A company merger is the tool through which two or more companies become one: to combine commercial strengths, simplify a group structure that has become unwieldy, or prepare for a generational handover. Done with the right timing and the correct documentation, a company merger can be tax neutral — but a mistake in the preliminary review can cost you your carried-forward tax losses, one of the most delicate aspects of the whole operation.
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How a Company Merger Works
The Italian Civil Code governs company mergers under Articles 2501 et seq.: it can take the form of a merger by union (the companies involved cease to exist and a new one is created) or a merger by incorporation (one company “absorbs” the others, which cease to exist). The typical process involves a merger plan, an updated balance sheet, the directors’ report, an optional experts’ report on the exchange ratio, filing and publication, and finally the merger deed — with a minimum creditor opposition period (60 days, with some exceptions) to protect third parties.
Tax Neutrality Isn’t Automatic
Article 172 of the Italian Tax Code (TUIR) provides that, in principle, a company merger is tax neutral: it doesn’t generate taxable capital gains or losses purely as a result of the merger itself. But “neutral” doesn’t mean “unchecked”. The company resulting from the merger takes over the tax positions of the merged companies, including — under certain conditions — their carried-forward tax losses.
The Vitality Test: The Point That Can Wipe Out the Tax Benefit
To carry forward the tax losses of the companies taking part in the merger, the law requires passing what’s known as the “vitality test”: the company whose losses are to be used must demonstrate, among other things, a minimum level of revenue and staff costs in the year before the merger, confirming it isn’t an empty tax shell with no real activity. If the test isn’t passed, the carried-forward losses stay blocked — a real risk when the merger involves companies with periods of reduced activity or undergoing restructuring.
What to Check Before Proceeding
- the actual value of each company’s assets, which underpins the exchange ratio;
- whether each company whose losses are meant to be carried forward passes the vitality test;
- any liabilities, disputes or guarantees given by the companies involved, which transfer with the merger;
- governance aspects (shareholder agreements, quorums, the rights of any minority shareholders);
- for cross-border mergers, the specific requirements introduced by Legislative Decree 88/2025 implementing the EU directive on cross-border mobility.
Many company mergers start from a simple need — combining two businesses that have already been working together for years, or eliminating an “empty” company left over in the group structure — but their technical execution should never be underestimated. A rough-and-ready merger plan, or a vitality-test check done too late, can turn a simplification exercise into a dispute with the Italian Revenue Agency over the carried-forward tax losses. That’s why it always pays to plan a company merger well ahead of the desired effective date.
How We Can Help
Studio Savia advises on company mergers from the preliminary analysis stage (including the vitality test on carried-forward losses) through to drafting the merger plan and the subsequent tax formalities. If you’re considering a merger between related companies or with third parties, let’s talk.
Merger by Union or by Incorporation: Which Form to Choose
Once the decision to proceed with a company merger has been taken, the first practical choice concerns its form. In a merger by incorporation, one existing company absorbs the others, which cease to exist: the absorbing company keeps its name, registration and contracts, which usually makes the operation simpler and quicker to manage, especially when one of the companies is clearly the operating core of the group. In a merger by union, all the companies involved disappear and a new entity is created: this is the preferred route when none of the parties wants to appear as the “survivor”, for instance when two businesses of similar size join forces on equal terms.
In both cases the sequence of steps is the same — merger plan, updated balance sheet, directors’ report, filing, creditor opposition period, merger deed — and so are the tax checks, starting with the vitality test on carried-forward losses. What changes is mainly the practical impact on contracts, licences and third-party relationships, which in a merger by incorporation continue in the name of the absorbing company. This is why the form of a company merger should be chosen at the planning stage, not adjusted afterwards.
Frequently asked questions about company mergers
What is the difference between a merger by union and a merger by incorporation?
In a merger by union, the companies involved cease to exist and a new company is created. In a merger by incorporation, one company absorbs the others, which cease to exist, while the absorbing company continues with its own name and registration. Both follow the same procedure under the Italian Civil Code.
Is a company merger always tax neutral?
In principle, yes: a company merger does not generate taxable capital gains or losses purely as a result of the merger itself. However, the company resulting from the merger takes over the tax positions of the merged companies, and the use of carried-forward tax losses is subject to specific conditions, including the vitality test.
What is the vitality test in a company merger?
It is the check required to carry forward the tax losses of the companies taking part in the merger. The company whose losses are to be used must show, among other things, a minimum level of revenue and staff costs in the year before the merger, proving it is not an empty shell. If the test is not passed, the carried-forward losses remain blocked.
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