Dividends Qualify, Intra-EU/EEA and Other Conditions

The 95 % IRAP exclusion applies to dividends received from entities that meet all of the following requirements as set out in Law No. 199/2025:

• Residency of the distributing entity. The investee must be tax-resident in an EU or EEA member state, or in a jurisdiction that has an effective exchange-of-information agreement with Italy. Dividends sourced from non-cooperative jurisdictions listed in the ministerial decree are excluded.
• Minimum holding period. The participation must have been held continuously for at least twelve months prior to the distribution date. Interrupted or recently acquired holdings do not qualify.
• Commercial-activity test. The investee must carry on a genuine economic activity, passive holding structures with no substance may fail this requirement. The test mirrors the conditions already familiar from PEX analysis under Article 87 of the TUIR.
• Accounting classification. The dividends must be recorded as financial income in the receiving entity’s statutory accounts and not reclassified as trading income or short-term gains.

Banks and other financial intermediaries are subject to a sector-specific carve-out. According to EY analysis, these entities face a separate IRAP rate increase and cannot apply the standard 95 % exclusion on the same basis as non-financial corporates, a point examined in greater detail in the entity-specific guidance section below.

Documentation and Reporting Requirements, Practical Checklist

To claim the IRAP dividend exclusion, the receiving entity must assemble and retain a complete documentary package. Early indications suggest that Italian tax authorities will scrutinise claims during post-filing audits, making contemporaneous documentation critical.

1. Certificate of tax residency of the distributing entity, issued by the competent authority of the investee’s jurisdiction, dated no earlier than twelve months before the distribution.
2. Board resolution or equivalent corporate act of the distributing entity approving the dividend and confirming the distributable reserves from which payment is drawn.
3. Holding-period evidence, share-register extracts, custodian statements or notarial records proving continuous ownership for the required twelve months.
4. Substance declaration confirming the investee carries on genuine economic activity (employees, premises, decision-making in-country).
5. IRAP return workpapers showing the calculation of the exclusion, cross-referenced to the statutory financial statements.

All documentation should be available at the time of filing the annual IRAP return and preserved for the standard assessment period.

Worked Example, Company-Level IRAP Calculation Before and After

The following table illustrates how the 95 % IRAP exclusion affects the taxable base for a resident investee company receiving €1,000,000 in qualifying dividends from an EU subsidiary.

The saving is material even for mid-cap investee companies. For groups receiving dividends across multiple subsidiaries, the cumulative benefit can run into six or seven figures. However, the IRAP saving disappears entirely if qualification conditions are not met or if documentation is incomplete, reinforcing the importance of the checklist above.

Dividend Taxation at Shareholder Level, Rate Changes and Timing

Dividend taxation Italy 2026 has been reshaped at the shareholder level as well. Law No. 199/2025 adjusts the withholding-tax rates applicable to dividends distributed to individual shareholders, with revised rates becoming effective on 6 April 2026. The changes have implications for withholding agents, corporate payers and entities that pass dividend income through to individual beneficiaries such as certain foundations and trust structures.

Effect on Different Shareholders, Individuals, Corporations, Foundations, Municipalities

The Budget Law differentiates the treatment of dividend income according to the nature of the recipient:

• Individual shareholders (non-qualified holdings). Dividends continue to be subject to a final withholding tax, but the applicable rate has been adjusted upward from 6 April 2026. Individuals receiving dividends from companies in which they hold less than a qualified participation will face the revised rate at source.
• Individual shareholders (qualified holdings). Dividends from qualified participations remain subject to progressive IRPEF taxation on a portion of the gross dividend, with the includible percentage confirmed at the level set by the 2026 Budget Law.
• Corporate shareholders (IRES-subject entities). The existing 95 % PEX exclusion under Article 89 of the TUIR is maintained, meaning only 5 % of qualifying dividends are included in the corporate tax base. IRAP now mirrors this at the 95 % level for qualifying dividends.
• Foundations. Tax changes for foundations Italy depend on whether the foundation holds tax-exempt status. Tax-exempt foundations are not subject to withholding on dividends but must still document qualification. Taxable foundations apply the corporate rules, with the 95 % exclusion available for both IRES and IRAP purposes.
• Municipalities. Dividends received by municipalities from investee companies (such as local utility holdings) are generally exempt from IRES but must be reconciled against municipal tax obligations 2026 and public-accounting rules.

Withholding and WHT Interaction

Withholding agents, typically the distributing company or its paying agent, must apply the correct rate from 6 April 2026. Dividends resolved before that date but paid after it will require careful analysis of the applicable transitional rules. The likely practical effect will be that payers should split their withholding processes at the 6 April threshold to avoid under-withholding penalties.

Cross-Border Situations and Tax Credits

For dividends flowing into Italy from abroad, the recipient may be entitled to a foreign tax credit under the applicable double-taxation treaty or under unilateral relief provisions in the TUIR. The 2026 Budget Law does not alter the basic credit mechanism, but the interaction between the 95 % IRAP exclusion and the foreign tax credit computation must be handled carefully. Only the 5 % of dividends included in the IRAP base generates a corresponding credit entitlement; claiming relief on the excluded 95 % would constitute an over-claim.

