Kath Day-Knight is still living in Fountain Lakes, Melbourne, but Kel Knight has become a bore after their honeymoon period, and Kim Day Craig has moved back in after a divorce from Brett Craig, despite marriage counseling from Marion. 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 filmed in Positano). Initially she asks Kel Knight, who refuses to travel due to a fear of flying and his devotion to watching the finals of MasterChef, so Kath reluctantly decides to take Kim Day Craig and Sharon Strzelecki along on the trip. Coincidentally, Prue and Trude are clandestinely embarking on a holiday to Italy at the same time.
After a 50-plus hour flight, the three arrive in Italy exhausted. A stop at a cheap knock-off fashion shop re-energizes them, and they reach Papilloma to find their accommodation closed down. They decide to take a complimentary trip to the castle on a hill and meet page Alain, who Sharon Strzelecki takes a liking to, and King Javier, who takes a liking to [Kath Day-Knight], allowing all three to stay in the castle under the impression they are wealthy from their imitation-brand clothing and could help save him from bankruptcy. Meanwhile, a strange noise echoes through the castle, eyes seem to watch from holes in pictures, and the masked figure—revealed to be the son of Javier, Prince Julio (unseen in this cast list)—becomes attracted to [Kim Day Craig], thinking she is royalty because of her “Princess” title.
Javier shows [Kath Day-Knight] through the town, where it becomes clear he is not liked by the poor, who spit at him and even throw a tomato. He later invites the three to an ’80s-style club, where they dance to “Wake Me Up Before You Go-Go,” and Javier arrests a gay couple who were dancing, telling Kath that homosexuality is illegal in Papilloma. Later, they’re invited to a royal ball, with [Kim Day Craig] wearing a large pink gypsy-inspired dress. The masked figure approaches and proposes to Kim; she initially refuses, thinking his mask hides a disfigurement. Julio unmasks himself, revealing a handsome look, blond hair hidden by a wig, and crooked teeth to be fake. It becomes clear he is not the queen’s son, and Kim accepts, declaring she has “done worse,” which becomes worldwide news.
That same night, a fire is spotted on a turret. Rushing inside, the royals, Kath, Kim, and Sharon discover that the queen has appeared and started the fire from Kim and Sharon’s bedroom using Kim’s hair straightener. The queen is suddenly killed by a falling chandelier, and the fire is put out; Javier explains that the queen was locked up because she was “crazy,” jealous of his attraction to Kath and the source of the noises around the castle.
Back in Australia, Kel is watching MasterChef with Brett when a Papilloma news update interrupts the program, hinting at Kim’s royal wedding. Javier is shown grabbing Kath’s backside, and Kel believes she is having an affair. The couple decides to fly to Papilloma, but first Kel undergoes hypnosis therapy from Marion to combat his fear of flying, which turns oddly sexual and programs him with the phrase “Tray tables up.” While on the flight with Brett and Epponnee-Rae, now a spoiled child beauty-pageant participant, Kel hears the phrase during the cabin announcement and, in a trance, heads to the toilet, undresses, and later exits with his luggage, triggering the emergency slide as the plane docks.
In Papilloma, [Kath Day-Knight] confronts Javier about his despotic rule over Papilloma. [Kel Knight] interrupts as Javier attempts to make a move on Kath, and the two engage in a sword duel for her affections; Kel wins and Javier flees. [Kim Day Craig] and [Sharon Strzelecki] become lost while exploring their shared bedroom’s closet, with Kim having been sabotaged and targeted for assassination by maid Isabella, who loves Julio and earlier had taunted Kim. After wandering into a disco-like chamber, it’s revealed that Alain has kept all the imprisoned townspeople and homosexuals there, and they are soon freed. Kath and Kel, making their way to the wedding, discover the lost Kim and Sharon. Kim frets about her messy hair, but [Kath Day-Knight], in a fantasy moment, practises her amateur TAFE-learnt “wicca” on Kim, giving her a makeover and turning her into Dame Edna Everage.
With the four finally arriving at the wedding, Epponnee-Rae and Brett—who had traveled to Papilloma with Prue and Trude in attendance—interrupt Kim and Julio’s vows. A heated argument reveals Kim is not actually royalty, and that Julio is not Javier’s son, as he fathered no children. Gary Poole (Mick Molloy) is revealed to be an extradited royal descendant, making [Kath Day-Knight] a queen and [Kim Day Craig] a princess. Alain also confesses he was forced to sleep with the queen and fathered a daughter, the maid Isabella.
Following the failed wedding, the royals (including Kath and Kim) along with Kel and Brett appear on a balcony above the town square as the townspeople chant for food. Javier relinquishes some power, allowing Papilloma to become a democracy, and a grand party with plentiful food follows. At the celebration, [Sharon Strzelecki] passionately kisses Alain and learns he cannot return her affections because she is gay—an element hinted at earlier in the tale—leaving her puzzled. She then meets Stephanie who shares an interest in golf and netball. In the end, [Kath Day-Knight] and [Kim Day Craig] discuss returning to Australia after their remarkable, fairy-tale holiday.
