In Italy, corporations are subject to a special restriction on the tax deductibility of interest on borrowed capital. This rule, known as the interest limitation rule, is intended to counteract excessive debt financing and is based on Art. 96 of the Italian Income Tax Code (TUIR).
The current regulation has been in force since 2019 and transposes the European ATAD Directive (Directive (EU) 2016/1164 on combating tax avoidance practices) into national law through Decree Law No. 142/2018.
Affected entities
The interest limitation rule applies to all companies subject to IRES, in particular:
- joint stock companies (SpA), limited liability companies (Srl), cooperatives and consortium companies based in Italy
- public and private institutions and trusts that mainly carry out commercial activities
- non-resident companies and entities, including trusts, which carry out their activities in Italy through a permanent establishment
Article 96 of the Italian Income Tax Act does not apply to financial intermediaries, IRPEF subjects (partnerships, sole traders) and non-commercial entities.
Functionality and calculation
The interest limitation rule determines the extent to which interest expense is tax deductible. The calculation is carried out in two stages:
- Offsetting against active interest: Passive interest (for the current period and carried forward) is subject to deductibility without limit up to the amount of active interest (current and carried forward).
- Deductibility of net interest expense: The excess portion of interest expense (after offsetting against interest income) is only deductible up to 30% of the "fiscal ROL" (Risultato Operativo Lordo).
The „Fiscal ROL” (EBITDA-like measure)
In simple terms, ROL corresponds to earnings before interest, taxes, depreciation and amortisation (EBITDA), but is calculated according to tax criteria rather than commercial law criteria.
Since 2019, it has been mandatory to use the "fiscal ROL" for the calculation, which replaces the former "accounting ROL" (ROL contabile). It is calculated as:
- Value of production – Production costs (items A – B of the income statement)
- + Depreciation of tangible and intangible assets
- + Leasing instalments for business assets
Tax deduction restrictions must be observed (e.g. telephone expenses are only 80% deductible, car expenses only 20%).
Carry-forward of surpluses
| Surplus |
Tax treatment |
Time limit |
| Passive interest |
Non-deductible passive interest can be carried forward indefinitely and is deductible in subsequent years if there is sufficient active interest or fiscal ROL. |
Unlimited |
| Active interest |
Surplus active interest can be carried forward to the next tax period without any time limit and offset against passive interest there. |
Unlimited |
| 30% ROL surplus |
If 30% of ROL exceeds the passive interest, the surplus ROL can be used for the following five tax periods (FIFO principle). |
5 years |
Special rule for „old loans“
For loans contracted before 17 June 2016, the unused accounting ROL accumulated up to 31 December 2018 may still be used. This amount can be carried forward without time limitation, but only to offset interest related to those specific pre-2016 loans.
Conclusion
The Italian interest limitation rule (Art. 96 TUIR) is of great importance for the tax planning and financing of companies. Careful calculation of the fiscal ROL and forward-looking design of the financing structure are crucial in order to avoid interest deduction restrictions or make optimum use of them.