Italy: The new tax realignment option in M&A transactions

With the Italian Legislative Decree 192/2024 significant changes have been made to the realignment regime. For transactions executed on or after January 1, 2024, the "ordinary" tax realignment regime outlined in Art. 176, para. 2-ter, of the Italian Consolidated Income Tax Act has been modified, and the "derogatory" tax realignment regime stipulated in Art. 15, para. 10-12, of Italian Decree-Law 185/2008 is no longer applicable. Therefore, it is now possible to opt only for the "single" realignment regime provided by Art. 176, paragraph 2-ter, of the TUIR.

The regime option must be indicated in the tax return for the tax period in which the transaction takes place.

The option provided by this regime, like the old regime, allows taxpayers to realign the higher values recorded in the financial statements, resulting from extraordinary transactions, by paying a substitute tax. The substitute tax rate is currently 18 per ​cent for CIT and 3 per cent for Regional tax, to which any surcharges are added (while the previous rates were 12 per cent, 14 per cent, and 16 per cent according to bracket). To calculate the substitute tax rate, the difference between the Regional tax rate applied to the entity opting for this regime and the ordinary rate for industrial companies must be considered.

The substitute tax must be paid in a lump sum by the deadline for payment of the balance of taxes relating to the fiscal year in which the transaction is carried out. For instance, if an entity ending its fiscal period on 31 December carried out a transaction in 2024, the payment deadline will be June 30, 2025.

Italian Legislative Decree no. 192/2024 made a significant change by allowing the revaluation and realignment of individual assets, and not only categories of assets. Consequently, application of the substitute tax is no longer constrained by the realignment of homogeneous categories but can be made to individual assets. This change fosters greater flexibility and precision in tax calculations, streamlining the realignment process for taxpayers.

In the absence of official clarification on the matter and of substantial differences with respect to the wording of the old regulations, the clarification provided by the Italian Revenue Agency in Circular no. 57/2008 on the previous regulation can still be considered valid. According to this Circular, the revaluable assets could be: tangible and intangible fixed assets classifiable under B.I and B.II of the Assets in the Italian balance sheet.

The greater values subject to substitute tax are recognised for tax purposes as of the tax period in which the option is exercised.

Also, on the basis of the new wording of paragraph 2-ter, the differences are determined by comparing the value recognised in the financial statements, following the extraordinary transaction, with the previously recognised value of the same assets. It follows that realignment may also be performed with respect to differences already existing prior to the time the tax-neutral transaction is implemented. Consequently, with regard to the different ways in which the realigned transactions could be recognized, the higher value disclosed in the accounts and subject to substitute tax must be considered, for tax purposes, as having being added to the “inherited” tax cost.

The surveillance period for the recapture rule has been redefined in the new wording of the law. The effects are forfeited in the case of transfer of an asset prior to the third tax period following the period of the option, instead of the fourth tax period as was provided under the previous rules.

Moreover, if the substitute tax has been separately identified for CIT and Regional Tax purposes (in addition to the specific surcharges), the recapture rule means that the amount already paid can be offset against the corresponding tax.

The above changes will have real effects in both M&A transactions and valuation appraisals.

In M&A transactions, as a result of the increase in the amount of the substitute tax (from 12-14-16 per cent to 21 per cent), a cost-benefit analysis of the regime is required. With the new substitute tax rates, the difference between the substitute tax and the ordinary CIT and Regional tax rates is significantly reduced, which will possibly also impact on contractual pricing.

Similarly, in the context of business valuation, in the past, the possibility of realigning higher values at a rate of 12-14-16 per cent allowed for reduced deferred taxation on capital gains. Today, with an overall tax rate of 21 per cent, the theoretical taxes on deferred capital gains may also be higher and, as a result, the estimated net worth may be lower.​