On 28 December 2018, Legislative Decree 29 November 2018 no. 142 implementing the Anti-Tax Avoidance Directives 2016/1164 and 2017/952 (ATAD implementing decree) was published in the Italian official gazette. On 31 December 2018, Italian Budget Law 2019 was published in the Italian official gazette.

Both the ATAD implementing decree and the Italian Budget 2019 introduced tax measures which have an impact on the real estate sector. The most significant changes applicable starting from FY 2019 are the following:

• new interest limitation rule;
• confirmation of full deductibility of mortgage loans interest incurred by real estate companies;
• repeal of the notional interest deduction (ACE);
• increase in the deductibility of municipal real estate tax (IMU);
• clarifications on the recharacterization rule for registration tax purposes;
• reintroduction of business assets step-up.

New interest limitation rule

ATAD implementing decree amends the existing interest limitation rule under article 96 of the Italian income tax code. According to the new regime, starting from FY 2019:

• passive interests (exceeding active interests related to the same FY and active interests carried forward from previous FYs) are deductible in each FY up to 30% of the tax EBITDA related to the same FY as well as 30% of tax EBITDA carried forward from previous FYs;
• the EBITDA is calculated taking into account tax rules (while under the previous regime the EBITDA was determined based on accounting rules);
• non-deductible passive interests may be carried forward without time limitation;
• active interests’ excess capacity may be carried forward without time limitation (while under the previous it was not allowed);
• EBITDA’s excess capacity may be carried forward for 5 FYs (while under the previous regime there was no time limitation);
• such new regime applies also to interest capitalized in the cost of assets, including inventory (while under the previous regime they were explicitly excluded from the interest limitation rule);
• interest incurred on loans used to fund long-term public infrastructure projects are excluded from the interest limitation rule, if certain conditions are met.

Confirmation of full deductibility of mortgage loans interest incurred by real estate companies

According to article 1 paragraph 36 Italian Budget 2008, passive interests related to mortgage loans secured by immovable properties meant to be leased are fully tax deductible for companies that mainly carry on real estate activity (Real Estate Company). In order to qualify as a Real Estate Company: (i) real estate assets meant to be leased shall represent more than 50% of the aggregate fair market value of the company’s assets and (ii) at least two thirds of the company’s revenues shall derive from the lease of real estate assets or from the lease of business going concerns whose value is mainly represented by the fair market value of real estate assets.

Such provision was repealed by the ATAD implementing decree starting from FY 2019. Therefore, the general interest limitation rule (i.e. 30% tax EBITDA threshold) applies also to interests related to mortgage loans subscribed by Real Estate Companies.

However, Italian Budget 2019 (which was published after the ATAD implementing decree) confirmed the full deductibility of mortgage loans interest incurred by Real Estate Companies.