The “new” step-up discipline for the step-up of company assets (Art. No. 110 of Law Decree 104/20)
Among the recent provisions, the new version of the discipline provided for the step-up of company assets and shares has aroused great interest among insiders.
The provision in question is still an effective mean for the improvement of the balance sheet starting from the company’s assets already available.
But the new formulation of the step-up discipline drawn up by the so-called “Decreto Agosto” (Art. 110, Law Decree no. 104/20) has several relevant novelties such as:
- possibility of revaluing only single assets and not entire categories of assets (i.e. “cherry picking“);
- the step-up only for statutory purposes is allowed (in this case no tax is due);
- the tax rate for the recognition of the step-up also for tax purposes, is very low, amounting to 3% of the revaluation value (please note that the tax rate for the tax recognition of the equity reserve related to the revaluation surplus is set at 10%).
The purpose of the assets step-up and its potential benefits
From an accounting point of view, the revaluation law has the purpose of allowing the realignment of the book values to the current values of the underlying assets. This leads to a general improvement of the company’s financial ratios. It is also an effective mean for the reinforcement of the balance sheet in case of potential future negative economic performance.
The revaluation is effective for accounting and statutory purposes as early as the 2020 financial statements.
Given the low amount of the substitute tax rate, the revaluation is appealing also from a tax point of view. Consider, for example, the deductibility for CIT (“IRES”) and Regional tax (“IRAP”) purposes of the higher depreciation quotas that will emerge in future years (the tax recognition of the higher quotas starts from fiscal year 2021).
It is possible to pay the substitute tax due in three annual instalments. The deadline for payment of the substitute tax is the same as the deadline for payment of income tax for the fiscal year during which the step-up took place. (so, if the fiscal year 2020 ends on December 31st, the first deadline will be June 30, 2021).
What to do to assess the feasibility of the step-up?
To calculate the feasibility of a potential step-up, it is advisable to carry out an initial survey of all the company’s assets reported in the financial statements for fiscal year 2019 (which is the reference basis for the revaluation) in search of assets whose book value may be significantly lower than their current value.
It is suggested to proceed also with the analysis of intangible assets not recorded in the financial statements. In fact, there is an ongoing discussion among tax experts and local jurisdiction regarding the possibility of an extensive interpretation of the scope of the provision in question.
In this respect, it would be possible to revalue also intangible assets not reported in the Balance Sheet as at December 31, 2019: for example, registered trademarks historically used by the company, but not recorded in the balance sheet in the fiscal year in which the development and registration costs were incurred. However, it should be noted that there is also local tax rulings that considers the latter procedure not allowed.
Given the broad potential scope of the revaluation law, it is important to proceed with the most extensive possible assessment. It is fundamental to carry out a legal and tax analysis of the company assets, but it is also necessary to have a full assessment made by advisors with direct experience and knowledge of the company’s business, especially in the case of businesses strongly involved in the new “digital economy”.
The tax and law experts strongly suggest the drafting of a sworn appraisal to support the effectiveness of the revaluation value. Such appraisal is intended to provide assurance to the directors and third-party users of the financial statements.
Final observations and notes
Please note that for companies whose financial year does not end on 31 December, the provisions for the step-up are different and should be analyzed on a case-by-case basis given the regulatory peculiarities for such entities.
The revaluation presented in the article is not applicable to companies that adopt international accounting standards (IFRS).