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.
From FY 2023 up to FY 2027 the amortisation of instrumental plants for large retail enterprises has been extended from 3% to 6%.
An additional increased IRES depreciation, the so-called 'super/hyper depreciation', was in force until FY 2019 to incentivize the acquisition of capital tangible and intangible assets used for business purposes. From the fiscal year starting on 1 January 2020, the purchases of new tangible and intangible assets may benefit from a tax credit (see the Tax credits and incentives section) instead of the above-mentioned increased tax deprecation.
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 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 (CIT) purposes pursuant to the enhanced derivation principle (see Adoption of IFRS and taxation in the Other issues section).
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 fiscal years. Hence, net interest expense not deducted in previous years can be deducted in the future 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.
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 advisable to seek ad hoc advice before implementing LBO operations.
Allowance for corporate equity (ACE) deduction
The ACE is a deduction equal to the net increase in the equity employed multiplied by a rate determined each year. This rate is equal to 1.3% from 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 period.
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 inter-company transactions have to be carefully monitored.
The Law Decree no. 73/2021 (the so-called 'Sostegni Bis Decree') introduced a measure aimed to strengthen the ACE benefit for the tax period 2021 only. The actual rate of 1.3% has been increased to 15% for up to EUR 5 million of the 2021 net equity increases.
In particular, the 15% rate is applicable to the net equity increases occurred in 2021 compared to those existing at the end of FY 2020. The FY 2021 increases take effect from the first day of the tax period for the full amount (i.e. no pro rata temporis mechanism applies).
Any capital increase exceeding EUR 5 million will benefit from the ordinary ACE regime.
A specific recapture rule also applies.
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.
IMU is deductible for IRES purposes up to 100% of the amount paid in FY 2022 and in the following fiscal years. Previously, it was deductible up to 50% of the amount paid in FY 2019 and 60% of the amount paid in FY 2020 and FY 2021.
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.