Backdating and tax consolidation for cross-border mergers

In its reply no. 486 of 29 December 2002, the Italian Revenue Agency provided some clarifications on cross-border mergers, indicating when backdating is possible and when it does not result in the interruption of the tax consolidation with the permanent establishment of the acquiring foreign company.


The French company Alfa controls the Italian company Beta. The latter participates as a consolidated company in a so-called ‘tax consolidation between sister companies’ in which the parent company ALFAFRANCIA S.A. has designated the Italian company ALFAITALIA S.p.A. as one of its subsidiaries in order to carry out the group taxation operation and assume the role of consolidator. Alfa is therefore an external party to this tax consolidation.

In connection with the merger by incorporation of its Italian subsidiary Beta, the French company Alfa submitted two related questions to the Italian Revenue Agency:

−    whether the acquiring company, as an IAS adopter subject, may backdate the effects of the merger by incorporation – to both accounting and tax rules – of the 'daughter' company Beta to the beginning of the tax year 2023, a transaction which will itself be completed in the course of 2023 from a statutory point of view;

−    whether the merger by incorporation of Beta into Alfa and the subsequent transformation of Beta into a permanent establishment of Alfa will not result in an interruption of the seamless consolidated taxation regime with the aforementioned permanent establishment, which is considered a subsidiary within the meaning of Article 120, paragraph 1-bis, of the ITC.

Revenue Agency Opinion

With regard to the first question, the Agency states that, to the extent that the merger in question entails the retroactive application of the accounting effects of the transaction on the basis of the application of the accounting principles, the tax backdating provided for in Article 172(9) of the ITC must be applied to the transaction on the basis of the general reference made in Article 179(1) of the ITC.

Article 172(9) provides that 'the instrument of merger may provide for income tax purposes that merger's effects shall run from a date not prior to the date on which the last financial year of each of the merging or acquired companies ends, or the date on which the last financial year of the acquiring company ends, whichever is the earlier.

Referring to its Answer No. 405 of 2019, the Revenue Agency confirms that the backdating of tax effects of a merger operation must be considered possible whenever the backdating of the accounting effects of the operation is permitted and practised. This is due to simplification reasons underlying the two types of backdating, which allow the companies involved in the merger operation to prepare a single balance sheet and a single tax return for the tax period in which the merger takes effect.

However, the Agency points out that for intra-Community mergers, Article 179 of the ITC merely refers to Article 172 of the ITC, which instead governs domestic mergers, without any adaptation to take account of the rules on the location and quantification of business income.

Given that, after the merger, Beta's assets and liabilities will be included in the assets of the permanent establishment that Alfa will set up in Italy as a result of the merger, conditions set out in Article 166 of the ITC, which regulates the transfer abroad of companies engaged in commercial activities, will not be met.

This implies:

−    that for Beta's tax period from 1 January 2023 until the date of legal effectiveness of the transaction, it will not be necessary to include the unrealised capital gains/losses of the assets that will not be transferred to Alfa's permanent establishment;

−    that it will be possible to consolidate Beta's income result until the date of legal effectiveness of the transaction with that generated in the same year by Alfa's permanent establishment.

With regard to the second question, although article 124, paragraph 5, of the ITC and article 13, paragraph 1, letter f), of the Ministerial Decree of 1 March 2018 provide for the interruption of the tax consolidation in the event that the consolidated subsidiary is merged by incorporation into a company outside the consolidation (as is the case here, since Alfa is outside the so-called sister consolidation), the same require an adjustment, considering that in the regulatory context at the time of the establishment of the permanent establishments, they could not participate in the regime as consolidated companies.

Legislative Decree No. 147/2015 ("Internationalisation Decree"), by introducing significant substantive changes to the tax consolidation regime, has extended its scope of application, allowing entities resident in EU/EEA States, controlled within the meaning of Article 2359, para. 1, no. 1 of the Civil Code, by parties resident in the territory of the State or in EU/EEA States or in non-EU States with which a double taxation treaty is in force that provides for an adequate exchange of information, to exercise the option of consolidation as a parent company through a permanent establishment as defined in Article 120, paragraph 1-bis of the ITC, if:

−    they have a legal form similar to those referred to in Article 120(1) of the ITC;

−    the parent company, domiciled in the territory of the State or in another EU Member State or in another agreed non-EU State, has a participation of more than 50 per cent in the share capital and the balance sheet profit of the EU subsidiary;

−    carries on a business activity within the meaning of Article 55 of the ITC (as clarified by Circular 40\E of 2016).

In the present case, it should be emphasised that the same consolidation relationship between ALFAITALIA S.p.A., acting as the designated consolidating company, and Beta will remain unchanged. The merger between Alfa, a French company, and Beta, an Italian company, merely transforms the latter from a company under Italian law into a permanent establishment of a foreign company entitled to group taxation under the amendments introduced by the Internationalisation Decree.

Therefore, the Agency answers both questions in the affirmative, clarifying that it will be possible to opt for the backdating of the tax effects of the merger transaction and that the tax consolidation will not be interrupted following the transformation of Beta into a permanent establishment of Alfa.