Participation exemption and tax arbitrage: Italy’s case

Marco Realdon ()

European Journal of Law and Economics, 2013, vol. 36, issue 1, 77-93

Abstract: This paper studies how participation exemption (PEX) tax rules for stocks owned by companies, which are frequent in EU countries, introduce tax arbitrage opportunities. The focus is on Italy’s PEX rules. PEX enables companies to make manufactured loans that generate tax exempt interest income by combining stocks with forwards or options. Borrowing through similar manufactured loans allows companies to bypass restrictions to deducting the cost of borrowing. PEX induced arbitrage exploitable through stock and options portfolios is available even when put-call parity holds for European options. Derivatives that hedge a stock can “inherit” the PEX regime of the stock they hedge. PEX gives companies that own a stock a tax timing option, which can be exploited through stock straddle strategies, i.e. long-short positions in the same stock, and which can generate valuable tax savings. Copyright Springer Science+Business Media, LLC 2013

Keywords: Participation exemption; Tax-timing options; Stock option valuation; Italy corporate tax; Tax arbitrage; G12; G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10657-010-9207-6

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