LED Taxand – Tax Insider No. 1/2019 – New Italian tax measures impacting on the Real Estate business
On 28 December 2018, Legislative Decree 29 November 2018 no. 142 implementing the Anti-Tax Avoidance Directives 2016/1164 and 2017/952 (ATAD implementing decree) was published in the Italian official gazette. On 31 December 2018, Italian Budget Law 2019 was published in the Italian official gazette.
Both the ATAD implementing decree and the Italian Budget 2019 introduced tax measures which have an impact on the real estate sector. The most significant changes applicable starting from FY 2019 are the following:
- new interest limitation rule;
- confirmation of full deductibility of mortgage loans interest incurred by real estate companies;
- repeal of the notional interest deduction (ACE);
- increase in the deductibility of municipal real estate tax (IMU);
- clarifications on the recharacterization rule for registration tax purposes;
- reintroduction of business assets step-up.
New interest limitation rule
ATAD implementing decree amends the existing interest limitation rule under article 96 of the Italian income tax code. According to the new regime, starting from FY 2019:
- passive interests (exceeding active interests related to the same FY and active interests carried forward from previous FYs) are deductible in each FY up to 30% of the tax EBITDA related to the same FY as well as 30% of tax EBITDA carried forward from previous FYs;
- the EBITDA is calculated taking into account tax rules (while under the previous regime the EBITDA was determined based on accounting rules);
- non-deductible passive interests may be carried forward without time limitation;
- active interests’ excess capacity may be carried forward without time limitation (while under the previous it was not allowed);
- EBITDA’s excess capacity may be carried forward for 5 FYs (while under the previous regime there was no time limitation);
- such new regime applies also to interest capitalized in the cost of assets, including inventory (while under the previous regime they were explicitly excluded from the interest limitation rule);
- interest incurred on loans used to fund long-term public infrastructure projects are excluded from the interest limitation rule, if certain conditions are met.
Confirmation of full deductibility of mortgage loans interest incurred by real estate companies
According to article 1 paragraph 36 Italian Budget 2008, passive interests related to mortgage loans secured by immovable properties meant to be leased are fully tax deductible for companies that mainly carry on real estate activity (Real Estate Company). In order to qualify as a Real Estate Company: (i) real estate assets meant to be leased shall represent more than 50% of the aggregate fair market value of the company’s assets and (ii) at least two thirds of the company’s revenues shall derive from the lease of real estate assets or from the lease of business going concerns whose value is mainly represented by the fair market value of real estate assets.
Such provision was repealed by the ATAD implementing decree starting from FY 2019. Therefore, the general interest limitation rule (i.e. 30% tax EBITDA threshold) applies also to interests related to mortgage loans subscribed by Real Estate Companies.
However, Italian Budget 2019 (which was published after the ATAD implementing decree) confirmed the full deductibility of mortgage loans interest incurred by Real Estate Companies.
In conclusion, mortgage loans interest incurred by Real Estate Companies are currently outside the scope of the general interest limitation rule (i.e. they are fully tax deductible). Such beneficial tax regime seems not compliant with the Anti-Tax Avoidance Directive which does not provide for any exception to the interest limitation rule in favour of real estate companies.
Repeal of the notional interest deduction (ACE)
Italian Budget 2019 repealed the notional interest deduction (in 2018 equal to 1.5%) on qualifying equity increases. Excess notional interest deduction available at the end of FY 2018 may be carried forward without time limitation.
On the other hand, Italian Budget 2019 introduces a reduced 15% CIT rate (instead of the 24% ordinary CIT rate) on profits reinvested for the acquisition of tangible assets and/or the increase in employment. However, investments in real estate assets are explicitly excluded from such beneficial tax regime.
Increase in the deductibility of municipal real estate tax (IMU)
Italian Budget 2019 provides for the increase from 20% to 40% of the deductibility for CIT purposes of the municipal real estate tax (IMU) related to immovable properties qualifying as capital assets.
On the other hand, the Italian Budget 2019 extends the surcharge of the TASI real estate tax. Indeed, as a general rule, TASI ordinary rate is 0.1% and it can be increased up to a cap according to which the sum of the TASI rate and the IMU rate cannot exceed 1.06% (TASI cap). Italian Budget 2014 allowed municipalities to resolve a TASI rate exceeding the TASI cap up to 0.08% (TASI surcharge). Italian Budget 2019 extends such TASI surcharge also to FY 2019. Therefore, the sum of the TASI rate and the IMU rate can reach 1.14% (i.e. 1.06% plus 0.08%).
Clarifications on the recharacterization rule for registration tax purposes
Italian Budget 2018 introduced a new recharacterization rule for registration tax purposes according to which registration tax applies on the intrinsic nature and legal effects of each single deed subject to registration. In this respect, for example, tax authorities should no more recharacterize a sale of shares (subject to EUR 200 registration tax) into a sale of business going concern (subject to registration tax at proportional rates).
Italian Budget 2019 clarified that such recharacterization rule has a retrospective effect, thus it applies also to transactions occurred before 2018.
Reintroduction of business assets step-up
Italian Budget 2019 reintroduced the opportunity for companies and entities subject to CIT, which adopt Italian accounting standards, to step-up business assets (except for trade goods, e.g. immovable properties held for sale by real estate companies) and qualifying shareholdings resulting from financial statements as at 31 December 2017.
A substitute tax is due on the difference between the historical cost of the asset and the value attributed following the revaluation. Substitute tax rates are 12% for non-depreciable assets and 16% for depreciable assets. As clarified by the Italian Tax Authorities with regard to a previous step-up regime in line with the one at hand, the value of lands underlying buildings may be stepped up by paying 12% substitute tax since lands qualify as non-depreciable assets while the related buildings may be steeped up by paying 16% substitute tax since they qualify as depreciable assets. In addition, taxpayers may decide to step-up the value of the sole building or the sole land (see Circular Letter dated 27 April 2017 no. 14/E). The equity reserve booked as a consequence of the step-up is freely distributable if a 10% substitute tax is paid.
The information provided in this newsletter cannot be regarded as legal advice. LED Taxand cannot accept any liability for the consequences of making use of this publication without their cooperation.