Prepared by Alessandro Catona, Carlo Romano, Rocco Mottolese, Roberto Colatorti
The decree-law 17 March 2020, n. 18, providing for extraordinary financial support for families, businesses and workers to face the epidemiological emergency “COVID-19”, contains, among others, law provisions to support the liquidity of businesses through the banking system.
In this regard, article 55 of the aforesaid decree fully replaces article 44-bis of decree-law 30 April 2019, n. 34, converted with modifications, by law 28 June 2019, n. 58. The law provision repealed and replaced with the intervention in question, provided for an incentive mechanism for business combinations located in southern Italy consisting in the conversion into tax credit of deferred tax assets related to certain postponed deductions and tax attributes.
Differently from the repealed provision, the new law is applicable with regard to the entire Italian territory, regardless of the tax domicile of companies. New article 44-bis introduces the possibility of transforming a portion of deferred tax assets (DTAs) relating to certain tax attributes into tax credits, for an amount proportional to the amount of non-performing loans transferred to third parties. The non-performing loans subject to the new provision can be both commercial and financing. The new law provision is applicable to all the companies regardless of the economic sector. However, banks and other financial intermediaries can be highly impacted from the change.
The provision in question is aimed at stimulating the sale of non-performing loans that companies and banks have accrued in recent years, also as a result of the financial crisis, with the aim of supporting the liquidity of companies in the current situation of economic uncertainty.
In line with the past, this provision is not applicable to companies involved in bankruptcy or bail-in procedures (according to article 17 of legislative decree no. 180 or to article 5 of royal decree 16 march 1942, no. 267).
In particular, for companies transferring non-performing loans by 31 December 2020, the provision introduces the possibility of converting a portion of DTAs into tax credits relating to: i) tax losses carried forward according to article 84 of the TUIR, and ii ) excess Notional Income Deduction (NID) carried forward (i.e. still unused or deducted from taxable income at the date of the transfer of NPLs.
As regards the definition of non-performing loans, NPLs are defined as past-due loans over ninety days from the due date. The law provision at hand is not applicable to the transfers of loans between controlling and controlled entities pursuant to article 2359 of the civil code and between companies subject to control, even indirectly, by the same entity.
The maximum amount of convertible DTAs that can be converted into tax credits is determined according to the amount of tax attributes to which DTAs relate. In this light, the maximum amount of tax attributes triggering the conversion of DTAs is equal to 20% of nominal value of the transferred NPLs. However, for the purposes of conversion, a limit of 2 billion euros in terms of nominal value shall apply to the total amount of NPLs transferred by 31 December 2020. For entities belonging to the same group, this limit is calculated taking into account all the transfers executed by the entities belonging to the same group. As a result, for baking groups the maximum amount of conversion (and related benefit) is 110 million euros.
For example, if an entity transfers non-performing loans for 1 billion euros, the conversion into tax credits applies to the DTAs related to a maximum amount of 200 million euros of eligible tax attributes (i.e. tax losses and / or NID carried forward). The resulting tax credit would be equal to 48 million euros, assuming the ordinary IRES tax rate of 24%.
The conversion into tax credits shall be applicable even if the DTAs have not been accrued to the financial statements, as a result of a negative outcome of the probability test, provided that the eligible tax attributes are still unused and not deducted at the effective date of the transfer of the NPLs.
The transformation shall be effective at the date of the transfer of the loans. From the effective date, the transferor will no longer be able to offset the taxable income with the tax losses carried forward, nor deduct or utilize as a tax credit the excess NID carried forward, for an amount equal to the portion of DTAs converted into tax credits.
The tax credits arising from the conversion are not interest-bearing, represent liquid assets and can be used, without limits, to offset any tax or social security payables pursuant to article 17 of the legislative decree 9 July 1997, n. 241, or transferred according to article 43-bis or article 43-ter of the decree of the President of the Republic 29 September 1973, n. 602, or asked for a refund in cash. The tax credits in question shall be reported in the tax return and do not contribute to the calculation of taxable income for IRES and IRAP purposes.
Companies willing to convert qualified DTAs into tax credits pursuant to the provision in question, must exercise the option referred to in article 11, paragraph 1, of the decree law 3 May 2016, n. 59, converted, with modifications, by law 30 June 2016, n. 119 (so-called “guarantee fee”). The option, if not already exercised, must be exercised by the end of the fiscal year in which the transfer of NPLs falls. The option is effective starting from the year following the one in which the transfer is effective.
In addition to the benefits in terms of conversion into tax credits of an illiquid asset such as the DTAs, the provision at hand also determines a benefit in terms of capital adequacy of banks. In fact, due to the transformability, some financial entities will be able to: i) accrue for the first time DTA / tax credits (the accounting representation of it will depend on the effective date of the transfer) or ii) transform DTAs into tax credits with obvious easing in terms of capital requirements.
Although the new law provision is fairly simple in its rationale, some doubts arise from its interpretation:
- Can the NPLs transferred before the Decree came into force trigger the conversion of DTAs?
- How to manage the new conversion regime with the tax group option?
- How to define the transfer of NPLs, whether according the formal / civil law approach or according to substantial / IFRS criteria;
- In case of multiple transfers oFor a deeperdiscussionpleasecontact:f NPLs within the group, how to calculate and take into account the limit of 2 billion euros;
- Is the tax relief only reserved to the originating companies or may be extended to subsequent transfer of lons (e.g. NPLs management companies)?
In ourview, the rationalebehind the new lawprovisionisconsistent with an extensiveinterpretation. However, in ordernot to reduce the potentialbeneficialeffects of the new law, wehopethatatleast the mostimportantdoubts (describedabove) will be clarified and solved by the Revenue Agency.
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