This is the second of a series of posts on the major developments introduced by Law No. 205 (enacting the Italian Budget Law for 2018)
Corporate taxation – Changes to calculation of EBITDA for deduction of any excess of interest expenses
Article 96 of the Italian Tax Act (hereinafter “ITA”), provides that the deduction of interest, resulting from companies’ financial statements and referring to any transaction having a financial purpose (e.g. interest from loans, bonds issued, notional cash pooling or finance leasing agreements) is subject to the following rules: Firstly,interest expenses are fully deductible up to the amount of interest income and, secondly, any excess of interest expenses is deductible up to 30% of the EBITDA or gross operating margin (“reddito operativo lordo”, also“ROL”). EBITDA is calculated as the difference between the value of production (item A of the profit and loss schemes, contained in article 2425 of the Civil Code) and the costs of the production (item B) grossed up by depreciations, amortizations and financial leasing. However, if in any fiscal year the net interest expenses is higher than 30% of the EBITDA, the difference may be carried forward without time limitation for offsetting against available ROL. Also, if 30% of the EBITDA exceeds the net interest expenses in any fiscal year, the difference may be carried forward to increase the deductible limit.
Special rules apply in case of tax group consolidation, where any excess of net interest expenses (or 30% of the EBITDA) may be transferred to the companies belonging to the group, and used for that member’s deductibility of net interest expenses purposes.
A number of developments to the overall provisions were introduced by way of article 4 of Legislative Decree No. 147 of 2015. Specifically, for fiscal periods starting from 7 October 2015, Italian companies could also include, in the computation of the relevant EBITDA, a financial item such as dividends received from non-resident subsidiaries, provided that the Italian shareholder held a participation representing more than 50% of the voting rights in the ordinary shareholders’ meeting of the non-resident. Further, in case of tax group consolidation, the above Decree had repealed the opportunity to increase the EBITDA by adding the “virtual”ROL of non-resident subsidiaries, provided that a number of conditions were met (e.g. the Italian company held more than 50% of voting rights in the subsidiary, the fiscal year of the non-resident was aligned to the fiscal year of the group consolidation, and the financial statement of the non-resident was subject to independent auditing by a certified firm).
Budget Law for 2018, amending article 96(2) of the ITA, has finally repealed the possibility (recently) introduced by Legislative Decree No. 147 of 2015, to include the amount of dividends received from controlled non-residententities in the computation of the relevant EBITDA. Hence, the Italian regulation is now more in line with article 4(2) of the European Directive 2016/1164 (Anti-Tax Avoidance Directive). The foregoing will come into force with retroactive effects as from 1 January 2017, thus obliging taxpayers to review the “virtual” EBITDA for fiscal year 2017.
Entry into force of Law No. 205 of 27 December 2017: 1 January 2018.
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