Article 110 of Law Decree 14 August 2020 no. 104 introduces the possibility to step-up the values of business assets and participations in the 2020 financial statements (Step-up Regime). The step-up can be executed only for accounting purposes or also for tax purposes; in the latter case a 3% substitute tax is due. In addition, the possibility to realign the tax value of the assets to their accounting value, if higher (Realignment Regime), is introduced. Please note that such Decree is subject to amendments until its conversion into Law, which shall occur by October 13, 2020.
The main aspects of the Step-up Regime include the following.
- Qualifying taxpayer: taxpayers that can opt for the Step-up Regime are Italian companies and commercial entities adopting Italian GAAP as well as partnerships carrying out commercial activities, sole proprietorships, resident non-commercial entities and non-residents with an Italian permanent establishment.
- Qualifying assets: the Step-up Regime applies to tangible and intangible fixed assets (including non-depreciable fixed assets such as for example land) as well as to participations in controlled and associated companies booked as financial assets, provided that the mentioned assets are included in the 2019 financial statement.
- Accounting Step-up: the step-up must be executed in the 2020 financial statements and can apply also to single Qualifying assets (i.e. in case of option for the step-up, it is not mandatory to step-up all the Qualifying assets of the same category). The value attributable to the Qualifying assets cannot exceed their fair market value. An appraisal on the Qualifying assets is not mandatory; however, it is recommended in case of Qualifying assets with significant values. In case of distribution, the revaluation reserve booked in the net equity is not taxed in the hands of the distributing entity but only in the hands of the shareholders as a dividend.
- Tax Step-up: the step-up can be executed also for tax purposes by paying a 3% substitute tax on the higher values booked in the 2020 financial statements. The substitute tax is paid in three annual instalments within the deadline for the balance payment of income taxes related to fiscal years 2020, 2021 and 2022 (e.g. for calendar year companies within 30 June 2021, 2022 and 2023). In case of distribution, the revaluation reserve booked in the net equity is taxed in the hands of both the distributing entity and the shareholders. However, if a 10% substitute tax is paid, in case of distribution, the revaluation reserve will be taxed only in the hands of the shareholders as a dividend.
- Recognition of the higher tax values: higher tax values are recognised for amortization and depreciation purposes starting from fiscal year 2021, while for capital gain/loss purposes from fiscal year 2024. As regards participations, the tax step-up seems interesting to the extent the participation exemption regime is not applicable (e.g. real estate companies). In addition, the higher tax values have impact also on the determination of the plafond for maintenance cost deduction as well as on the application of the dormant company regime (art. 30, Law 23 December 1994 no. 724).
In addition, the Decree also introduces the Realignment Regime according to which it is possible to realign the tax value of the assets to their higher accounting value, by paying a 3% substitute tax on the higher value and by qualifying (for the same amount) the already existing net equity reserves as tax-deferred reserves (i.e. taxable in the hands of the distributing entity upon distribution). The difference between the tax and the accounting values of the assets could occur in case of extraordinary transactions (e.g. merger) or following previous step-up executed only for accounting purposes. Differently from the Step-up Regime, the Realignment Regime is available also for IAS/IFRS companies.
LED Taxand Take
Given the low rate (3%) of the substitute tax, the Step-up Regime and the Realignment Regime represent an interesting tax opportunity, which should be carefully evaluated by both Italian companies and non-residents companies with an Italian permanent establishment.
For further information please refer to your contact in LED Taxand: email@example.com firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.
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