Tax settlement and its potential

The possibility to “negotiate” with the Tax Authorities and social security institutions is certainly a considerable advantage for distressed entrepreneurs and businesses.

As already mentioned, those persons that apply for insolvency procedures are commonly those having debts due to the tax authorities and other public entities.

Therefore, the new provisions are aimed at helping distressed businesses as much as possible, also on a going concern basis, however, many question the fact that the tax settlement procedure is applicable only to judicial procedures, i.e., arrangement with creditors and debt restructuring agreement, therefore excluding the “certified reorganization plan” and the newly introduced “negotiated settlement of the business crisis”.

The exclusion of out-of-court procedures from the application of the tax settlement procedure has certainly reduced their significance and, subsequently, limited their use.

Both the abovementioned out-of-court procedures are based on the achievement of agreements with creditors without the participation of the judicial authority but, as it happens for the obtainment of safeguard measures within the abovementioned negotiated settlement of the business crisis, a proper appeal should be filed with the Court and, similarly, a specific court validation of the tax settlement agreement could have been provided for both procedures.

The lack of a similar provision is even more manifest in the certified reorganization plan, since, while in the negotiated settlement of the business crisis the only possible proposal to the involved Institution is an extraordinary deferment of debt up to 10 years, in this case no proposal can be made and the amount due must be fully paid within the ordinary terms.

However, in the case of court procedures, which the tax settlement can be applied to, limits to its use are provided as well.

For example, within debt restructuring procedures, it is more and more believed that it is impossible to reach an agreement with creditors in case of a “single” creditor, most of all if this is the Revenue Office. At the end of the recent years’ discussion, in which both law and case law had opposite opinions on the possibility to validate an agreement with the single creditor, the latest and recent judgments of the Florence Court of Appeal – no. 370/20022 – and the Milan Court of Appeal – no. 1125/2022 –, clarified its inadmissibility.

On the one hand, the rationale under the above judgments is understandable and right, as they are aimed to prevent the Tax Authorities from being the only creditor to pay the price of restructuring, however, on the other hand, their limitation contrasts with the current Italian situation which is characterized by companies than need only – or almost only – to manage their unbearable debt with the Revenue Office and social security institutions.

The current formulation provides that the tax settlement proposal is to be submitted to concerned Institutions no later than 90 days before the filing of the court validation application, in the case of a debt restructuring procedure, or at the moment of filing of the appeal in the case of an arrangement with creditors procedure. The concerned institutions will then evaluate the content of the application and issue their reply on the same.

Such evaluation will concern the advantage of the proposal compared to that obtainable through the liquidation procedure.

According to the regulation and to Circular Letter of the Revenue Office no. 34E of 2020, such “advantage” should be the only condition to be evaluated and, therefore, no further conditions should be considered, such as the past conduct of the concerned debtor or if the same “deserves” to be helped, the degree of satisfaction of the proposal, or further hypotheses or actions that the debtor may take.

Nevertheless, it could be ascertained that the opinion of Institutions – and, subsequently, their acceptance or refusal – is strongly influenced by other elements, such as the debtor’s conduct in the years preceding the application, the origin of debt, and the reasons underlying its increase over time, the “effort” requested to the concerned Institution compared to that proposed to other creditors, the efforts made by the concerned entrepreneur to resolve the crisis, and the relation between the original credit due and the one actually offered.

Without making any generalization on the behaviour of Institutions in evaluating proposals, it can be affirmed that the economic “advantage” of the proposal is not the only element to be considered and, therefore, that offering a higher amount compared to that obtainable through the bankruptcy procedure would not be sufficient to obtain acceptance by the concerned Institution of the proposed tax settlement terms.

A further critical aspect related to the methods adopted for the analysis of proposals is the territorial factor, as it could be noted that Institutions and Courts have shown different interpretations and opinions in the case of request for a Court validation. Therefore, this aspect should be preliminarily analysed, too, with respect to each specific case.

However, to mention one positive aspect, there is a general and higher attention to those cases where the tax settlement procedure is applied for by entities having a considerable number of employees, since a refusal of the proposal by the Institutions would imply an almost certain default.

Despite the critical aspects that are still present, the tax settlement procedure is certainly a very useful instrument to be applied carefully, and the contribution of new external financial resources is the determining element that can lead to the approval of the proposal by concerned Institutions. The financial factor is the one which clearly determines the “advantage” mentioned by the regulation, excluding any possible interpretations of other evaluation factors or other unclear elements related to the proposal.