Italy: The point about the two-year composition with creditors

published on 12 July 2024 | reading time approx. 5 minutes

Legislative Decree 13/2024 introduced and regulates the new composition, but what is the real scope of this institute?

The two-year composition with creditors can be defined as a compliance institute aimed at encouraging voluntary compliance aimed, first and foremost, at those who apply ISAs. For the year 2024 only, on an experimental basis at taxpayers under the flat-rate system (regime forfetario).

Therefore, the institute under consideration applies to smaller taxpayers, income from business owning and self-employment income from the exercise of arts and professions carrying out activities in Italy. The regulation does not make any distinctions based on the legal structure of taxpayers. Therefore, both taxpayers subject to IRPEF (e.g., self-employed, individuals, entrepreneurs, partnerships and assimilated entities) and entities subject to IRES (e.g., corporations) can access the two-year composition with creditors. In this regard, from an interpretation of what is reported in the regulatory text, Italian permanent establishments of non-resident companies would also seem to be included in the scope of the arrangement.

In order to enter into the two-year agreement with the Revenue Agency, the above-mentioned taxpayers must meet the following access requirements:

absence of definitively assessed tax and social security debts; the explanatory report to Legislative Decree 13/2024 clarifies that debts arising from taxes administered by the Revenue Agency means those arising from the notification of:

a. tax acts resulting from control activities of the offices;
b. tax acts resulting from settlement activities of the offices;
c. payment notices concerning tax claims, which are the subject of notices of irregularities issued as a result of automated or formal control of the declaration pursuant to Articles 36-bis and 36-ter of Presidential Decree 600/73 as well as Article 54-bis of Presidential Decree 633/72;

having paid, by the deadline for acceptance of the proposal, any definitively assessed tax and social security debts in the total amount of EURO 5,000.00 or more (including interest and penalties).

In addition to meeting the aforementioned access requirements, Legislative Decree 13/2024 stipulates that the signing of the composition with creditors is limited as well for taxpayers who:

have failed to file their tax returns in at least one of the previous three tax periods;
in the last three tax periods, have been convicted (or have taken a plea bargain) for tax crimes under Legislative Decree No. 74/2000 or for the crimes of false corporate communications, money laundering, self-laundering and use of money, goods or utilities of illicit origin;
have started business in the previous fiscal year.

The Council of Ministers is considering whether to include additional grounds for exclusion in order to limit access to composition with creditors for individuals who:

adhere for the first fiscal year covered by the arrangement to the flat-rate system (regime forfetario);
are affected by changes in the corporate structure in the first year to which the proposal of arrangement refers;
are involved in merger, demerger, transfer in the first year to which the proposal of arrangement refers;
have earned, in the exercise of arts and professions or business, income or portions of income that are wholly or partially exempt, excluded or not competing in the determination of the tax base and/or in excess of 40 per cent of business or self-employment income.

The two-year composition with creditors represents an attempt to bring the Revenue Agency and the taxpayer closer together in the income determination process. The arrangement proposal is formulated by the Revenue Agency at the end of a process based on information to be provided by the taxpayer. This information must be communicated through the compilation:

Of panel P of the ISA Form 2024, as far as ISA subjects are concerned;
of Section VI of the LM framework of the REDDITI 2024 model for taxpayers under the flat-rate scheme (regime forfetario).

Within the aforementioned frameworks, it will be possible to view the agreed income proposal put forward by the Revenue Agency and, if necessary, accept it by submitting the REDDITI 2024 form.

Acceptance of the proposal made to the taxpayer entails a number of benefits, namely:

access to the bonus scheme (regime premiale) under Article 9-bis co. 11 of DL 50/2017;
exclusion from assessments by the Revenue Agency under Art. 39 of Presidential Decree 600/73 for the fiscal years covered by the agreement. However, controls that could potentially lead to the forfeiture of the stipulated agreement always remain possible;
for the categories of income subject to the arrangement, the possible realization of a higher taxable income than that agreed with the Revenue Agency does not result in a modification of the terms of the agreement.

However, the actual convenience of initiating the above-described procedure with the Revenue Agency should be evaluated as:

the income subject to arrangement is determined unilaterally by the Revenue Agency taking into account a series of parameters (including reliability and anomaly indicators, evaluation of the operating management of the last three fiscal years, intersectoral comparison and revaluation considering macroeconomic projections of the country's GDP growth) in order to define an agreed income that determines an ISA score of 10. In defining the income, there is no adversarial process between the taxpayer and the Revenue Agency; as a result, the taxpayer can merely accept or reject the proposal received;
taxpayers with low ISA scores would receive a composition with creditors proposal with significantly increased income (even up to eight times the declared income) in order to achieve an ISA score of 10 with obvious economic-financial impacts in the short term. On the other hand, taxpayers with high ISA scores (equal to or higher than 8) should have little incentive in joining the two-year arrangement since their declared income would not deviate much from the Revenue Agency's proposal.

In conclusion, the institution under consideration would appear to be particularly convenient exclusively for those taxpayers who anticipate substantial growth in taxable income, subject to arrangement, in the coming tax periods.