With art. 1 of Decree Law n. 201/2011, the Italian government introduced the so-called ACE benefit, acronym for "Aiuto per la Crescita Economica" (Aid for Economic Growth), a specific measure aiming to boost Italy's economic development by reducing company tax liabilities and enhancing their capital structure. The main objective of this new tax benefit was to start by reducing the difference in tax treatment between debt finance and corporate capitalization.
The ACE benefit consists in granting the deduction from corporate income of "notional interests" obtained by multiplying the increase in equity by a coefficient determined by law. Such coefficient corresponds to a tax rate fixed at 3% for the first three tax periods (starting from 2011), raised to 4% for 2014, 4,5% for 2015 and 4,75% for 2016 as provided under par. 3 of art. 1 of the above-mentioned Decree Law.
In relation to the deductible amount, par. 4 of the Decree establishes that if the notional value exceeds the overall declared income, the exceeding amount may be carried forward to increase the deductible amount for the following years or may be considered as a tax credit (with the application of the tax rates provided under art. 11 and 77 of the Italian Income Tax Code i.e. Presidential Decree n. 917/1986). In particular, such tax credit may be used to reduce the Regional Tax on Productive Activities (IRAP) to be divided in five equal annual amounts.
To give a concrete example, the ACE benefit works in the following way: for an increase in capital of 400.000 euro in 2016, for example, the tax rate applied would be 4,75%, which would result in a 19.000 euro deduction from corporate income.
In specific, the ACE base takes into account the net equity resulting from the end-of-the-year balance sheets of the previous year and the increases in equity i.e. the sum between the positive elements, such as cash contributions or allocations of profit to reserves (excluding the ones destined to the non-disposable reserves) minus the negative ones, such as distributions of earnings or allocation of assets to the shareholders.
Art. 68, par. 4 of the draft 2017 Budget Law (not approved yet) brings a series of amendments affecting the ACE benefits. First of all, it plans to reduce the coefficient of 4,75% established for 2016 to 2,3% for 2017, and 2,7% from 2018 onwards, thus reducing the ACE tax benefit for Italian companies.
Furthermore art. 68, par. 2 of the draft 2017 Budget Law extends also to exceeding ACE the limitations already provided for tax losses and passive interests (art. 96, par. 4 of the Italian Income Tax Code) in case of extraordinary operations.
In particular, in case of merger (art. 172, of the Italian Tax Code) or demerger (art. 173, of the Italian Tax Code), any exceeding amount of ACE may be carried forward by the company resulting from the operation provided that the following conditions are met:
- the amount of ACE to be carried forward does not exceed the relevant net equity (i.e. without considering capital contributions undertaken during the 24 months before the merger or the lowest amount of net equity shown by the interim financial statement) (so called "Net Equity Test"); and
- the profit and loss statement (P/L) of the company shows, for the financial year prior to the merger resolution, revenues related to the core business of the company ("ricavi e proventi dell’attività caratteristica") and employment costs higher than 40% of the average of the two prior financial years (the same limits would be applicable also to the potential ACE realized during the period in which the merger is executed) (so called "Vitality Test").