Kath Day-Knight (Jane Turner) is still living in Fountain Lakes, Melbourne, however Kel (Glenn Robbins) has become a bore after their honeymoon period and Kim (Gina Riley) has moved back in after a divorce from Brett (Peter Rowsthorn), despite receiving marriage counselling from Marion (Marg Downey).

While visiting the local pharmacy for wart remover, Kath fills out a form for a chance to win a holiday to the (fictional) "Kingdom of Papilloma" on the heel of Italy (with the real scenes being filmed in Positano).

Initially asking Kel, who refuses to travel because of his fear of flying and his dedication to watching the finals of MasterChef, Kath reluctantly decides to take Kim and Sharon (Magda Szubanski) along on the trip.

Meanwhile, a strange noise can be heard echoing throughout the castle, eyes watch from holes in pictures, and a masked figure, revealed to be the son of Javier, Prince Julio (Erin Mullally), becomes attracted to Kim (thinking that she is royalty from her top bearing the title "Princess").

Disregarding Javier's protests, Julio unmasks himself, revealing a handsome face, blond hair hidden by a wig and his crooked teeth to be fake.

In a trance, he makes his way to the toilet, where he undresses before later collecting his luggage, opens the sealed door (with the plane having just pulled into the airport), triggering the evacuation slide and leaves.

Following the unsuccessful wedding, the royals (including Kath and Kim) along with Kel and Brett appear on a balcony above the town square, where the townspeople chant for food.

Javier decides to relinquish some of his power (allowing Papilloma to become a democracy), and a party with plentiful food is later thrown, which the townspeople attend.

At the party, Sharon passionately kisses Alain, who tells her he cannot return her affections because she is gay (which had been hinted at throughout the film, referencing Szubanski's real-life coming out), leaving her confused and disheartened before she meets Stephanie (Tasneem Roc), who shares her interest in golf and netball.