In outbound scenarios, dividends paid by an Italian company to a non-resident, the domestic withholding rate applies unless reduced by treaty. Cross-border payers should update their WHT matrices to reflect the new rates from 6 April 2026 and ensure that treaty-relief certificates are current. The CMS Cross-Border Tax Forecast for Italy provides additional guidance on treaty interactions.

Entity-Specific Guidance, Investee Companies, Foundations, Municipalities

The practical impact of Italy 2026 dividend tax and IRAP changes varies significantly depending on the entity type. This section provides targeted checklists for the three categories most affected: investee companies, foundations and municipalities.

Investee Companies, Balance-Sheet, Reserve and PEX Considerations

Resident investee companies, whether they receive or distribute dividends, face a dual compliance burden. On the receiving side, they must verify qualification for the 95 % IRAP exclusion. On the distributing side, they must ensure that dividend resolutions, reserve classifications and PEX eligibility are aligned with the revised rules.

• Distribution resolution timing. Board resolutions approving dividend payments should specify whether the distribution is drawn from taxed reserves, tax-deferred reserves 2026 or share-premium reserves, as the characterisation affects the shareholder-level tax treatment. Distributions from tax-deferred reserves may trigger a tax charge at the company level if the reserves were previously sheltered.
• PEX eligibility testing. The Budget Law tightens dimensional criteria for PEX qualification, including turnover thresholds for the investee. Companies relying on the participation exemption for capital gains should re-test eligibility before any planned disposal. Related analysis is available in existing coverage of Italy’s private equity tax changes for 2026.
• IRAP base recalculation. The finance team should run a parallel IRAP calculation using the 95 % exclusion to quantify the benefit, adjust quarterly IRAP prepayments and update forecasts. Failure to adjust prepayments may result in under-payment penalties or, conversely, an over-payment tying up working capital.

Foundations, Charitable Status, Endowment Dividends, Trustee Checklist

The tax changes for foundations Italy introduced by the 2026 Budget Law require trustees and governing boards to re-examine distribution policies, endowment management and annual reporting.

• Tax-exempt status review. Foundations that have historically relied on a blanket exemption for dividend income should confirm that their registration with the Registro Unico Nazionale del Terzo Settore (RUNTS) remains current and that their activities continue to meet statutory charitable objectives.
• Endowment portfolio alignment. Dividends from non-qualifying jurisdictions or from investees that fail the commercial-activity test cannot benefit from the 95 % exclusion. Trustees should audit the endowment portfolio to identify any holdings that fall outside scope and consider restructuring where the IRAP cost is material.
• Distribution policies. Foundations that distribute endowment income to beneficiaries must ensure distributions are consistent with founding statutes and that withholding, if applicable, is applied at the correct rate from 6 April 2026 onward.
• Tax position memo. A formal tax position memo should be prepared for the trustee file, setting out the basis on which the foundation claims tax-exempt status for each category of dividend income and the IRAP exclusion for qualifying receipts.

Municipalities, Budgeting, Tax-Deferred Reserves, Public Accounting

Italian municipalities frequently hold equity stakes in local utilities, transport companies and service providers. Dividends from these investee companies constitute a meaningful revenue line in the municipal budget, making the municipal tax obligations 2026 under the Budget Law a priority for finance officers.

• Budget appropriation entries. Dividend income should be recorded in accordance with the principi contabili (public-accounting standards) applicable to local government. The IRAP exclusion does not alter the gross revenue figure but does affect the net tax cost, which should be reflected in the fiscal forecast.
• Tax-deferred reserves. Where a municipal investee distributes reserves that were previously tax-deferred, the municipality may face an unexpected tax charge at entity level. Council resolutions should specify the reserve category from which the dividend is drawn and obtain a certificate from the investee confirming the tax status of the reserves.
• Interaction with IRAP relief. Municipalities that are themselves subject to IRAP on commercial activities should apply the 95 % exclusion to qualifying dividends when computing their own IRAP base, subject to the same documentation requirements outlined above.

Comparison Table, Reporting Obligations by Entity Type

Operational Next Steps and Timeline: What to Do Now

Compliance with the Italy 2026 dividend tax and IRAP changes requires coordinated action across finance, legal and governance functions. The checklist below prioritises tasks by urgency and assigns suggested internal owners.

90-Day Priority Actions, Board Resolutions, Accounting Entries, Tax Disclosures

1. IRAP base recalculation (CFO / Tax). Run a parallel IRAP computation applying the 95 % exclusion to all qualifying dividends received in FY 2025. Adjust quarterly prepayments for FY 2026 accordingly.
2. Documentary audit (Tax / Legal). Assemble the full documentation package, residency certificates, holding-period evidence, substance declarations, for every investee from which dividends were or will be received.
3. Board or trustee resolution (Legal / Governance). Pass a formal resolution acknowledging the new rules and authorising the finance team to apply the 95 % exclusion. For foundations, the resolution should confirm consistency with charitable objectives.
4. Withholding-rate update (Tax / Payroll). Update internal WHT matrices and payment-processing systems to apply the revised individual-shareholder rates from 6 April 2026.
5. PEX re-testing (Tax / M&A). Re-evaluate PEX eligibility for all material participations in light of the Budget Law’s revised dimensional criteria, including turnover thresholds.

