Tax reform: new discipline to loss carry forward

At its meeting on April 30, 2023, the Council of Ministers approved the draft legislative decree on the revision of the taxation regime for the income of individuals (IRPEF) and companies and entities (IRES). Among the many new features, an amendment was proposed to the rules on the carry forward of losses under art. 84, c. 3, and those governed by art. 172, c. 7 TUIR, including the carry forward of interest expense and ACE. In line with what was introduced by the draft, it is also provided, under certain conditions, that limitations on the carry forward of tax attributes in the case of extraordinary intercompany transactions are inoperative.

Under article 84, paragraph 3, provided for in the draft decree, the principle that a company's losses cannot be carried forward if two conditions are jointly met remains unchanged: (i) transfer, or otherwise acquisition from third parties, even on a temporary basis, of the majority of the voting shares in the ordinary shareholders' meeting of the entity reporting the losses ("change of control") and (ii) change of the principal activity in fact carried on during the tax periods in which the losses were realized ("change of principal activity").

Compared with the provision currently in force, the draft decree expressly provides for the revision of the notion of change in activity "in the case of a change of sector or commodity segment or the acquisition of a business or branch thereof." The rule that such a change becomes relevant if made in the current tax period at the time of the transfer or acquisition or in the next two or earlier ones is not changed.

There are two exemptions to the limitations on loss carry forward under the new decree: (i) in cases where the transfer of the majority of the shareholdings takes place intra-group; or (ii) where the entity carrying forward losses takes off the "viability test" (without considering, as under the reform, the minimum number of ten employees in the two-year period prior to the transfer).

An important novelty concerns the disapplication of the limit on loss carry-forward when the viability test is exceeded: it is stipulated that only in the latter must the carry-forward of losses take place within the limit of the equity of the company that produced them. The value of equity, in fact, must be considered based on the economic value of the same, as resulting from a sworn appraisal report.

In the absence of the aforementioned appraisal, the value of equity to be considered will be the book value net of the contributions and payments made by shareholders in the last twenty-four months.

Losses in art. 84 that cannot be carried forward are those that result at the end of the tax period prior to the transfer of the shareholdings or, if the transfer occurs after the lapse of six months from the end of that period, those that result at the end of the tax period current on the date of the transfer.

Important changes have also been made in the context of the merger governed by art. 172 TUIR: in the sphere of intercompany mergers, in fact, the draft decree does not provide for any limit in this regard, leaving free the "circulation" of losses within the group, limited to those generated in constancy to the controlling relationship. For losses generated prior to entry into the group, their use by the merged entity is permitted provided that "the limits and conditions for their use provided for in article 84, paragraph 3, or paragraphs 7 and 7-bis, were applied when the company to which they refer entered the group." Indeed, this normative dictate is not perfectly clear, and a revision of the text by the delegated legislature would be desirable: the limits and conditions of use to which the rule seems to allude should in fact reasonably be those set forth in paragraph 3-bis of art. 84 (not those of paragraph 3), namely the "viability test" or the acquisition of the majority of the shareholdings of the loss-reporting entity by a company belonging to the same group.

In all other cases of mergers between entities that are not linked by controlling shareholding relationships, the draft decree stipulates that loss carry forward is subject to passing the traditional viability test and equity limit.

It is understood that the mentioned rules also apply in the case of the carry forward of non-deducted excess interest expense, as well as to that related to economic growth aid ("ACE").