Revaluation reserve: taxation only in case of distribution to shareholders

The revaluation of business assets, with tax recognition through the payment of a 3% substitute tax pursuant to Article 110 of Legislative Decree 104/2020, entails the recognition in equity of a reserve equal to the higher value attributed to the assets net of the substitute tax payable.

If not franked by payment of the 10% substitute tax, the revaluation surplus becomes a reserve in suspension of taxation and therefore, in the event of distribution to shareholders, it would be subject to taxation both by the company and by the shareholders benefiting from the distribution, pursuant to Article 13, paragraph 3 of Law 342/2000.

However, the issue becomes more complicated when it comes to the use of the revaluation reserve in suspension of taxation to cover losses of the company.

Paragraph 2 of the same Article 13 provides that the revaluation surplus in suspension of taxation is not taxed if it is used to cover losses, but in that case the suspension restriction is not removed, because it is transferred to the future profits of the company, unless the reduction is made definitive by resolution of the extraordinary shareholders’ meeting. In the latter case, the obligation to reconstitute the assets is removed and the tax suspension clause ceases.

The revaluation surplus could also be used, for example, to offset a merger deficit and thus reduce equity, if not attributable to assets or goodwill.

In its answer 316/2019, the Italian Revenue Agency stated that all uses other than to cover losses result in the taxation of the reserve by the company; therefore, in the case of a merger deficit, a reduction of the revaluation reserve in suspension of taxation should lead to the automatic taxation of the reserve by the company.

However, the Italian Association of Accountants (AIDC), in its rule of conduct No. 211, has pointed out that reserves subject to tax suspension fall into two categories
– reserves subject to taxation in any case of use
– reserves subject to taxation only in the event of allocation to shareholders
and that revaluation reserves fall into the second category.

The AIDC, after a careful analysis of Article 13 of Law 342/2000, states that any reduction of the revaluation reserve in suspension of taxation for reasons other than its allocation to shareholders is governed only by the second paragraph of Article 13, and not by the third paragraph of that article.

Accordingly, all uses of the tax-suspended revaluation reserve other than allocation to shareholders would have no effect on the company’s income. Therefore, according to the AIDC, there should be no taxation of the company either when the reserve is used to cover losses for the year, or when it is used to offset, for example, a merger deficit not otherwise allocable.