By decision no. 8714/2024, the Italian Court of Cassation stated that the non-recourse assignment of a non-recoverable debt produces a deductible tax loss only if the taxpayer provides and documents reliable and precise elements, which are not limited to showing a consideration lower than the face value of the assigned credit and an emerging loss, but also include the elements that led to the transaction and the consequent only partial recovery of the face value of the credit.
A tax loss is deductible pursuant to Article 101, paragraph 5, of the Income Tax Code (TUIR) if the assignment determined a reasoned and relevant differential: the Italian Court of Cassation clarified this with its decision no. 8714 of April 3, 2024.
According to the Italian Revenue Agency, although the transaction was formally correct and in compliance with the first paragraph of Article 101, the same implied substantially an hypothesis of tax avoidance pursuant to Article 101, paragraph 5, and constituted a loss on receivables, provided that certain elements were lacking : lower valuation of the assigned receivables if compared to the to their face value, the requirements of reliability and exactness, necessary for the purposes of the corresponding deductibility. In a nutshell, the loss had been reclassified by the taxpayer as a capital loss on disposal, fully deducted, but non-deductible according to the Italian Revenue Agency.
The case at hand
The dispute at hand originated from an audit carried out by the Italian Revenue Agency against the taxpayer company, which showed that, with reference to FY 2008, the same company had assigned non-recourse credits deemed uncollectible. A notice of assessment followed whereby the Italian Revenue Agency challenged the incorrect deduction of the capital loss deriving from the differential of the assignment, recovering higher Income Tax (IRES) and Regional Tax on Productive Activities (IRAP).
In support of the avoidance nature of the transaction, the Revenue Office had alleged the timing of the assignment (completed at the end of the year, upon closing of the financial year) and the relationship (due to economic and personal obligations) between the transferor, the transferee and the transferred debtors, which constituted a substantial economic group among the various companies.
The notice of assessment was challenged before the First Instance Tax Court of Rome which upheld the company’s claim. An appeal followed before the Second Instance Tax Court of Lazio, with a negative outcome for the company.
The decision of the Court of Cassation
In its appeal before the Court of Cassation, the company stressed that it was a capital loss that, consequently, would not entail the requirements of reliability and exactness set forth by paragraph 5.
The Court of Cassation, in its recent decision no. 8714, rejected the taxpayer’s appeal and confirmed the position of the Tax Court of Lazio. In particular, referring to the past jurisprudence of legitimacy, clarifying that the taxpayer is required to demonstrate the presence of reliable and exact elements allowing the deduction of the loss on receivables: the agreement of a payment lower than the face value of the assigned credit is not sufficient and the reasons of the transaction and the consequent only partial recovery shall be also indicated.
Furthermore, the Court confirmed that both capital losses and losses on receivables require a review of the relevance of the cost: in both circumstances, the negative component will be deductible if the reasons of economic convenience that determined the acceptance of a payment much lower than the face value of the receivables are demonstrated.
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