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June 2, 2021

Italy enacts exceptional 15% Notional Interest Deduction or equivalent tax credit for 2021

Executive summary

On 25 May 2021, Italy’s Law Decree n. 73 of 25 May 2021, referred to as the “Sostegni-bis” decree (the Decree), was published in the Official Gazette and entered into force on the same day. While effective immediately, the Decree will have to be converted (with potential changes) into Law within 60 days from its publication to remain in force. Some implementing measures will follow.

The Decree introduces additional economic measures in response to the COVID-19 crisis by pledging €40 billion in stimulus measures to help relaunch the Italian economy. Several measures are introduced including a new set of cash incentives, extension of specific tax credits, resources to guarantee access to credit and liquidity as well as specific tax benefits for the textile and fashion industries.

Among others, a significant tax measure has been introduced to allow companies to benefit from an exceptional 15% Notional Interest Deduction (NID) for fiscal year (FY) 2021 or, alternatively, from an equivalent tax credit to be used against any type of tax.

Detailed discussion

Exceptional 15% NID for FY2021

In order to incentivize Italian entities’ capitalization, the Decree includes a strengthening of the NID for the fiscal year following the one in progress at 31 December 2020 (i.e., FY2021 for calendar year companies). The same rule applies for Italian permanent establishments of foreign groups.

An increased 15% (instead of the ordinary 1.3%) NID rate exceptionally applies to the equity increase computed at the end of FY2021 as compared with the equity at the end of FY2020. The maximum limit for such qualifying increase is set at 5 million per company (which would result in a maximum NID of 750,000 with a cash corporate income tax (CIT) savings of 180,000 per legal entity).

Any equity increases beyond the 5 million threshold should still be able to benefit from the ordinary 1.3% NID regime as well as any qualifying NID base accrued as at 31 December 2020.

Cash injections and shareholder debt waivers, even if made in the last days of 2021, are relevant as of the beginning of FY2021 for the computation of the 2021 NID basis as well as the set aside of 2020 profits to equity reserves.

Tax credit alternative

According to the existing rules, any excess of ordinary NID may be converted into tax credits to be used against payments of the Regional Tax on Productive Activities (IRAP, generally levied at 3.9%).

With reference to the exceptional 15% NID, the Decree provides that, as an alternative to a CIT deduction and irrespective of any excess NID, companies may simply choose to convert the total or part of the 2021 NID in tax credits (i.e., maximum 180,000) to be used immediately after the execution of the equity increase against any type of tax even during 2021, i.e., CIT, local tax (IRAP), value-added tax, payroll taxes, social security contributions. Such tax credit could even be available for refund or sold to third parties. The tax credit election may prove particularly efficient for companies in a CIT loss position.

Implementing details concerning the tax credit alternative are deferred to an upcoming measure that, among other things, should provide instructions for a preliminary notification to the tax authorities.

Recapture mechanisms

Recapture mechanisms (both for the case of the deduction and tax credit alternatives) will apply if the 15% NID qualifying equity decreases within the following two FYs for reasons other than statutory loss coverage, e.g., dividend distributions or returns of capital before January 2024 may cause a recapture of the 2021 benefit to the extent such distribution brings the company’s equity below the portion of the 2021 amount that benefitted from the 15% NID.

Companies incorporated in FY2021

Companies incorporated through FY2021 are expected to benefit from the 15% NID with reference to the entire qualifying equity increase. However, the benefit should be pro-rated to the days of the company’s existence in 2021. For example, a company incorporated on 1 June 2021 receiving an equity injection of 5 million before the end of FY2021 with a 31 December year-end should benefit from the 15% NID for six months only (i.e., 750,000/12*6). Nonetheless, non-calendar year companies formed during 2021 and closing their FY after twelve months should be able to take the exceptional benefit for their entire FY.

Multiple companies and tax groups

As mentioned, the Decree sets a maximum threshold of equity increase qualifying for the 15% NID at 5 million (resulting in a cash tax saving of 180,000). Since this limit is set per legal entity, a group with multiple Italian subsidiaries should be able to have each of the entities benefit from the qualifying maximum equity increase. The same conclusion should apply if the multiple Italian subsidiaries are part of an Italian tax group. For example, if an Italian company with two local subsidiaries receives a cash contribution of €15 million and makes a cash contribution to its subsidiaries of 5 million each (by decreasing its NID base by €10 million) each of the three entities may be able to benefit from the 15% NID on a 5 million basis.

As a general reminder, NID cannot be used to put a company in a tax loss position and any excess NID may be either carried forward with no time limitation or surrendered to a domestic tax group, if any. As a residual option (and as already mentioned above), according to the ordinary rules, any excess NID may be converted into a tax credit for IRAP purposes.

Corporate reorganizations

While the Decree does not address the specific case of company reorganizations, it is expected that ordinary NID rules should apply in the case of mergers between Italian entities which have benefitted from the 15% NID. According to such ordinary rules, the NID basis of the company resulting from a merger should correspond to the sum of the respective NID positions.

In this respect, it is crucial that the aggregate NID basis is not lower than the basis at the end of FY2021 in order to avoid the risk of a 15% NID benefit recapture. Also, any excess 15% NID carryforward by the companies involved in the merger should survive provided that the ordinary merger tests for tax attributes carryforwards are met (i.e., “vitality” and “net-equity” tests).


Groups with an Italian presence may want to reconsider the impact of Italian profits repatriation and restructurings planned for 2021, evaluate year-end strategies to capitalize Italian subsidiaries or permanent establishments, consider acceleration of funding for potential acquisitions in Italy and conversion of shareholder loans into equity benefitting from the 15% NID.


For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, International Tax and Transaction Services

Ernst & Young LLP (United Kingdom), Italian Tax Desk, London

Ernst & Young LLP (United States), Italian Tax Desk, New York


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