EC Examines Italian Merger Tax Credit For Small Businesses

by Ulrika Lomas, for LawAndTax-News.com, Brussels

18 May 2006

The European Commission announced on Wednesday that it has opened a formal investigation under EC Treaty state aid rules into an Italian tax credit scheme designed to encourage small and micro enterprises to merge.

The Commission believes that the measure might distort trade and competition, and doubts that state aid is the appropriate instrument to tackle the issue.

The scheme is known as “Merger incentive”, and provides a tax credit to micro and small undertakings from the same sector for their consolidation by merger or acquisition. The credit totals 10% of the increase in the value of production of the acquiring enterprise, which constitutes the taxable basis for the regional business tax (IRAP).

The credit may be used to offset payments with respect to a number of business taxes or social contribution charges. Although a link between the credit and the consolidation process exists, the amount of the tax credit is not calculated on the basis of investments or costs.

In a statement, the EC explained that:

"The design of the scheme may bring windfall gains to some players and the distortion may be reinforced by previous illegal and incompatible aid still to be reimbursed."

The opening of the formal investigation will be published in the EU’s Official Journal, allowing interested parties to comment. The launch of this inquiry does not prejudge the Commission’s final decision.

EU Competition Commissioner Neelie Kroes announced that: “We need to ensure that, on balance, the positive effects of the Italian scheme outweigh any negative effects.”

Recommended