This content is from: Italy

Italy: Green light given to deductibility of interest expenses for real estate companies involved in the shopping mall business

Giovanni Aprile
Alban Zaimaj
Two recent decisions of the Italian tax Courts strike a blow for real estate operators, rejecting an odd interpretation taken by the Italian Revenue Agency in recent tax audits regarding the deductibility of interest expenses, which could have heavily hurt real estate companies involved in the shopping mall business.

In fact, the deductibility of interest expenses plays a key role for the real estate operators involved in the shopping mall business. Their business model, actually, relies on the revenues derived from the rental of the shopping malls to serve the mortgage loans (and the related interest expenses) granted for the acquisition of the real estate properties.

In this regard, for these companies the favourable regime established by Article 1, paragraph 36 of Budget Law 2008 is applicable, which provides the full deductibility of interest expenses accrued on mortgage loans granted for the acquisition of real estate properties to be rented out, instead of the ordinary regime, which provides for the deductibility of interest expenses up to the amount of interest income plus 30% of the company's Ebitda.

In this context, relying on the above provision, real estate companies which enter into the above-mentioned mortgage loan agreements deduct entirely interest expenses.

Differently, the Italian Revenue Agency, on the basis of a surprisingly restrictive interpretation, challenged the deductibility regime adopted by these companies, maintaining that this regime could be applied only by the so called "immobiliari di gestione", which are companies whose business activity is limited to the "passive" management of real estate property. In the view of the Revenue Agency, companies operating in the shopping mall business could not be considered as "immobiliari di gestione" in case they provided any other additional services (for example, cleaning and maintenance services, security services, management of common parts) to tenants, with the result that the management activity of such companies could not be considered passive. On these grounds, the Revenue Agency raised several assessments to real estate companies, denying the full deductibility of interest expenses and thus increasing the tax burden on such companies.

In contrast, Italian Tax Courts, relying also on the Circular 29 March 2013, No. 7, rejected the interpretation of the Revenue Agency and upheld that real estate companies involved in the shopping mall business were to be considered "immobiliari di gestione".

Indeed, the Courts stressed how the overall amount of revenues derived from the ancillary services was negligible compared to the rental revenues. Consequently, the provision of additional services did not transform, neither from a quantitative nor a qualitative perspective, the lease agreements into an integrated service agreement. Hence, the full deductibility of interest expenses was maintained.

Although Italy is not a common law country, the two judgments highlight a positive trend in favour of real estate operators. It cannot be ruled out, however, that these judgements will be appealed considering the obstinacy of the Revenue Agency in carrying out carpet assessments in this sector.

Giovanni Aprile ( and Alban Zaimaj (
Tremonti Vitali Romagnoli Piccardi e Associati
Tel: +39 06 321 8022 (Rome); +39 02 5831 3707 (Milan)

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