6–12 Month Actions

1. Filing amendments (Tax). If the 95 % exclusion applies retroactively to FY 2025 returns, prepare and file amended IRAP returns to claim the benefit or request a refund of overpaid IRAP.
2. Portfolio restructuring (Trustees / CFO). For foundations and municipalities, review investee portfolios to exit non-qualifying holdings where the IRAP cost exceeds the investment return.
3. Cross-border matrix update (Tax / International). Update the group’s treaty-relief and WHT matrix for all Italian-sourced and Italian-received dividends to reflect the interaction between the 95 % exclusion and foreign tax credits.

Template Language for Board Minutes and Trustee Resolutions

The following template may be adapted for use in board minutes or trustee resolutions to document the entity’s decision to apply the 95 % IRAP exclusion:

“The [Board of Directors / Board of Trustees] hereby resolves, in light of Article [●] of Law No. 199 of 30 December 2025 (the 2026 Budget Law), that the Company/Foundation shall apply the 95 % IRAP exclusion to qualifying dividends received during the fiscal year [●], subject to verification by the [CFO / Tax Director] that all conditions, including EU/EEA residency of the distributing entity, continuous holding for twelve months, and genuine commercial activity, are satisfied. Supporting documentation shall be assembled and retained in accordance with the checklist approved by the [Audit Committee / Tax Advisor].”

Risks, Audits and Common Pitfalls

The benefits introduced by the Italy 2026 dividend tax and IRAP changes are significant, but so are the risks of incorrect application. The following pitfalls are the most frequently encountered in practice and the most likely to trigger post-filing audits.

• Assuming automatic qualification. The 95 % IRAP exclusion is not self-executing. Entities that include the exclusion in their IRAP return without assembling contemporaneous documentation risk having it disallowed on audit, resulting in back-tax, interest and potential penalties.
• Overlooking the substance test. Investments in holding vehicles with minimal operational substance, even if EU/EEA-resident, may fail the commercial-activity requirement. The Italian tax authorities apply this test rigorously, drawing on guidance developed under the PEX regime.
• Misclassifying reserves on distribution. Distributing dividends from tax-deferred reserves 2026 without correctly identifying the reserve category can trigger an unexpected corporate-level tax charge. This is especially relevant for municipalities whose investee companies may hold multiple reserve layers.
• Failing to update withholding rates. Withholding agents that continue to apply pre-6 April 2026 rates after the effective date will under-withhold, exposing both the payer and the recipient to penalties.
• Interaction with sector-specific IRAP increases. Banks and financial intermediaries face a separate IRAP rate increase under the same Budget Law. Applying the 95 % exclusion while ignoring the higher rate produces an incorrect net calculation.
• PEX threshold failures. The Budget Law introduces revised turnover and dimensional thresholds for PEX eligibility. Entities that have historically relied on PEX without re-testing may discover, potentially too late, that a participation no longer qualifies.

Early indications suggest that the Agenzia delle Entrate will prioritise audit activity on entities claiming the IRAP dividend exclusion for the first time. Proactive documentation and pre-filing review are the most effective defences.

Conclusion

The Italy 2026 dividend tax and IRAP changes enacted through Law No. 199 of 30 December 2025 represent one of the most significant reforms to the Italian tax treatment of dividends in over a decade. The 95 % IRAP exclusion delivers a substantial reduction in the effective tax cost of intra-group and cross-border distributions, but only for entities that meet every qualification condition and maintain rigorous contemporaneous documentation. Investee companies, foundations and municipalities each face distinct compliance requirements, and the staggered effective dates (1 January, 6 April and 1 July 2026) demand an immediate, phased response.

Organisations that act now, recalculating IRAP bases, auditing documentation, passing formal resolutions and updating withholding systems, will be best positioned to capture the full benefit of the reform while avoiding the audit risks that will inevitably follow.

Sources

1. Ministero dell’Economia e delle Finanze (MEF), Main measures of the 2026 Budget Law
2. KPMG, 2026 Budget Law PDF
3. CMS, Cross-Border Tax Forecast 2026 (Italy)
4. PwC, Tax Summaries: Italy Corporate Tax Administration
5. A&O Shearman, Italy’s 2026 Budget Law: Practical Takeaways for Businesses
6. EY, Italian Parliament Approves 2026 Budget Law
7. Chiomenti, 2026 Budget Law Analysis
8. Bird & Bird, New Rules on the Tax Treatment of Dividends, Capital Gains and Financial Transactions
9. Fisco Oggi, Budget Law 2026: Incentives, Investments and New Tax Tools