The principles outlined in the section on Income determination also apply for deductible costs.
Depreciation and amortisation
All fixed assets that are used in the business of the company, except land, are depreciable for tax purposes (for both IRES and IRAP).
For IRES, the maximum depreciation rates for fixed tangible assets are set forth in a Ministerial Decree. Such depreciation rates are different, depending on the type of asset and on the economic sector in which the company operates. In the event that financial accounting depreciation exceeds the amounts allowed for tax purposes, temporary differences arise. Tax depreciation of fixed tangible assets is allowed from the tax period in which the asset is first used. In the first tax depreciation period, the depreciation rate cannot exceed one-half of the normal rates.
An additional IRES depreciation is granted for new investments on fixed tangible assets purchased from 15 October 2015 to 31 December 2017. In particular, the relating cost is increased by 40%, bringing the taxable basis of the asset to 140%. The eligible assets are those whose tax amortisation rate is higher than 6.5%.
The benefit is also applicable to investments made by 30 June 2018, provided that, by 31 December 2017, the following conditions are met:
- the purchase order has been accepted by the seller, and
- at least 20% of the purchase cost has been paid.
For new investments carried out in FY 2017 in hi-tech, cloud, ultra broad band, industrial robotics, digital manufacturing, IT security, etc. a notional increase of the purchase cost of 150% has been introduced for tax depreciation, bringing the IRES basis of the assets to 250%.
The benefit applies to eligible investments made from 1 January 2017 until 31 December 2017 or by 30 June 2018, provided that, by 31 December 2017, the following conditions are met:
- the purchase order has been accepted by the seller, and
- at least 20% of the purchase cost has been paid.
A notional increase of 40% of purchase cost of intangible assets (e.g. software, systems, platforms and applications connected to hi-tech investments, etc.) is also possible. The benefit applies to software, IT systems and integration systems, platforms and applications, etc.
As for leasing contracts, the benefit is addressed only to the lessee and not to the lessor. Capital goods acquired with operational lease contracts or rental contracts are excluded from the benefit.
Land is not a depreciable asset. Amortisation of goodwill derived from an asset deal and amortisation of trademarks are deductible for an amount not exceeding 1/18 of the cost in any year.
Patents, know-how, and other intellectual property (IP) may be amortised over a two-year period.
Concession rights may be depreciated with reference to the utilisation period as determined either by law or in the relevant agreement.
For IRAP purposes only, depreciation and amortisation (other than as related to goodwill and trademarks) are deductible in accordance with the amounts reported in the financial statements, regardless of the limits outlined above.
Leasing expenses booked in the profit and loss statement pursuant to Italian GAAP are fully deductible from the IRES taxable base if the relevant agreement has a minimum duration period. In particular, if the agreement is executed as of 1 January 2014, the duration required is the following:
- For fixed tangible assets, at least half of the depreciation period as set forth in the above Ministerial Decree.
- For real estate, at least 12 years.
Longer minimum duration periods are provided for financial leasing agreements executed before 1 January 2014.
Generally, interest expense is fully tax deductible up to the amount of interest income. Thereafter, excess interest expense is deductible at up to 30% of the gross operating margin (interest deduction capacity) as reported in the financial statements. Gross operating margin is defined as the difference between operating revenues and expenses excluding depreciation of tangible and intangible assets and charges for leased assets as stated in the profit and loss account for the year.
Net interest expense in excess of the yearly limitation is carried forward indefinitely. Hence, net interest expense not deducted in previous years can be deducted in any future fiscal year as long as total interest in that year does not exceed 30% of gross operating margin. If net interest expense is lower than the annual limit (i.e. 30% of gross operating margin), this difference can be carried over to increase the company’s interest deduction capacity in future years.
The inclusion of dividends received from foreign subsidiaries in the computation of the ‘earnings before interest, tax, depreciation, and amortisation’ (EBITDA), used to determine the interest expenses deductibility limit, is allowed.
Where an election is made for the domestic tax consolidation regime (as discussed in the Group taxation section), the net interest expense limitation applies to the consolidated tax group. As a consequence, if a company participating in a tax group has an excess interest deduction capacity, this excess may be used against the interest deduction deficit in another company belonging to the same tax consolidation group. Under specific conditions, non-resident subsidiaries can also be ‘virtually’ included in the tax consolidation for the sole purpose of transferring their excess capacity over 30% of gross operating margin in order to increase the overall interest deduction capacity of the Italian group.
The above-mentioned rules are not applicable for financial institutions, such as banks and insurance companies, where the deductibility of interest expense (for both IRES and IRAP purposes) is limited to a fixed amount of 96% of the interest expense shown in the income statement of these entities. Starting from FY 2017, holdings and banks will be allowed to fully deduct interests.
The tax authorities have provided some general guidelines regarding leveraged buyout (LBO) operations. The latter shall be considered legitimate and interests arising from related acquisition financing shall be considered, in principle, deductible within the ordinary limits (30% of EBITDA, transfer pricing rules, etc.).
