Demerger of a professional firm: the tax treatment of pre-existing receivables
In the evolution of the professional services market, extraordinary transactions are playing an increasingly central role. Mergers, demergers, transformations and contributions are no longer merely tools for internal reorganization, but have become true strategic steps aimed at achieving scale, multidisciplinary integration and generational continuity within professional firms.
In this context, the tax treatment of “pre-existing” items is far from marginal. This issue was specifically addressed in Ruling No. 21 of 28 January 2026 issued by the Italian Revenue Agency, which examines the treatment of receivables accrued by a professional association and subsequently collected by a Società tra Professionisti (STP) resulting from a tax-neutral demerger pursuant to Article 177-bis of the Italian Income Tax Code (T.U.I.R.). The tax authorities clarified that, when such fees are collected by the STP, they are not subject to withholding tax, as they contribute to the business income of the receiving entity.
This clarification is relevant beyond the specific case at hand. It sits at the intersection of tax regulation and the organizational transformation of professional firms, offering useful guidance also for structuring M&A transactions in the sector.
The case under analysis concerns a total asymmetric demerger of a professional association composed of lawyers, chartered accountants and labor consultants, aimed at continuing the activity in corporate form. The structure of the transaction is also influenced by the specific regulations governing legal practice, which restrict the exercise of the profession in corporate form to law firms, thereby excluding, in certain cases, the possibility of a simple transformation of an association into a multidisciplinary company. Hence the need to resort to a demerger.
The key issue concerned professional fees already accrued and invoiced by the association, but not yet collected at the time of the transaction. Under the mechanism provided by Article 177-bis, paragraph 4, of the T.U.I.R., the objective is to avoid gaps or double taxation when moving from an entity determining its income under self-employment rules to one producing business income. From this perspective, items that have not yet contributed to income under the cash basis become relevant when the financial realization occurs in the hands of the successor entity. The example provided in the ruling is particularly clear: a professional receivable not yet collected at the time of the transfer to the STP contributes to the company’s income upon collection.
While the income classification appeared substantially consistent with the framework of the rule, the issue of withholding tax under Article 25 of Presidential Decree No. 600/1973 remained unresolved.
The doubt arose because the services to which the fees referred had been performed when the activity still had a professional and associative nature. From a strictly formal perspective, it could therefore be argued that the withholding agent should still apply the withholding tax, since the payment originated from self-employment services. The ruling request itself, as a precaution, was based on this possible interpretation.
However, the Italian Revenue Agency adopts a systemic approach. According to the ruling, what matters is the tax classification of the entity receiving the payment at the time of collection. Since, following the extraordinary transaction, the recipient is an STP generating business income rather than self-employment income, the payment does not fall within those subject to withholding tax.
This represents a significant step, as it emphasizes the tax regime of the recipient at the time of collection, moving beyond a purely historical interpretation of the underlying service.
Therefore, in transactions involving the transition from a professional organizational model, such as an individual or associated practice, to a corporate structure, the correct tax qualification of pre-existing items cannot be addressed through purely static logic. Instead, it is necessary to consider the continuity of the economic relationship and the tax regime of the entity that ultimately assumes ownership of the realization phase.
The application of this principle entails several practical considerations throughout all stages of the transaction. First, in financial and tax due diligence: where receivables accrued prior to the transaction are transferred, they must be assessed not only in terms of collectability, but also with regard to the tax treatment applicable upon collection. An incorrect approach may distort cash flow projections and directly or indirectly affect the valuation of the transaction. Secondly, in contractual structuring, the treatment of such pre-existing items must be carefully regulated in the transaction documents, clarifying, for example, who will benefit from subsequent collections, who will bear any tax burdens, and how communications with all relevant parties should be managed.
With specific reference to the post-transaction execution phase, one of the most practical aspects of the ruling emerges. The Italian Revenue Agency specifies that, due to the tax liability borne by withholding agents, the STP must issue a specific declaration informing them of the demerger and confirming that the recipient entity is no longer subject to withholding tax.
This guidance is particularly relevant as it highlights that proper tax treatment is not limited to interpretation but also requires appropriate administrative processes. In the absence of clear information flows, it is easy to envisage that the client or other paying party may automatically apply withholding tax, following standard internal procedures. The Agency also clarifies that, even in such cases, the STP may offset the withholding tax suffered against its IRES taxable base, starting from the tax return relating to the period in which the withholding was applied.
The Italian Revenue Agency’s ruling therefore provides useful guidance for M&A transactions involving professional firms. On the one hand, it clarifies the tax treatment applicable to transferred pre-existing receivables; on the other, it outlines an interpretative approach consistent with the increasing organizational complexity of the sector. In a market where extraordinary transactions are becoming an integral part of firms’ growth strategies, and which has recently attracted the interest of investment funds, the correct tax treatment of “boundary” items proves to be a decisive factor for the successful execution of such transactions.
