On 16 March, the Cura Italia decree (Law Decree No. 18/2020) was approved – effective as of 17 March – to strengthen the health care system and support businesses, workers, and families, by preserving employment levels and income, in the face of Covid-19.

The Cura Italia decree includes a measure to allow financial and non-financial companies (excluding those in insolvency proceedings) which transfer their receivables from defaulting debtors by 31 December to convert existing deferred tax assets (“DTAs”) into tax credits. It applies only to DTAs relating to: (a) tax losses carried forward (“Tax Losses”) and (b) excess of notional interest deduction carried forward (“NID”) (Art. 55).

The benefit deriving from the Tax Losses and NID cannot exceed 20% of the face value of the disposed loans. Furthermore, the aggregate loans by the corporate group is capped at EUR 2 billion.

From the disposal date:

• the tax credit is interest free and reflected in the regulatory capital of banks;

• the tax credit can be: (a) set off against tax liabilities; (b) refunded by the tax authorities; or (c) transferred to other companies in the group or to third parties;

• Tax Losses and NID whose DTAs have been converted into tax credit cannot be carried forward; and

• the conversion of DTAs into tax credits is subject to application of the 1.5% DTA guarantee fee regime.

These tax credits do not give rise to any taxable income in the hands of the seller for the purposes of corporate income tax or regional tax on productive activities.

The Government announced that this measure will allow businesses to access additional liquidity and credit of up to EUR 10 billion and will give additional impetus to the non-performing or unlikely to pay loan markets. However, uncertainty exists concerning its scope and application, especially with respect to businesses with international activities.

First, although the decree refers to “company”, it is expected that the incentive is not limited to Italian tax resident companies but extends to Italian permanent establishments of non-resident companies (or at least resident in EU/EEA countries).

Second, no clear reason is given as to why the conversion of DTAs into tax credits is subject to the application of the 1.5% DTA guarantee fee regime. The new incentive merely refers to Art. 11 of Law Decree No. 59/2016 (introduced to close the infringement proceedings brought by the EU Commission against the previous DTA conversion tax regime for banks). Considering the short time of applicability of the new incentive (i.e., loan disposals this year) and the upcoming new state aid framework, a 1.5% fee on converted DTAs seems disproportionate. Indeed, it could lead to excessive costs that would negate the tax incentive.

Third, there is no clear reason to limit the scope of the incentive to DTAs relating to Tax Losses and NID. Indeed, Italian companies (and Italian PEs of non-resident companies) operating abroad (especially in jurisdictions with a CIT rate higher than the Italian one) may also have DTAs related to surplus foreign tax credits (which can be carried forward for up to eight years and set off against corporate income tax due on income sourced in the same country). The need to ensure enough liquidity to businesses may be met by granting a full tax credit (instead of the ordinary tax credit) for taxes paid abroad on or before 31 December 2019. Therefore, the DTAs eligible for the conversion should include also those relating to surplus foreign tax credits.

It is to be hoped that during the 60-day term for conversion into law, Parliament will broaden the scope of Art. 55 to grant liquidity incentives to companies with international activities and eliminate the costs that make the tax incentive less appealing.