According to Legislative Decree. No. 175/2014, in case of defaulting transferee / buyer, the transferor / supplier is entitled to recover the VAT originally paid to the Treasury, under the condition that the transferee / buyer - who has not paid his debt - has entered into a debt restructuring agreement with creditors pursuant to Article 182-bis of the Italian Bankruptcy Law (IBL) or into an out-of-court reorganization plans pursuant to Article 67, third paragraph, letter d) of the Italian Bankruptcy Law (IBL)
The New Provision
Article 31 of Legislative Decree No. 175 of November 21st, 2014 (so-called Tax Simplification Decree), which came into force on December 13th, 2014, extended the scope of Article 26, second paragraph, of Presidential Decree No. 633 of October 26th, 1972 (so-called VAT Decree).
First of all, it should be noted that the aforesaid Article 26 deals with the notes of variation issued for VAT purposes, i.e. the notes that transferor / suppliers are entitled to issue whenever the taxable amount or the tax due of a transaction already registered is reduced as a result of “pathological events” (such as declaration of voidness, revocation, termination, rescission and other similar events, non-payment wholly or partly due to insolvency proceedings or to fruitless enforcement proceedings), and as a consequence of the application of allowances or discounts provided by the contract.
It is well known that, in case of uncollected (in whole or in part) receivables, the creditor has to deal with the following issues: (i) the deductibility of the loss on receivables from business income, (ii) the recoverability of VAT originally paid to the Treasury.
(i) As to the first issue, Article 101, fifth paragraph, of the Italian Tax Income Code (TUIR) allows the deductibility of loss on receivables provided that the debtor is subject to the following insolvency proceedings: bankruptcy, compulsory administrative winding-up (liquidazione coatta amministrativa), concordato preventivo, extraordinary administration for large insolvent companies, debt restructuring agreement with creditors.
Such provision does not include the out-of-court reorganization plans among the insolvency proceedings which would entitle the creditor to deduct loss on receivables. In this regard, it should be noted that the draft of the Decree providing measures for the growth and internationalisation of companies - which is currently undergoing the approval process by Parliament - extends the deductibility of the loss on receivables even to losses realized towards debtors who has entered into an out-of-court reorganization plan published in the Companies’ Register.
(ii) As for the recoverability by the creditor of the VAT originally paid to the Treasury, before the amendments introduced by the Tax Simplification Decree, it was believed that – given the content of insolvency proceeding herewith which are aimed to reach a restructuring of the debt outside of a judicial process – the note of variation could not be issued – due to the provisions of Article 26, third paragraph, of Presidential Decree No. 633/1972 – more than one year after from the transaction date. Upon expiration of that period, the VAT related to the credit unfulfilled was no longer deductible.
The Tax Simplification Decree provides that, when the debtor has entered into a debt restructuring agreements with creditors pursuant to Article 182-bis of the IBL or into an out-of-court reorganization plans pursuant to Article 67, third paragraph, letter d) of the IBL published in the Companies’ Register, the transferor / supplier can recover the VAT originally paid to the Treasury even if later than one year from the transaction date. The lawmakers have therefore expressly recognised relevance to non-payment arising from proceedings which, although governed by bankruptcy law, cannot be considered as insolvency proceedings, as they are based on an informal restucturing arrangement that is not based on a permanent state of insolvency.