"NEWS September 22, 2016-loss on lease back fully deductible in the year"

Posted by on Sep 22, 2016

In a previous posting we have had the opportunity to comment on the ruling of the Court of Cassation No. 35294/2016 in terms of taxation of capital gains from sale and lease back contract: the position of judges of the Supreme Court, are entirely acceptable, in contrast to the positions expressed by the Inland Revenue, allows the taxation of income realised at the time of supply to the leasing company on the basis of imputation of accounting, in accordance with article 2425-bis, paragraph 4, cod. CIV..

The treatment of losses from lease back

It might be the case for which the asset is transferred to the object of lease back leasing companies realizing a capital loss; such a loss could be that originated from the fact that the market value of the asset is less than its carrying amount, as for the fact that the company intends to finance itself for an amount less than the market value of the asset. What is the accounting treatment to be followed?

You should immediately notice how the article 2425-bis, comma 4, cod. CIV. It refers solely to the capital gain; This, however, according to the Appendix of the CIU 12 should not be read as an oversight: the legislative silence is explained because the accounting solution is not, as a general rule, similar to that of capital gains.

If the sale and leasing are not implemented on market terms, the loss, up to the amount of the difference between the carrying amount and the lowest market value at the time of conclusion of the transaction is fully charged to the income statement for the year. The remaining loss is recognised the economic accounts in proportion to the canons themselves, over the period of duration of the contract, provided that:

  1. the sale price is below the market value at the time of sale, and
  2. This residual loss is compensated by future royalty payments below market.

If the sale or leasing shall be made at non-market conditions, namely if the loss is related to pay below market rents, in which case it should be deferred, amount by adjusting economic accounts in proportion to the canons themselves along the length of the contract.

The deductibility of losses

As regards taxation, the Agency's circular No. 38/E/2010 stepped in to clarify the treatment of any capital loss that could result from the supply of goods to the leasing company. In particular it is stated that "in the event that the lease back reveals a loss in market value, within the limits of what is expensed in the exercise of jurisdiction, it is believed that it is tax deductible in the exercise thereof in accordance with the combined provisions of articles 101 and 109, paragraph 2, lett. a) of the tax code. "

With reference to the loss, the Agency marries a thesis that is in line with the guidelines of the OIC accounting standard 12: it is necessary to verify the conditions for the allocation of such negative component to the exercise and, when they occur, said component is immediately deductible for derivation.

Today we wonder on what might be the consequences of that judgment of the Supreme Court regarding the deductibility of capital losses. It does not seem that the conclusions adopted by the judges of the Supreme Court in pronunciation in comment can undermine the possibility of deducting fully exercise the loss, when the market value of the asset is lower than the carrying amount, and the part corresponding to this difference. The tax treatment in this case is in line with the accounting treatment regulated by OIC accounting standard 12: the decision recalled other does nothing but reiterate as there are no specific rules for lease back, which means you have to follow the principle of derivation. Therefore, if the inclusion of the capital loss is carried out according to the rules contained in the accounting standards, that component will remain still deductible.

Fabio Garrini