Italian Real Estate Sector Up In Arms Over New Tax Proposals

by Ulrika Lomas, Tax-News.com, Brussels

12 July 2006

A proposed change to the way tax is charged on real estate in Italy could severely dent profitability in the country's real estate sector.

The new law, proposed as part of an emergency decree designed to cut the budget deficit, which was approved last month, would replace the current system of value added tax on buildings which aren't used in a company's core business with a 10% flat tax.

According to the Italian daily La Repubblica, which cited a study by the Scenari Immobiliari research institute, the tax changes would have cost real estate funds an additional EUR388 million ($495 million) in 2005. This would have cut the profits of the 15 most prominent funds to EUR853 million from EUR1.24 billion, the report stated.

Under the current VAT system, companies have the ability to claim back the tax over a period of ten years, meaning the tax has a minimal impact on balance sheets.

Meanwhile, Banca Italease SpA, Italy's largest leasing company, has revealed in a statement that the tax proposals would cost the firm an additional EUR1.4 billion in tax over the next three years.

"Banca Italease, together with all companies active in the leasing business, expresses serious concerns about the effects of retroactive value-added taxation (VAT), as currently contemplated in the supplemental budget law," the company stated.

"Based on an interpretation of the aforementioned legislation, companies owning buildings acquired after 1998 and not used in the exercise of their business activity would be affected, regardless of the type of financing used for the purchase of the property, even if the purchase were to have been made in cash," the firm's statement added.

Banca Italease is working with the leasing industry trade association, ASSILEA, in order to persuade the government to modify the proposed legislation.

According to ASSILEA, it is estimated that the additional tax burden of the retroactive VAT will equal roughly EUR15 billion for the clients of Italian leasing companies.

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