Italian Financial Statements 2023: return to the loss coverage obligation

published on 7 February 2024 | reading time approx. 4 minutes

The return to the application of the ordinary rules on the reduction of share capital due to losses leads to greater complexity for companies that benefited from the exception rule in the financial years 2020 or 2021 or 2022.

Decree Law No. 23 of 2020 (so-called “Liquidity Decree”) had temporarily suspended the law that established the requirement of capital reduction or recapitalisation as well as the cause for the liquidation of companies in case of losses that reduced the share capital.

The deadline by which the loss must have reduced to less than one-third has been postponed to the fifth financial year following the current one as at 31 December 2020, so that if by the year 2025 the loss has not been decreased to less than one-third, the shareholders' meeting must reduce the capital in proportion to the losses ascertained when approving the financial statements.

For losses that reduced the capital below the legal minimum, the exemption rule provided that the shareholders' meeting, convened without delay by the directors, could act alternatively:

by postponing until the fifth subsequent fiscal year (i.e., financial year 2025 for 2020 losses) the immediate reduction of capital and the simultaneous increase to an amount sufficient to return to the required legal minimum;
by resolving to transform the company into another company without the minimum capital requirement.

Moreover, It is specified that until the end of the financial year 2025, the cause for dissolution due to reduction or loss of share capital does not apply.

This exception rule was subsequently extended for the 2021 and 2022. Therefore, losses related to financial year 2021, will have to be covered by 2026, while those related to financial year 2022 will have to be covered by 2027.

The financial statements for the financial year 2023 return to the application of the ordinary rules on the reduction of share capital due to losses.

The table below summarises the different cases in which share capital may be reduced due to losses and the relevant Italian Civil Code rules on the possible recapitalization of share capital:

Share capital reduction due to losses	Requirements
less than one-third of the share capital that does not affect the minimum capital	the loss may be carried forward indefinitely
more than one-third of the share capital that does not affect the minimum capital	the loss carry-forward for a financial year. If by the following fiscal year the loss has not reduced to less than one-third, the shareholders’ meeting must decrease the share capital in proportion to the losses determined
more than one-third of the share capital, which leads to a decrease of the capital under the legal minimum	the shareholders’ meeting must resolve on the reduction of the share capital to cover the loss and simultaneous increase, transformation of the company or its liquidation
complete loss of capital	the shareholders’ meeting must resolve to reduce the share capital and a simultaneous capital increase

Now, it becomes appropriate to analyse the two different interpretations of the rule for those companies that show a loss in the 2023 financial statements that, alone, does not affect the share capital, but that in the 2020 or 2021 or 2022 financial years benefited from the exemption rules.

Consider, for example, a joint-stock company that in the Financial Statements as at 31. December 2022 showed the following equity: share capital of 50.000,00 Euro, retained earnings 20.000,00 Euro, loss of the year 40.000,00 Euro. The result for the financial year 2023 shows a loss of 16.000,00 Euro.

According to an initial the thesis published by the Notarial Committee of Triveneto in maxim T.A.1, the exception rule provided for by the Liquidity Decree establishes that the sterilization of losses would disregard the fact that they are such as to affect the share capital and therefore considers that losses emerging from the profit and loss account for the financial years from 2020 to 2022 can be suspended regardless of their amount, gross of any reserves capable of offsetting or reducing them. Therefore, in the above described case, there is no obligation for the shareholders' meeting to intervene, as the share capital, due to the presence of the reserve of 20.000,00 Euro, is not affected by the loss of 16.000,00 Euro.

According to another thesis, shared by the National Council of Notaries (Study No. 88/2021, paragraph 8), the losses subject to sterilization, which must be specifically indicated in the notes to the Financial Statements, would only be those affecting the capital (so-called "capital losses"), and therefore not those arising from the income statement of the financial years subject to the special rules. Therefore, in the above case, previous losses must also be considered, in fact the company has already recorded a loss in year 2022 that reduced the share capital by more than one third (which would be 16.666,67 Euro). Therefore, the loss that emerged in 2023 should be fully covered (unless the company is converted or dissolved).

In the opinion of the undersigned, the first one is the viable thesis, as accepting the second one would mean anticipating the timeframe provided for by the specific rule, which would in fact already take effect when the 2023 financial statements are approved.