"NEWS 1 SEPTEMBER 2016-Carryover losses, interest expense and ROL in the fusion"

Posted by on Aug 1, 2016

Companies that have implemented a merger are required to perform several tests to verify the correct application of the provisions of article 172 of the tax code.

Remember, in fact, that paragraph 7 of article 172 of the tax code governing initially carrying forward of losses, stipulating that "the losses of the merging companies, including the acquiring company, can be brought down by the acquiring or merged company's income for the portion of the amount that does not exceed the amount of the respective shareholders ' equity resulting from the last budget[…] and the income statement of the company whose losses are carried forward , for the year preceding the one in which the merger was deliberate, is an amount of income of the core business, and the amount of expenses for subordinate job performance and its contributions, as referred to in article 2425 of the civil code, 40 percent higher than that resulting from the average of the last two front exercises ".

Secondly, the provision in commentary focuses on the case of merger with backdating of tax effects, applying the above limitations even to the negative result that would be generated independently on the part of the merging parties in the period between the beginning of the tax period and prior to the date of legal effect of merger.

Finally, the last sentence of the same paragraph 7 also extends to interest expenses carried forward the same restrictions with respect to tax losses carry forward, stipulating that "the provisions of this paragraph shall also apply to non-deductible interest carried forward pursuant to paragraph 4 of article 96".

The application of that provision requires, therefore:

  • It is preliminarily verified the respect of the existence of the so- assumption of "vitality" of society;
  • and is then verified the respect of the extent of net equity.

In operational terms, once you know the existence condition of preliminary viability (without which nothing is possible without the prior presentation of the carry-forward tax ruling disapplication), you can carry forward tax losses and deductible interest expense of surpluses within the limits of the amount of the net equity of the company whose interests relate.

We must also consider the interesting case where the company participant to the fusion has a dowry of previous interest expense is tax losses carried forward.

In this case, as pointed out by the Inland Revenue in circular No. 19/E/2009 equity limit is an absolute limit, because the amount of losses of previous tax and interest expense, as a whole, can be carried forward up to the level of equity and that although the nature of these elements is entirely different. The ratio of such equalization would be searched, based on acceptable interpretation of the Agency, in determining the taxable profit of the acquiring company. This is because any excess of deductible interest expense "else would only join the loss, becoming part and increasing the amount of the same".

Equivalence of the two elements is such that, if there is an excess of interest expenses and losses compared to equity, the acquiring company may decide, based on its calculations of convenience, which of the two amounts (losses or non-deductible interest) impute the non usable. The example proposed in document of practice is to a net worth of 1000, tax losses deductible interest expense for 600 to 800 and previous experience. In this case, the net worth of 1000 compares to the sum of deductible interest expense and tax losses of previous years to a total of 1400 and the company may allocate the surplus of 400 (not applicable) either on one of the two elements: losses, reporting, so interest expense for 600 and 400 losses — to interest expense, reporting losses of 800 and interest expense for 200.

In case of backdating the merger, moreover, these limits to carry-forward must be applied even to non-deductible interest expenses and losses that would be generated independently on the part of the merging parties in the period between the beginning of the tax period and prior to the date of legal effect of merger. And the unique model SC, righi RV30 – Sene4454 (for merging) and righi RV63 and RV64 (for incorporated) will welcome this particular hypothesis, requiring the calculation of taxable profits until the effective date of the merger in order to attribute to one or the other element amount (possibly) not reportable.

Finally, with regard to the possibility of carry-forward of surplus ROL, the norm and the Agency did not provide any indication of the need for prior verification of the limitations discussed.

In this regard, it is noted that the circular n ROME. 28 of 3/29/2012 on ACE said, probably in a hurry, that the vitality test would apply not only to interest payments but also at ROL surpluses carried forward. However, it is believed that these restrictions do not apply in the case of surplus ROL, both because of a purely literal interpretation and because, in practice, such surplus ROL might constitute a ceiling for the purposes of the deductibility of any excess interest expense generated by a different party to the merger, which then have already granted the limitations in comment.

by Enrico Ferra