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 was granted for new investments in fixed tangible assets carried out in FY 2018 (or carried out by 30 June 2019, provided that by 31 December 2018 the purchasing order of the new asset was accepted by the seller and the buyer paid an instalment of at least 20% of the purchasing cost).
In such cases, the relating cost is increased by 30%, bringing the taxable basis of the asset to 130%. The eligible assets are those having a tax amortisation rate higher than 6.5%. Previously, from 15 October 2016 to 31 December 2017, the cost for new investments was notionally increased by 40%.
The above benefit has been extended to investments lower than EUR 2.5 million made between 1 April 2019 and 31 December 2019. In addition, investments can also be made up to 30 June 2020, provided that by 31 December 2019 the purchase order has already been accepted and that advances payments have been wired for at least 20% of the amount.
Furthermore, as for the so-called 'hyper depreciation', purchase cost for qualified tangible assets (such as hi-tech, cloud, ultra-broadband, industrial robotics, digital manufacturing, IT security, etc.) incurred between 1 January and 31 December 2019 are increased by:
- 170% for investments up to EUR 2.5 million.
- 100% for investments between EUR 2.5 million and EUR 10 million.
- 50% for investments between EUR 10 million and EUR 20 million.
The above benefit applies also to eligible investments made by 31 December 2020, provided that by 31 December 2019 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.
The recapture of the benefits applies in case the asset is sold and failing specific conditions.
A notional increase of 40% of the purchase cost of intangible assets (e.g. software, systems, platforms and applications) is also applicable to those intangibles required to operate tangible hyper-amortised assets.
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.
For the FY starting on 1 January 2020, purchases of new tangible and intangible assets may benefit from a tax credit, treated below, instead of the abovementioned increased tax depreciations (so-called super and hyper depreciation).
In addition, enterprises must obtain a technical report issued by an engineer or an industrial expert, or a certificate of conformity issued by an accredited certification body, certifying that the assets comply with technical characteristics required by annexes A and B of the law n. 232/2016 and that they are interconnected with the business system of production management or the supply network. Should the purchasing cost be lower than 300K€, instead of the technical report enterprises can prepare a declaration undertaken by the legal representative according to decree n. 445/2000.
The legislation requires a careful assessment of the time in which investments are “sustained”, as the tax credit does not apply to investments in:
- «ordinary» assets received between 1 January and 30 June 2020, if within 31 December 2019 (i) the purchasing order was accepted by the seller and (ii) the buyer paid an installment of at least 20% of the purchasing price. For such investments, indeed, based on art. 1 of Legislative Decree n. 34/2019, the so-called Super-depreciation continues to apply;
- «4.0» assets received between 1 January and 31 December 2020, if within 31 December 2019 (i) the purchasing order was accepted by the seller and (ii) the buyer paid an installment of at least 20% of the purchasing price. For such investments, according to paragraphs 60 and 62 of the law n. 145/2018, the so-called Hyper-depreciation continues to apply.
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 was 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.
For IFRS adopters, the lease accounting of IFRS 16 is relevant for Corporate Income Tax purposes pursuant to the enhanced derivation principle (see paragraph Adoption of IFRS and taxation).
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 EBITDA (interest deduction capacity) relevant for tax purposes (before 2019, reference had to be made to EBITDA 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 based on their tax value.
Net interest expense in excess of the yearly limitation is carried forward in the following five fiscal years (before 2019 indefinitely). Hence, net interest expense not deducted in previous years can be deducted in the future five fiscal years 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 the future five years.
Starting from 2019, interest income exceeding interest expenses can be carried forward to offset future interest expenses in any following FYs.
Dividends received from foreign subsidiaries are excluded in the computation of the EBITDA used to determine the interest expense deductibility limit (prior to FY 2017, these dividends were included).
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 fully admitted. For SGR and SIM the deductibility of interest expense is limited to a fixed amount of 96% of the interest expense shown in the income statement of these entities.
The tax authorities have provided guidelines regarding leveraged buyout (LBO) operations. The latter shall be considered in general 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.). It is anyway advisable to seek ad hoc advice before implementing LBO operations.
The ACE is a deduction equal to the net increase in the equity employed i, multiplied by a rate determined each year. This rate was equal to 1.3% for FY 2019.
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 distributions;
- Investments in controlled companies;
- certain intra group business acquisitions and transactions;
If the allowance for a year is higher than the net IRES taxable base, the difference will be carried forward to the next fiscal periods.
To calculate the equity increase, the reference equity is the one disclosed in the Financial Statements for the fiscal year current at 31 December 2010, net of the profits for the same year.
Specific ACE anti-avoidance rules, in order to exclude duplicates of ACE benefit within a group of companies, apply. ACE anti-avoidance intercompany transactions have to be carefully monitored.
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.
Specific rules apply to small credits. In particular, 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.
Moreover, losses are tax deductible in case of derecognition of bad debts applied in compliance with accounting standards (both Italian 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.
Expenses related to gifts with a value of EUR 50 or less are entirely deductible.
Meals and lodging expenses
For IRES purposes, the deduction for meals and lodging 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 relevant deductions.
Starting from FY 2019, IMU is deductible for IRES purposes up to:
- 50% (until FY 2018, it was 20%) of the amount paid in FY 2019.
- 60% of the amount paid in FY 2020 and FY 2021.
- 100% of the amount paid in FY 2023 and in the following ones.
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 de-merger.
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.