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New corporate tax-incentive measures against Covid-19-related economic downturn

07 Apr 2020

Italian economy faces the COVID-19 health emergency and the related lockdown restrictions imposed to many business categories – mostly affecting retail, sport and leisure industries. A severe economic downturn is expected in 2020. The Italian Government urgently adopted Law Decree No. 18/2020 that includes several tax incentive measures aimed at restoring the economic losses that many businesses are already suffering. Amongst the measures, particular appeal is raised by the possibility to convert DTAs into tax credit, to extend or redevelop business lines to produce medical devices and protective equipment, to obtain a tax credit for the lease rents paid in March and a bonus for employees who did not benefit from homeworking.

With Decree-Law No. 18 of 17 March 2020, the Italian Government struggled to face the most urgent difficulties brought by the COVID-19 health emergency. New incentive measures were introduced for Italian businesses who are suffering actual and forecast losses due to the economic downturn expected for 2020.
The Decree Law is currently under the examination by the Italian Parliament in order to be converted into law. Various national stakeholders expressed little enthusiasm for the Government efforts. The Prime Minister recently declared that additional financial resources will be allocated to enterprises in order to prevent the looming economic recession. Hundreds of amendment proposal have already been presented by MPs.
We expect the final law to booster and extend the scope of the incentives already introduced.

Conversion of deferred tax assets into tax credit

Who is entitled?
Italian corporations (partnerships should be excluded) that sell non-performing (“deteriorated”) loans to third parties within 31st December 2020. Intragroup sales are not considered.
Non-performing loans qualify as such if, at the day when the sale takes place, are past due for over 90 days.
Mostly interested taxpayers
Financial industry
What is the benefit?
Possibility to convert certain Deferred Tax Assets into a tax credit that could be used in order to:
offset tax payments, without any amount limitation (the ordinary EUR 700,000 annual limitation would not be applicable),
– be sold to third parties at face value,
– be asked for refund.
Not any DTA can be converted but only those that originate from:
carried-forward tax losses – this DTA can be converted into tax credit for 100% of its amount (the ordinary limitation under which tax losses accrued after the third year of activity can be used up to 80% of their amount would not apply);
– unused carried-forward amount of notional interest deduction (1.3% in FY 2019; 1.5% in FY 2018).
Other categories of DTA (for instance, those originating from the past tax rules that limited the annual deduction of loan losses) fall out of scope.
Importantly, it is possible to convert also DTA that the company did not record in its last annual financial statements – for instance, because the so-called probability test was deemed to be failed.
For sake of completeness, the loan losses originated from the sale of NPLs would be entirely tax deductible.
Additional limitations
The total amount of NPLs that can be sold at group level within 31st December 2020 is set at EUR2 billion.
Moreover, the amount of DTAs that can be converted into tax credit could not exceed 20% of the face value of the NPLs sold. As a consequence, the maximum ratio between amount of NPLs sold and the tax saving would equal 4.8%.
In order to comply with EU State Aid rules, it is required that taxpayer who wish to benefit from the tax incentive exercises an option and pays starting from 2021 a 1.5% annual fee linked to the amount of converted DTA.
Open issues
It is not clear if only the qualified DTAs existing at 31st December 2019 (recorded in the financial statements or not) can be converted or if the option can be extendedalso to the ones accrued in the course of 2020.
It is not clear whether the tax credits would be (proportionally) available right after the NPL is sold or rather starting from 2021 (after the abovementioned option becomes effective and the 1.5% fee is paid). The first solution seems more convincing.

New investment projects related to the COVID-19 health emergency

Who is entitled?
Italian companies who present a new business project aimed at redevelop or expand existing lines of business in order to produce medical devices (like respirators) and personal protective equipment (like breathing-masks) meeting the technical requirements to be used for the COVID-19 health emergency.
Mostly interested taxpayers
Manufacturing industry
What is the benefit?
The incentive would consist in an interest-free loan repayable in 7 years and covering up to 75% of the business expenses related to the new production process.
The granted amount can be converted into straight (non-repayable) grant (contributo a fondo perduto):
– up to 100% if the project is concluded within 15 days;
– up to 50% if the project is concluded within 30 days;
– up to 25% if the project is concluded within 60 days.
Enterprises must file an online application in order to obtain the entitlement to the benefit.
Additional limitations
The maximum amount that can granted would equal EUR 800,000.
The project dimension should be in a range between EUR 200,000 and EUR 2 million.
Only the amount of qualified expenses borne after 17 March 2020 could be eligible.
The incentive cannot be cumulated with other tax benefits that may apply to the qualified expenses (for instance, the tax credit for new capital goods).
Finally, the incentive funding is limited to EUR 50 million. Applications are evaluated until the full amount is used.
Open issues
It is not clear whether the incentive can be granted also to enterprises who realise the project and then lease the activity to a third party.
The incentive has been an immediate success and many applications have already been accepted. Pressure is made to the Government to allocate additional resources.

Tax credit on lease rental payments for shops spaces

Who is entitled?
Italian enterprises (even individual business) who suffered lockdownrestrictions in order to prevent the COVID-19 spread and paid the lease rents for shops and stores registered under the cadastral category C/1.
Mostly interested taxpayers
Retail industry
What is the benefit?
Qualified taxpayers may benefit from a tax credit up to 60% of the amount of lease rents related to the month of March.
The credit can be used to offset tax payments.
Additional limitations
The benefit would not apply to real estate units registered under a cadastral category different from C/1. It may be the case of shopping malls under category D/8, warehouses under category C/2 and laboratories under category C/3.
Moreover, as the Ministry of Economy and Finance made clear, the tax incentive would not apply to business units used by virtue of a business lease (affitto di azienda) – even if the business unit is registered under the C/1 cadastral category. This is typically the case of stores located into shopping malls.
Open issues
It is not clear weather the tax credit could be determined by reference to the monthly amount indicated in the lease agreement, thus irrespective to the actual payment by the tenant. This view does not seem as totally convincing since the Ministry of Economy and Finance stated that reference should be paid to expenses actually borneby the tenant in March.
Many stakeholders asked for the measure to be extended to other cadastral categories and also to the case of business lease agreements. Amendments are expected when the Law Decree will be converted into Law.

Tax bonus for employees who did not benefit from homeworking

Who is entitled?
Italian employees who in March 2020 did not benefit from homeworking and worked at office/business premises.
Mostly interested taxpayers
Employees of manufacturing/financial services/healthcare enterprises who do not suffer lockdown restrictions and have little possibility for homeworking.
What is the benefit?
The benefit is granted up to 100 Euros per employee. The amount is computed proportionally to the actual working days spent at the work place. This reference leads to believe that the basis for calculation is 22 working days expected in March 2020.
The bonus is granted by the employer who pays it, if possible, within the salary for April 2020.
Additional limitations
The bonus is available to individuals who, in the previous tax year, obtained a total amount of employment income not higher than EUR 40,000.
Self-employed workers are excluded, as well as company directors, statutory and non-statutory auditors and certain collaborators (co.co.co.).
Open issues
Various requests have been raised to extend the scope of the bonus in terms of amount, duration and categories of eligible employee