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Notional Interest Deduction (Aiuto alla Crescita Economica – D.L. N. 201/2011)

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Notional-Interest-DeductionThe NID regime was introduced in Italy in 2011 to mitigate the difference in the tax treatment applied to com- panies funded with debt versus companies funded with equity and, in general, to encourage Italian businesses to strengthen their equity structure.

While companies leveraged with debt would generally deduct accrued in- terest expenses, NID allows Italian companies and Italian branches of foreign companies funded with equity to deduct a notional expense computed as a percentage of the equity increases occurred after FY 2010. Such amount represents a tax deduction for CIT purposes (not IRAP).
From an operating standpoint, ACE allows the deduction from the overall taxable income of an amount corre- spondent to the notional return of the new equity capital according to the following rules:
• each year equity increases shall be computed compared to the equity as at 31.12.2010;
• for FYs 2011, 2012 and 2013 deduction was calculated as 3% of the equity increases. FY 2014’s rate was 4%, 4.5% for FY 2015 and 4.75% for FY 2016. FY 2017 and 2018’s rates are, respectively, 1.6% and 1.5%;
• equity increases are triggered, mainly, by cash contributions and profits carried forward as well as re- nounce of credits by the shareholders;
• equity decreases consist of reductions of the equity through any kind of assignment in favor of the shareholders (i.e. dividends). Losses are not considered as equity decreases;
• each year, the deduction cannot exceed the amount of the equity of the company at the end of the FY (including the loss /profit of the year);
• the deduction cannot generate a tax loss. Therefore, if the deduction exceeds the taxable income for CIT puposes the difference can either be carried forward to the next FYs or converted into a credit to offset IRAP payments (if due) in the next FYs.

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