Deductibility of losses on bad debts: new guidelines from the Italian Revenue Office

Federico Di Cesare
Macchi di Cellere Gangemi, Rome
f.dicesare@macchi-gangemi.com

The Italian Revenue Office, through its answer to Ruling No 342 of 13 May 2021, returned to the issue of the deductibility for imposta sul reddito sulle società (IRES) purposes of losses on bad debts of small amounts that expired more than six months previously. It clarified (once again) the conditions required by the legislator and the methods that can be adopted to identify the taxable period of their deductibility.

The tax regulations regarding the deductibility of losses on bad debts for entities other than banks, financial institutions and insurance companies, are included in Article 101, paragraph 5 of the Consolidated Income Tax Code (TUIR), according to which losses on bad debts are generally deductible if resulting from certain and specific elements.

In addition to the cases of bad debts due from insolvent parties and time-barred receivables, a specific provision is set forth by Article 101, paragraph 5 of the TUIR for the so-called ‘mini-receivables’. This provides that certain and specific elements exist in any case when the receivable is of a reasonable amount and a period of six months has elapsed since the due date for the payment of the credit itself.

The same regulation specifies that the receivable is considered reasonable when it does not exceed the amount of €5,000 for larger companies (ie, those companies with a revenue not less than €100m) and no more than €2,500 for all other companies. It is also envisaged that the specific elements that determine the deductibility of the loss are considered to be present in all cases where the receivables were written off from the financial statements following the application of the applicable accounting standards.

Through the answer to Ruling No 342/2021, which confirmed the previous clarifications provided for by Circular No 26/E of 1 August 2013, and Circular No 14/E of 4 June 2014, the Italian Revenue Office specified the following two points.

Firstly, write-downs and provisions in the financial statements shall be equally treated with regard to bad debts that meet the deductibility requirements set forth by Article 101, paragraph 5 of the TUIR and for the purposes of the ‘tax provision fund’.

Provisions in the financial statements made for bad debts meet the requirements of prior allocation pursuant to Article 109, paragraph 4 of the TUIR, meaning that ‘mini-receivables’ registered in the profit and loss account as provisions are immediately deductible if they meet the requirements of Article 101, paragraph 5 of the TUIR.

Secondly, if the receivable has never been written down, the choice of the taxable period in which the deduction of the related negative component becomes relevant for tax purposes is left up to the creditor company. The only time limit is the taxable period during which the receivable is cancelled from the financial statements.