Revaluation of Shares, Leveraged Cash Out, and Abuse of Rights

The Court of Cassation has recently issued a ruling, judgment no. 6741/2025 dated March 14, 2025, concerning the issue of abuse of rights and circular transactions, with particular reference to leveraged cash outs. The traditional cash out scheme involves the revaluation and subsequent transfer of shares to a company controlled by the transferor. What distinguishes the leveraged cash out is that the consideration for the transfer of the revalued shares is not paid immediately, resulting in a debtor-creditor relationship between the acquiring company and the individual transferors, which is repaid through dividends distributed by the target company. These dividends benefit from a reduced tax rate of 1.2%, compared to the ordinary tax rate of 26% applicable to distributions to individual shareholders prior to the reorganization.

Specifically, the judges ruled that in the presence of valid non-tax reasons, which the taxpayer is required to demonstrate pursuant to Article 10-bis, paragraph 9, of Law 212/2000, the abuse of rights should be excluded.

In the case under consideration, the majority shareholders of Beta established a holding company (Gamma) to which they transferred, along with the minority shareholders, the entire participation in Beta, following revaluation with the payment of a substitute tax. The payment was made in installments: one part via dividend distribution from Beta to Gamma, and the other through a capital contribution by the shareholders and the issuance of four twenty-year bonds, which were subscribed to by the three majority shareholders.

The objective of the transaction was to use Beta’s profits to gradually repay the bonds. As a result, the shareholders of Gamma did not receive dividends as individuals but instead received repayment of the bonds.

The Court of Cassation, reiterating the centrality of the principle of freedom in business decisions, including those that allow for legitimate tax savings, concluded that the taxpayers had justified valid non-tax reasons. In particular:

-        The need to liquidate the minority shareholders of Beta, whose share transfer to Gamma enabled a smoother liquidation process;

-        The desire to establish a family holding company, thus making the ownership structure more homogeneous;

-        The necessity of maintaining confidentiality over strategic information, which, in the case of a contribution and the valuation report filed with the business registry, would have become accessible to third parties.

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