Italy’s tax administration issued the new consolidated corporate income tax return form for the year 2009, with its instructions, which deals with the new rules for interest deductions in tax consolidated groups.
The Finance Law for 2008 repealed the thin capitalization rules and enacted new provisions on limitation of interest deductions for business and corporate taxpayers. Under the new rules, interest expenses exceeding interest income are deductible up to 30 percent of borrower’s gross accounting profit or earnings before interest, taxes, depreciation and amortization (EBITDA). Excess interest (that is, interest expenses exceeding the 30 percent threshold for a year) and excess limitation (that is, the excess of 30 percent limitation over net interest expenses for a year) can be carried over to and deducted in future tax years up to the limitation amount available in those years.
In tax-consolidated groups, excess interest and excess limitation can be transferred among the members of the group, enhancing the ability to deduct interest expenses within the group.
The new tax form and instructions for 2009 confirm that each member of the group computes their own interest deductions and excess interest and limitation amounts, and any excess interest or excess limitation of any member of the group can be transferred to the parent, which would calculate the additional interest deduction and adjust the taxable income of the group accordingly.
For example, if group member A has excess interest of 100, group member B has excess interest of 50, and group member C has excess limitation of 120, the parent can deduct additional 120 of interest by using the excess limitation of group member C to offset the excess interest of group member A and B.
It is still not clear whether the transfer of the excess limitations and excess interest is mandatory or elective, and whether it should be done proportionally or for the entire amount.
With a proportional rule, 80 of excess interest would be transferred from group member A and 40 of excess interest would be transferred from group member B; a total of 120 excess interest would be offset with a total excess limitation of 120 transferred from group member C, and excess interest of 40 and 10 would be carried over to future years individually by group members A and B.
With an all inclusive rule, 30 would be excess interest of the group that the parent would carry over and deduct in future years.
In general, the new rules as implemented in the new tax form for 2009 facilitate the deduction of interest expenses within a tax consolidated group. For this purposes, the group includes foreign subsidiaries that meet the domestic tax consolidation requirements.