Italy Tax Alert - 6 February 2012
Tax authorities further clarify rules on utilization of tax loss carryforwards
By Luca Bosco, Francesca Muserra and Stefano Schiavello
On 25 January 2012, the Italian tax authorities issued a clarification regarding the utilization of net operating loss carryforwards that could significantly affect the tax accounting of Italian corporations and permanent establishments of foreign companies.
This clarification follows guidance released on 6 December 2011 on the rules introduced in Law Decree No. 98/2011. Decree No. 98/2011, which applies as from 1 January 2011 for companies with a calendar year tax period, introduced new rules on the tax treatment of loss carryforwards. Previously, tax losses could be carried forward only for five years for offset against future taxable income (except in the case of start-up losses (i.e. losses incurred during the first three years of operations), which could be carried forward without limit provided the losses related to a new business activity). Decree No. 98/2011 abolished the five-year limit on loss carryforwards, but introduced a restriction in that losses may only be used to offset up to 80% of taxable income (rather than 100% as was previously the case). The 80% limit does not apply to start-up losses.
It was unclear under Decree No. 98/2011, however, whether the indefinite carryforward applies only to losses incurred as from 2011 or whether it applies to losses incurred in the previous five years as well. The December guidance clarifies that the regime under Decree No. 98/2011 does apply to losses incurred as from 2006 and still unused as at 31 December 2010.
The 25 January clarification confirms that a company can use without distinction either losses incurred during the first three years of activities (which can be fully set off against taxable income of the relevant year) or losses incurred during subsequent years (which can be set off up to 80% of taxable income of the relevant year). However, if the losses of the first three fiscal periods are not sufficient to offset total income, other tax losses may be used only if the remaining income exceeds 20% of total taxable income and only in respect of the amount of income that exceeds the 20% threshold.
|20% of total income||220|
|Losses of the first three years||1,000|
|Income subject to tax||100|
In this example, all of the tax losses incurred during the first three years (i.e. 1,000) can be set off. However, because the remaining income of 100 (i.e. the difference between 1,100 and 1,000) is less than 220 (20% of total income), the taxpayer cannot use the other losses.
From a tax accounting perspective, for many companies, the recognition of deferred tax assets will be affected by the ability to carry forward all existing losses indefinitely with effect from 2011.