Allowance for Corporate Equity (ACE)
The ACE is a deduction that corresponds to the net increase in the equity employed in the entity, multiplied by a rate yearly determined by the Ministry of Finance. This rate is equal to 1.6% for FY 2017 (previously 4.75%) and to 1.5% for FY 2018 and onwards.
The relevant increase is determined by the equity contributions and by the retained earnings (except profits allocated to a non-disposable reserve) less the following items:
- Reductions of the net equity with assignment to shareholders, including, in particular, dividend distribution.
- Investments in controlled companies.
- Certain intra-group business acquisitions.
If the allowance for a year is higher than the net IRES taxable base, the difference will be carried forward to the next periods.
To calculate the equity increase, the reference equity is disclosed in the financial statements for the fiscal year current as at 31 December 2010, net of the profits for the same year.
Yearly provision for bad debts not guaranteed by third parties and relating to sales of goods and services is tax deductible at up to 0.5% of the receivables gross value. Deduction shall no longer be permitted when the total amount of the bad debts reserve exceeds 5% of the above-mentioned gross value of the receivables as of the end of the fiscal year.
Regardless of the above, losses on bad debts shall be deductible if supported by precise and objective elements or, in any case, if the debtor is subject to bankruptcy proceedings, including foreign ones.
A loss on a bad debt can be deducted for IRES purposes when the following conditions jointly apply:
- The term for payment has elapsed by six months.
- The receivable has a determined threshold. In particular, the item is up to EUR 2,500 for small companies and up to EUR 5,000 for big corporations (with turnover over EUR 100 million).
The loss is tax deductible, regardless of the amount, when the collection right is prescribed.
Further changes are intended to make certain the identification for the year attributable to the deductibility of the loss. Specifically, the deduction of the loss is allowed in the period charged to the balance sheet, even if that offsetting is performed in a tax year following the year in which there are the precise and objective elements, or the debtor is considered subject to bankruptcy proceedings.
Moreover, losses are tax deductible in case of derecognition of bad debts applied in compliance with accounting standards (both Italian Generally Accepted Accounting Principles [GAAP] and IFRS), always provided the inherence test is met.
Deduction of charitable contributions is allowed. The amounts allowed for deductions depend on the specific features of the recipient entity, and specific limitations are set by the law.
For IRES purposes, expenses for gifts and entertainment that meet the requirements (both qualitative and quantitative) contained in the specific Ministerial Decree are fully deductible in the tax period in which they are incurred. Entertainment expenses that do not meet these requirements cannot be deducted. As of FY 2016, the thresholds for the tax deductibility are increased.
Expenses related to gifts with a value of EUR 50 or less are entirely deductible.
For IRES purposes, the deduction for travel expenses incurred within the municipality is limited to 75% of the amount incurred. However, the VAT related to such costs is fully recoverable.
The IRES deductibility of expenses related to cars used by companies is as follows:
- 20% for cars that are not assigned to employees or are granted to employees solely for business use.
- 70% for cars granted to employees for both business and private purposes.
Car costs may be entirely deducted if (i) automobiles are absolutely necessary for the company’s business or (ii) automobiles are an essential element in the company’s activity (i.e. vehicles owned by a car rental company).
For IRES purposes, up to 80% of the total expenses related to both mobile and landline telephones are deductible.
Fines and penalties
Fines and penalties are generally not considered inherent costs and are, consequently, not deductible for tax purposes.
The following IRAP items are deductible in determining the IRES taxable base:
- 10% of IRAP paid during the year.
- An amount determined on the IRAP paid on the cost of employees, net of the relevant deductions.
IMU is deductible for IRES purposes at up to 20% of the amount paid in the fiscal year, whereas no deduction is allowed for IRAP purposes.
Purchases from suppliers resident in tax haven jurisdictions
Expenses incurred for goods and services bought from entities resident in ‘tax haven’ jurisdictions are fully tax deductible.
Net operating losses
Tax losses can be carried forward for IRES purposes and used to offset income in the following tax periods without any time limitation.
Tax losses can only be offset with taxable income for an amount not exceeding 80% of the taxable income. Thus, corporations are required to pay IRES on at least 20% of taxable income.
Note that losses arising in the first three years of activity can be offset with 100% of taxable income.
For IRAP purposes, tax losses may not be carried forward.
Specific (tax anti-avoidance) rules limit the carryforward of tax losses in the event of:
- change of control and
- an effective change of the main activity (performed by the company carrying forward the losses).
The aforementioned changes must occur together in order for the limitations to be applicable. The change of the main activity is relevant for these purposes if it takes place in the tax period in which the change of control occurs or in the two subsequent or preceding periods.
Specific anti-abuse provisions are also applicable to net operating losses in cases of merger or demerger.
In Italy, tax losses may not be carried back.
Payments to foreign affiliates
Transactions with foreign affiliated companies should be at ‘fair market value’ and, generally, as defined by OECD Guidelines. See Transfer pricing in the Group taxation section for more information.