Step of up of Shares – Advancing the Tax on Capital Gains by paying substitute tax in exchange for a step-up

Article 1, paragraphs 693 and 694, of the Law of 27 December 2019, n. 160 (Finance Law 2020 – amending and extending article 2(2) of Decree Law of 24 December 2002, no. 282, and article  7 of Law 28.12.2001, n. 448) allows the revaluation of equity investments held on January 1, 2020 .

The revaluation must be supported by an appraisal (by a registered and authorised accountant such as our staff) and the payment of the substitute taxes to be made by 30 June 2020.

This regime has been available for a number of years and involves stepping up the tax basis in the asset to current market value, paying tax, at a lower rate than normal, on the step up.

There is now a single rate of substitute tax, equal to 11%, to be applied to all shareholdings. In previous years different rates applied depending on the percentage of share capital and corresponding voting rights.

The equity investments which can be stepped up consist of investments held by natural persons otherwise than in the course of a trade or business activity – i.e. they must be held as private investments.  Certain sole proprietor, partnerships  and similar entities, non-commercial entities and non-residents without a permanent establishment in Italy) can also benefit.

The revaluation of the shareholding is allows the value of the revalued equity investment to be taken as the base value recognized for tax purposes in calcuing the capital gain arises when the shares are eventually disposed of.

This allows taxpayers to legitimately achieve, by revaluation of the shares in equity investments in companies, a tax saving ahead of a possible sale as compared to the normal tax on the capital gain.

The legislation allows you to pay substitute tax on the revalued amount, replacing the ordinary tax, generating a reduced  tax burden compared to what would have been due in the ordinary course of events. Until 31 December 2017, the ordinary taxation regime saw a distinction between substantial and non-substantial shareholdings. Substantial shareholdings were taxed at ordinary Irpef rates on a part of the taxable amount (in 2017 58,14% of the gain was taxable). Non-substantial shareholdings were taxed at 26% on 100% of the taxable gain.

From 2018, capital gains (as well as dividends) are taxed at a fixed rate of 26% on the taxable amount.

By way of example: a natural person owns – by way of a private, non business investment – a share of an srl, representing 50% of the entire share capital , with a purchase value of € 50,000, which he wants to sell at a price of € 600,000. Under the ordinary regime he or she would realise a capital gain before the deduction of acquisition costs of  € 550,000 (600,000 – 50,000) with a liability to tax at 26%  of Euro 143,000

The revaluation of the quota, if implemented before 30 June 2020, would see the payment of the substitute tax of 11% on the entire revalued amount, ie. € 550,000 x 11% = € 61,050.  A saving of nearly Euro 82,000.

The payment of the substitute tax can be made in a single instalment on or before 30 June 2020. Alreantativey in can be paid in three equal annual instalments  with a 3% per annum uplift calculated from  1 July 2020 to 30 June 2021 and 30 June 2022 respectively.

The F24 tax payment form needs to be completed to effect the tax payment The code is:  ” 8055 –  Substitute tax on income taxes for the restatement of the purchase values ​​of equity investments not traded on regulated markets”.

The substitute tax due can be offset on the F24 form, using any available tax credits (VAT, personal income tax, etc.). In case of payment in installments, the revaluation is completed with the payment of the first installment of the substitute tax. The Revenue Agency in the Circular 4 August 2004, n. 35 / E, clarified that the failure to pay the installments after the first one does not invalidate the revaluation and the unpaid tax becomes a due due to the authorities in the normal way.  Thus for example it is possible to make late payment with interest and penalties.

If you want to ‘update’ the final value of a previous revaluation, you can deduct the substitute tax paid on a previous revaluation is allowed.

Article 5 of Law no. 448/2001,  states that: “ for the purposes of determining the capital gains and losses referred to in art. 81 (now art. 67) , paragraph 1, lett. c) and c-bis) of the TUIR, for securities, units and rights not traded on regulated markets, held on January 1, 2002 (read now January 1, 2020) , instead of the cost or purchase value, it is possible to take the value on that date of the fraction of the shareholders’ equity of the company, association or entity, determined on the basis of a sworn appraisal, … provided that the aforementioned value is subject to a substitute tax on income taxes … ”

The value subject to revaluation replaces the purchase cost in determining the capital gain on the future sale of the company shares.  Thus the value determined by the appraisal is subtracted from the price realized from the sale of the equity investment, canceling (if the sale price coincides with the appraisal value) or reducing the capital gain.

Any capital loss generated as as result of the appraisal value being higher than the actual sale proceeds is not relevant for tax purposes.
In determining whether the payment of the substitute tax is worthwhile you need to consider two things:-
1) how certain is it that you will realise a gain of the shares above the appraised value:
2) what is your existing basis in the assets – as you will be paying 11% of your basis if you opt for the substitute tax.

Example: let’s  assume that you have a shareholding stake worth € 200,000; this investment is sold at the price of 300,000 euros, with a capital gain of 100,000 euros

In the event of taxation at the normal rate of 26%, the amount of € 26,000 will be due (ie: € 100,000 x 26%);

With revaluation and application of he 11% rate), an amount of € 21,0000 will be due (ie: €200,000 x 11%);

In this example, the revaluation carried out will ‘cost’ almost as much as the substitute tax. This is unlikely to make it worthwhile given that in the event of revaluation, the cost of preparing a sworn report must be taken into account.

If you would like our assistance help in deciding whether to step your shares please contact us here

The table below shows how the revaluation rules have developed over the years.

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