Edited by Flavia Barone, Valeria Ventura
The draft of 2024 Budget Law provides a tax relevant amendment to the current tax regime of the constitution of real property rights on immovable properties from natural persons not subject to VAT.
Current regulatory provision, tax practice, and case law
In the current tax framework, art. 9, par. 5 of Italian Tax Code (hereinafter, ITC) equates to onerous transfers also the deeds having as their object the constitution or transfer of real property rights, among which are included the usufruct right and surface right.
In the event that the constitution or transfer of the real property right is carried out by a no-VAT subject, “other income”, according to art. 67 of ITC, arises for that subject.
The constitution or transfer of the aforementioned rights, in general, is attributable to the rules of two different provisions contained in the same art. 67 of ITC.
In particular:
- art. 67, par. 1, lett. b), qualifies as “other income” the capital gains realized through onerous deeds involving the constitution or transfer of real property rights acquired no more than 5 years ago.
- On the other hand, art. 67 par. 1, lett. h), qualifies as “other income”, among others, income derived from the grant of usufruct.
Eligibility in one or the other case has relevant consequences, as:
- the application of lett. b) entails that the constitution or transfer of real property rights determines the arising of taxable capital gains only where the real property right has been acquired by the transferor from less than 5 years.
- The application of lett. h) implies that the grant of usufruct right being taxable regardless of the 5-year period.
Based on the above, the Italian Tax Authority (hereinafter, ITA) via ruling No. 381/2023 examined, from an income tax point of view, a complex real estate contract concerning the constitution of a real property right on an agricultural land.
In detail, the transferor, owner of the property right for more than 5 years, had intended to conclude a contract aimed at setting up a 30-year usufruct right and a surface right on the land.
ITA held that the act of constitution of the usufruct right on agricultural land generated “other income” under art. 67, par. 1 lett. h) of ITC, even if owned for more than 5 years and, at the same time, held that the constitution of a surface right on the same agricultural land, falling under lett. b) of art 67, par. 1, did not generate capital gains, since, in the case at hand, the land had been owned for more than 5 years.
ITA reaches the said conclusion regarding the usufruct right re-proposing a previous practice (R.M. No. 20/1993) where it was stated that letter h), referring in a “no-technical sense” to the “granting” of the usufruct right, should include all cases of transfer of this real property right, determining the irrelevance of the duration of the permanence of the right in the hands of the transferor for tax purposes.
This position was challenged by the Notary in its Study No. 32-2017/T, which, to coordinate art. 9, par. 5 and art. 67 of ITC, held that it should be included:
- under lett. b) of art. 67, par. 1, all cases of transfer and constitution of real property rights (including usufruct right) operated by the full owner, by virtue of the equivalence of real estate transfers, envisaged by the aforementioned art. 9, par. 5.
- Under lett. h) of the same art. 67, par. 1, only the deed of transfer of the usufruct right put in place by a previous usufructuary.
Several Supreme Court decisions ruled in line with the Notary position. The Supreme Court stated that “(…) in case of transfer of usufruct right put in place by the usufructuary, the taxation of “other income” referred to in Article 67, lett. h) should apply. On the contrary, all further cases of transfer or onerous constitution of the other rights, and, therefore, also the constitution of usufruct right, must be regulated by article 9, par. 5 of ITC. In this case, the accrued capital gains are regulated in the same way as onerous transfers, by article 67, lett. a) and b) of ITC” (Supreme Court, Civ. Sect. V, Ord., No. 31642 of 4/12/2019, as recalled by Supreme Court, Civ. Sect. V, Ord., No. 6622 of 1/03/2022).
The amendments introduced by the draft of 2024 Budget Law
In the context described above, the Italian legislator, through the article 23, par. 5, lett. a) and b) of the draft of 2024 Budget Law, has taken action to amend:
- art. 9, par. 5 of ITC, limiting the principle of equivalence between the right of ownership and the real property rights, which – “where it is not otherwise provided for” by ITC or other regulatory provisions – operates exclusively in the case of the transfer of the real property right, whilst such equivalence is excluded in the case of their constitution.
- Art 67, par.1, lett. h) of ITC, introducing the provision according to which “those arising from the constitution of the other real property right” on real estate, also constitute “other income” in addition to the “granting of usufruct” on the same real estate properties.
Narrowly, these amendments overcome the previous jurisprudential trends favorable to the taxpayer.
The Explanatory Report to the draft of 2024 Budget Law states that “The amendment under consideration includes within the scope of article 67, par. 1, lett. h), of ITC the case of the constitution of the surface right on real estate properties, and the constitution of other real property rights, in analogy to the grant of usufruct.”
As a result of this amendment, income derived from the constitution of real property rights other than the right of usufruct are, therefore, attracted to taxation under lett. h), regardless of the term of the transferor’s title.
In particular, the “migration” of the constitution of real property rights from lett. b) to lett. h) of article 67 would eliminate the cases of non-taxability (e.g., the constitution of the right of usufruct, surface or an easement on a non-building land purchased more than 5 years ago), subjecting such transactions to ordinary IRPEF, resulting in a lower tax benefit for a natural person who setting up such real property rights.
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