Tax regime of interest expense related to the late payment of IRES and IRAP taxes

In its response to tax rule N. 172/2024, the Revenue Agency confirmed the deductibility, for the purposes of the IRES and IRAP, of interest expenses related to the higher taxes established by conciliation and assessment with adhesion acts, departing from Ruling n. 28740/2022 of the Supreme Court of Justice, which denied the deductibility of interest on arrears resulting from the late payment of a tax.

In the case dealt with in the reply, the petitioner is a company in respect of which the administration has challenged certain transfer pricing determinations. After signing an agreement with the Regional Directorate, the petitioner implemented it by means of the settlement and adhesion acts for the tax periods concerned. Given that the company intends to deduct the amount paid as interest when determining its income for the tax year 2022, the issue of the tax regime of the interest applied for the late payment of IRES and IRAP taxes will be submitted to the Agency for examination.

The reason for this is that although the Agency's practice has repeatedly confirmed the deductibility of interest expenses, the recent Supreme Court decision n. 28740/2022 has raised a number of interpretative doubts.

According to this ruling, since financial charges, in order to be deductible, must necessarily be transformed into costs functional to the production of business income, it follows that interest on arrears due to the non-payment or late payment of sums owed by the company for the payment of taxes is not deductible. In the words of the Court: “(...) with particular reference to interest expenses, in order to be deductible, they must be transformed into charges generated by the financial function in support of the business activity, that is to say, they must relate to the undertaking in its existence and progress in economic and income terms. In other words, in order to be considered deductible under Articles 63 and 75 of Presidential Decree N. 917 of 1986, such interest must necessarily be transformed into functional costs for the production of business income (...)”.

Bearing in mind the above, the Agency agrees to the full deductibility of the interest on the higher taxes determined by means of conciliation deeds and assessment with adhesion, since they have no financial cause (as expressly stated in reply n. 541/2022). 

Lastly, it is particularly interesting to note that the contrary precedent mentioned above (Order N. 28740/2022) was cited by the applicant in the reply to the comments as a source of legitimate interpretation doubt, and that the tax administration itself appears to have deliberately chosen to depart from it.