Italian thincap rules explained
In 2004 thin capitalisation rules became applicable for holding companies as well as other companies having a turnover exceeding approx. 5.1m euro. The current thincap rules allow – as a safe harbour rule – debts that average, during the year, up to four times the adjusted equity (i.e. debt : equity ratio of 4:1). Failing this test means that the interest on any excessive loans granted or guaranteed, directly or indirectly, by a related party is not deductible for tax purposes. The provision does not apply, however, if the debtor proves that its own credit capacity is sufficient to justify the excess debt.
In a recent circular letter the Italian tax authorities address certain practical aspects of the thincap rules. Notably it clarifies that the provision also applies to Italian permanent establishments of non resident companies.
Furthermore the letter stipulates that a loan is deemed to be justified by the debtor’s credit capacity if the loan is exclusively secured by a pledge on the shares of the debtor company.
