Within the regulatory framework established following Legislative Decree 192/2024, the rules for carrying forward tax assets in merger transactions continue to be based, as far as relevant here, on the net equity limit and the vitality test referred to in Art. 172, paragraph 7, of the TUIR. The legislator has confirmed the rule for neutralizing contributions and payments made in the periods immediately preceding the merger, according to the mechanism commonly defined as “sterilization.” This equity limit is accompanied by the vitality test, which generally conditions the very possibility of carrying forward tax losses and other tax assets.
Application criticalities in MLBO transactions
The application of these limits to merger leveraged buy-out transactions presents particularly complex profiles. The special purpose vehicle, or BidCo, is in fact normally newly incorporated and lacks an independent economic and financial history. For this reason, it is ordinarily unable to pass the vitality test in the absence of financial statements for previous years. Furthermore, due to the sterilization of initial contributions, the book value of net equity is often zeroed out or otherwise insufficient compared to the amount of tax assets accrued during the transaction.
The substantive approach of Circular No. 6/2016
As early as Circular No. 6/2016, the Revenue Agency had recognized, with reference to MLBO transactions, the possibility of adopting a substantive approach. According to this approach, the BidCo could be considered “viable” by virtue of the instrumental function performed within the acquisition transaction; similarly, initial contributions could be qualified as physiological with respect to the structure of the transaction, rather than artificial contributions aimed at increasing carry-forward tax assets. In this context, demonstrating during a tax ruling that the BidCo’s tax assets derived exclusively from the MLBO transaction allowed, according to the previously consolidated approach, for the non-application of both the vitality test and the net equity limit.
The new orientation of the Tax Administration
However, a recent unpublished tax ruling response would seem to mark a different orientation by the Tax Administration. According to reports, the Agency distinguishes between two scenarios:
- if the book value of net equity, net of sterilization, is sufficient, the limit is considered respected and no appraisal would be required;
- if, on the other hand, the book value of net equity is insufficient, the taxpayer should prepare a sworn appraisal report suitable to certify the sufficiency of the economic net equity.
In this second scenario, the Agency would therefore seem to require that, in the absence of sufficient book net equity, the carry-forward of the BidCo’s tax assets be supported by an appraisal of the economic value of the net equity. It follows that, in MLBO transactions, the non-application of the limit could no longer be based solely on the instrumental nature of the vehicle company and the physiological nature of the initial contributions, but would also require a formal evaluative confirmation.
This approach appears questionable, however, as it introduces an additional burden not expressly provided for by the law and of limited economic utility: since BidCo normally lacks independent operations, it does not have its own goodwill and has assets consisting essentially of the investment in the target, against liabilities represented mainly by the debt contracted for the acquisition, presenting an economic value that is often reducible to a mere algebraic result, given by the value of the investment in the target net of the acquisition debt.
The orientation therefore risks weighing down MLBO transactions with formal requirements of doubtful utility, whereas it would be preferable to continue to value the economic substance of the transaction, in line with Circular No. 6/2016.