Italian tax reform: enfranchisement of tax-suspension reserves

The draft legislative decree reforming IRPEF and IRES, approved by the Council of Ministers on 30 April, provided for the possibility of enfranchising revaluation surpluses, reserves, or funds in tax suspension, recognized in financial statements in progress as of 31 December 2023 and remaining at the end of the financial year in progress as of 31 December 2024. Enfranchisement is possible upon payment of a 10% substitute tax, deferred in four annual instalments.

The draft legislative decree on the reform of IRPEF and IRES approved by the Council of Ministers on 30 April 2024 and currently submitted to the parliamentary committees for examination, contains a rule on the enfranchisement of tax-suspension reserves.

As is well known, there is no regulatory definition of tax-suspension reserves, but the Financial Administration provided for this in Circular No. 310/E/1995, which explained a enfranchisement regime like the one in question. In the practice document, these reserves were defined as ‘ideal equity items (...) for which taxation has been postponed to the moment in which their distribution takes place, or to the moment in which one of the conditions determining the disappearance of the suspension regime occurs’.

The most frequent cases of tax-suspension reserves are those created on the occasion of revaluation regimes of business assets (the last one introduced by the 2021 Budget Law) which, in exchange for the payment of a substitute tax, postulate the genesis of a revaluation surplus, consisting of the amount recorded in the financial statements as a counterpart of the higher values attributed to the revalued assets, which is usually set aside in a special tax-suspension reserve. The option provided for in the draft decree is not a structural measure, since the possibility of freeing the reserves in suspension is generally granted on the occasion of the revaluations themselves. The last time this measure was granted on an autonomous basis was Law No. 311/2004 (Article 1, paragraphs 473-478).

The draft decree provides, as mentioned above, that the enfranchisement may take place through the payment of a substitutive tax on income tax and IRAP at a rate of 10% and a deferred payment of said tax in four instalments mandatory, the first of which is to be paid within the deadline for the payment of the balance of income tax relating to the 2024 tax period and the others within the same deadline relating to the following three tax periods. The deferral should not provide for the payment of interest.

In compliance with Circular 6/E/2022 (issued in explication of the revaluation and redemption regime pursuant to Legislative Decree 104/2020), the taxable base should be calculated on the net amount of the reserve (i.e., the amount of the reserve recognized in the financial statements net of the tax paid for the revaluation).

As a result of the enfranchisement, therefore, corporations will be able to distribute the reserve without any further tax levy on the entity. Shareholders, however, will pay the taxes ordinarily levied on profit distributions. The measure will also be particularly attractive for partnerships, since the payment of the substitute tax will allow the distribution of the reserve without the rising of any additional taxable value, both for the entity and the partners.