Optional revaluation of real estate – Law Decree 185/2008 (L. 2/2009)

OBJECTIVE AND APPLICATION SCOPE OF THE ANTI-RECESSION DECREE

Optional revaluation of real estate assets

The law decree of November 29 2008 n. 185, so-called "anti-recession decree", was approved by the Government to face the exceptional international crisis and it establishes extraordinary measures in favour of families, workers, retired individuals and businesses. In particular, article 15 (paragraphs 16 to 23) contains tax provisions regarding the optional revaluation of real estate assets. The rational of the new norm must be understood as a chance for any unprofitable subject to represent real estate value in greater accordance with market criteria. At the time the Bill was passed (Law 28 of January 2009, n. 2) it was amended with regard to the substitute tax rate (decreased with respect to the initial version) and to the period in which you may take the greatest depreciation and the value for purposes of conveyance of property (more time for the acknowledgement of greater values).

SUBJECTIVE REQUIREMENTS

Individuals entitled to real estate revaluation

Ires individuals and Irpef collective organizations, which do not apply the international accounting principles in preparing their balance sheet. Capital companies may take advantage of the revaluation, including cooperative companies and health insurance companies, non-commercial organizations and partnerships, as well as individual businesses and non-residents (limited to assets included in their organizations established in Italy). Subjects that prepare balance sheets based on international accounting principles are always excluded.

ASSETS THAT MAY BE REVALUATED

Not all real estate assets may be subject to a revaluation

Real estate property, excluding building sites and property whose production or exchange represents the actual line of business of the company, reported on the balance sheet in progress as of December 31, 2007. Property transferred during fiscal year 2008 can obviously not be the subject of a revaluation. Instrumental and non-depreciable property, on the other hand, may be revaluated. Therefore, it seems the exclusion only applies to merchandise real property, that is, used by the business in its trade which must involve the building or sale of real property with the objective of exploiting the same and not just using it for no profit (cf. Internal Revenue Service memorandum 4/08/2004, n.36/E and its subsequent resolution 15/12/2004 n.152/E). Therefore, in light of the above, we reach the conclusion that both the construction company and whoever purchased the property for resale are excluded from the regime in question, since it represents left-over stock.

TIME LIMIT

Terms to carry out the revaluation

Any revaluation must be reported in the balance sheet or statement of accounts of the fiscal year following the one in progress as of December 31, 2007, with a subsequent approval deadline of November 29, 2008.

REVALUATION TERMS AND PROCEDURE

How to charge the credit balance

The revaluation must pertain to all assets belonging to the same homogeneous category; depreciable and non-depreciable assets are deemed to belong to different categories. Requirements to fall into a specific category shall be the ones applicable on the date of the balance sheet that includes said revaluation. The credit balance resulting from the revaluation must be charged to the capital or allocated in a sort of reserve, with a tax suspension.

RIGHT TO FISCAL ACKOWLEDGEMENT OF GREATER VALUE OF PROPERTY

Fiscal effects of revaluation and early conveyance of property

You may obtain a fiscal acknowledgement of the greater value attributed to real estate property by paying a 3% substitute tax (previously 7%) on instrumental property, thus depreciable, and by 1.5% (previously 4%) on non-instrumental property, thus not depreciable. Said greater value will be acknowledged, for purposes of a greater depreciation, as of the fifth fiscal year following the one in which said revaluation was recorded, whereas for purposes of a possible transfer, as of the sixth subsequent fiscal year. For instance, an individual whose fiscal year corresponds to the calendar year, will have the greater depreciation acknowledged as of fiscal year 2013 and the increased value for purposes of establishing a capital gain or loss at the time of transfer, as of January 1st, 2014. The early conveyance of a revaluated asset cancels the fiscal effect of the revaluation causing a capital gain or loss to be determined without taking into account the greater value recorded at the time of the revaluation.

RIGHT OF REDEMPTION OF ASSET RESERVE GENERATED BY THE REVALUATION CREDIT BALANCE

One may also redeem the revaluation credit balance through the application of a 10% substitute tax of individual income tax, company income tax, regional taxes on production activities and any possible additional tax.

TAX PAYMENT TERMS

Payment in full by the time of payment of the tax balance pertaining to the fiscal year in which the revaluation was effective or in 3 yearly instalments, with the first instalment due by the same date. Tax amounts may be subject to adjustments.