The law that established Benefit Companies (L. 208/2015) did not regulate the tax treatment, i.e. the potential deductibility, of costs and charges pertaining to the sphere of charitable activities, which the benefit company is obliged to pursue. In the absence of a specific tax provision in this sense, one wonders how the principle of tax relevance can be reconciled with the obligation to operate in a sustainable way balancing the interests of the shareholders, those of other stakeholders and the pursuit of the common benefit purposes.
In fact, in carrying out their economic activity, Benefit Companies combine the profit-making purpose typical of the corporate contract and the common-benefit purposes that entail the presence of cost components necessary to operate in a responsible, sustainable and transparent way, towards all stakeholders. It follows that the costs incurred in pursuit of the purposes of common benefit, given the compliance with the requirements of certainty, accrual, relevance and determinability prescribed by the tax legislation, must be assessed under the additional filter of tax inherence.
Although the original principle limited to the cost-revenue relationship has been superseded by the broader cost-business relationship, the development of case law has not definitively expressed the basis of this principle, leaving some doubts.
We can infer a general notion of the principle of tax inherence, implicit in the concept of income, from Article 109(5) of the Income Tax Code (TUIR), which states that “expenses and other negative components other than interest expense, with the exception of tax, social security and socially useful charges, are deductible to the extent that they relate to business or assets that generate revenues or other income which contribute to forming income or which do not contribute to forming income because they are excluded“.
In other words, the deductibility of the costs incurred is conditioned by their inherent nature in the business carried out since they are functional to the income creation. The guideline of the tax authorities have clarified on several occasions that the relevance of a cost is linked to the referability of the same to the company’s business (Resolution 196/2008), meaning that a correlation between the cost incurred and the taxable income is necessary, whose scope of applicatoin must necessarily be assessed in relation to all the business indicated in the company’s purpose and for which the company was established and which the shareholders are required to contribute. The Supreme Court has also expressed the same view, affirming the principle according to which inherency is to be understood as a correlation in a broad sense between the cost and the business. Therefore, the expenses”assumes relevance for the purposes of tax base qualification not so much because of its explicit and direct correlation to this or that specific income component, but by virtue of its correlation with an activity potentially capable of producing profits for the enterprise“.
That said, it is believed that not all expenses incurred by the Benefit Company can be viewed under the same lens by the tax authorities.
In fact, although there are no doubts about the deductibility of costs incurred in pursuit of common benefit purposes that are intimately connected to the business of the company, given the “indissoluble correlation” between the expense and the company, some critical issues may arise in the case of general common benefit purposes, i.e. that do not have a direct link to the business of the company because they fall within those expenses of the subjective commitment of the Benefit Company to operate in a responsible, sustainable and transparent way. In the latter case, the expenses for common benefit purposes can be considered deductible if the analysis clearly shows the logical decision-making process that links them to the business of the company, which required their inevitable incurrence.
The Benefit Company can find a valid evidential support in the annual report, which, according to the provisions of Law no. 208/2015, must include “the assessment of the impact generated“. The impact report, precisely, illustrates the impact objectives, both specific and general, that the company aims to achieve, defining the individual activities that have been carried out to achieve them in the past financial year and setting out those to be achieved for the following financial year, thus also making it possible to identify the costs incurred and to be incurred, for the pursuit of said objectives, which will flow into the financial statements. Lastly, the Benefit model has a significant impact on the company’s reputation in the eyes of the community. Therefore, the ability of “Benefit costs” to directly increase the intangible asset represented by the company’s image and the positive effects in terms of increased competitiveness on the market, justifies their deductibility insofar as they can produce future revenues and profits.
In the lack of previous case law and guideline documents on the subject, these considerations are based on the general principles of tax law. We therefore hope that an ad hoc legislative text will better define the scope of operation of the Benefit Company model, with the relative consideration of the tax regime.