Registration tax in case of contribution of wind power projects followed by the transfer of shares: Italian Supreme Court rejects the requalification as a sale of going concern

Article published in Italian on Pianeta Terra n. February 2017

Tax Alert

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We report a recent decision of the Supreme Court (Cass. Civ. Section V, no. 2054, issued on January 27, 2017) excluding the requalification made by the Revenue Agency, under an anti-elusive perspective, of the contribution of a going concern represented by two wind farms under construction and subsequent transfer of shares as a single transfer of going concern.

The mentioned decision is of a general interest for whom operates in the energy industry, as it regards the common practice of transferring the wind projects into a special-purpose company, usually in the form of a newly incorporated limited liability company (s.r.l.) (so-called SPV or Newco), whose capital could be subsequently transferred to third parties. On the one hand, this practice is justified by the opportunity of segregating the project within the Newco for the purpose of benefitting from the limited liability regime applicable to the Newco and, on the other hand, the beneficial owner of the project can separate it from its other activities reducing the relevant risk of default (insolvency remote). This operation of risk segregation (so-called ring-fencing) is the standard procedure in the project financing transactions.

Moreover, the contribution in kind of the going concern represented by a wind farm, followed by the sale of capital to a third party purchaser, would allow - if all the necessary requirements are met - to benefit from the participation exemption regime (PEX), i.e. the exemption from the payment of direct taxes in relation to 95% of the capital gains resulting from the sale of capital, provided for under articles 87 and 176, 3rd paragraph of the Income Tax Code (TUIR) and Circular no. 36/E/2004 issued by the Tax Authority.

However, the above described sequence of steps (contribution in kind of a going concern and subsequent transfer of capital) is often requalified by the Tax Authority pursuant to article 20 of the Consolidated Law on Registration Tax (TUR) pursuant to which "The tax [i.e. the registration tax] is applied according to the intrinsic nature and the legal effects of the acts to be registered, even if different from their title or formal structure". Basically, when the tax office believes that certain acts or sequences of acts are performed with an elusive purpose, it has recognized the power to apply the registration tax considering the effects that such acts are meant to generate.

The requalification of the transfer of a going concern followed by the sale of capital as a single sale of the going concern could have serious tax consequences: while the contribution in kind of a going concern and the sale of capital are subject to a fixed registration tax, equal to € 200 (Tariffa, part 1, art. 4, No. 3 of the TUR), the sale of a going concern is instead subject to a proportional registration tax calculated on the value of the transferred assets, varying from 3% in case of securities up to the 9% - 15% for the real estate assets (Tariffa, part 1, art. 1 and art. 2 of the TUR), in addition to cadastral and mortgage taxes.

Summary

Following the emission by the Italian Revenue Agency (breviter the Revenue Agency) of some payment notices concerning the amount of registration tax in relation to a contribution in kind of a going concern and the subsequent sale of capital, qualified by the Revenue Agency as a single transfer of going concern and therefore subject to proportional registration tax, the involved companies have appealed against the Revenue Agency.

One of the companies had transferred in two distinct newcos two different going concerns regarding two wind farms for an overall value of several hundred thousand Euros. Following the contribution, the company had also sold to other two companies of the same group the entire capital of the above mentioned newcos.

The payment notices issued by the Revenue Agency, based on the conviction that the acts performed by the companies had the sole purpose of transferring a going concern, requested the companies to pay a proportional registration tax plus interests. In light of the above, the Revenue Agency had requalified the transaction superseding the formalities of the transaction and the qualification made by the parties and enlightening a hypothetical functional link between contracts for the purpose of applying the registration tax on the final achieved legal effects of the transaction.

Besides upholding the expiry of the 3-year time limit provided by art. 76, paragraph 2 of Presidential Decree no. 131 of 1986 for the Revenue Agency to exercise its power of assessment, the companies also contested in appeal (with ruling in favor) the reconstruction of the Revenue Agency who sustained the full legitimacy of its actions and of reconducting a bundle of deeds to a single one for the final taxation of the result.

The Supreme Court has not shared the interpretation given by the Revenue Agency considering it in breach of the recent relevant case law, pursuant to which "it is true that the registration tax is to be applied according to the intrinsic nature and to legal effects of the acts, but it is also true that it is necessary to consider the functional link established by the parties among different acts". Therefore, it is not possible to consider that the acts under consideration are suitable to produce the same legal effect of a sale of going concern, being them two separate acts. The first act being the transfer of a going concern in exchange of a participation in the newco's capital, and the second act being a sale of a participation against a price; specifically the sale of participation generates a capital gain, whilst the contribution of going concern is a neutral transaction and is performed in exchange of a participation in newcos' capital.

The registration tax, as "deed-based tax" (imposta d'atto), should therefore be applied to the legal effect that the relevant act is suitable to realize, independently from the denomination indicated by the parties and by any formality, without referring to its economic effects. The connection between different acts cannot be deducted by the relevant content rather by the behaviour of the parties. Article 21, paragraph 2, of the TUR admits the unified taxation of multiple transactions functionally connected only if they are contained in the same act.

The Supreme Court, in the case of stake, has not detected any elusive purposes and considered the matter as a legitimate choice made by the parties among different solutions. "In fact, although from an economic perspective it can be concluded that the situation of who is transferring the going concern is the same of who is transferring the entire participation, given that in both cases they are "monetizing" certain assets, it must be recognized that from a legal point of view the two situations are completely different."

The debate among scholars and the relevant case law on this matter (i.e. the tax treatment, not only in relation to the transactions whereby a contribution of going concern is followed by a transfer of capital, but more generally in relation to the anti-elusive effect of Art. 20 of the TUR) and there are several adverse decisions; anyway, this decision should be viewed with optimism by the operators since it clarifies the different tax treatment between the deed of transfer and the deed of contribution of a going concern and also better defines the registration tax as a deed-based tax (imposta d'atto).