Tax settlement: its origin and the reasons underlying its widespread publicity

The tax settlement for distressed businesses represents a particular settlement procedure between the Tax Authorities and taxpayers, which can be applied only within arrangement with creditors insolvency procedures and debt restructuring agreements and allows taxpayers to reduce and/or defer their tax debt, in case of both ordinary and privileged credit.

The tax settlement procedure, introduced based on the definition of “settlement” under art. 1965 of the Italian Civil Code, represents an innovation in the Italian tax system, since, going beyond the general principle of inalienability of the tax credit, it allows public institutions to accept partial payment proposals, i.e. to waive part of their credit, or deferred payment proposals, according to rules that are distant from the ordinary ones regulating the procedures to avoid tax litigation.

Commonly referred to as “tax settlement”, it rather admits the settlement not only of tax and ancillary amounts due to the tax authorities, but also of contributions due to social security, welfare, and insurance (against invalidity, old age, and for survivors) institutions, as well as their relevant ancillary amounts. Therefore, the concerned institutions are – besides the Revenue Office – INPS, INAIL and any other private social security and welfare institutions that impose the payment of mandatory contributions.

Referring to the provisions under the Italian Insolvency Law of 1942 and, then, under the Business crisis and Insolvency code of 2019, it is possible to make settlement proposals to the Revenue Office and to social security and welfare institutions, provided that the following conditions occur: i) advantage compared to the liquidation alternative (i.e., bankruptcy); ii) prohibition to set worse conditions.

Substantially, institutions can accept proposals or enter into agreements with taxpayers in difficulty if such proposals are “advantageous”, both as regards the amount payable and in relation to payment terms, compared to what they would receive in case of starting a liquidation procedure and provided that the proposal does not provide worse conditions compared to the proposals made to other creditors belonging to the same category or to lower categories.

This procedure, introduced in the first years of 2000, has gone through significant modifications over years.

In its original formulation, the tax settlement was referred to as “settlement of tax bills” and was only applicable to amounts entered in the taxpayers’ roll relevant to taxpayers resulting as insolvent in enforcement procedures. Later, in order to safeguard creditors and the going concern, the group of admitted debtors was extended by introducing the “tax settlement” and art. 182 ter of the bankruptcy law in 2005. In following years, concerned debtors were further extended, by including agricultural entrepreneurs in 2011, and the scope of the provision was also extended, by introducing the cut of VAT and of applied but unpaid withholdings in 2016.

Among the most relevant updates, there is the one introduced with art. 3, para. 1 bis, of Law Decree no. 125 of 2020, which introduced the so-called tax “cram down”, i.e., the power of the Court to remedy the lack of acceptance, by Institutions, of the proposals made by taxpayers through an imposition, if: i) the proposal is actually “advantageous” compared to the liquidation alternative; ii) voting results as determining to reach the majorities established by law.

Due to the above further provisions, aimed at making up for the inefficiencies of Institutions, which often put off their answers due to rigid internal bureaucratic processes, or did not answer in order to avoid incurring personal liabilities of their officers, the tax settlement procedure and, therefore, both procedures it is related to, reached great success and an extended utilisation by Italian companies.

In fact, in recent years, the number of Italian companies, most of all SMEs, whose debt structure is totally or almost totally made up by tax and social security debts, has increased considerably, up to constituting the greatest part of applicants for insolvency procedures.

There are many reasons underlying the fact that tax and social security debts are the most part of the total debt of Italian companies.  On the one hand, among the possible creditors of a company, the Revenue Office and social security institutions are often those able to act less promptly and effectively towards taxpayers, as they often require years before starting enforcement measures that can preclude business activities; moreover, on the other hand, the means made available by the revenue office over years have allowed taxpayers to postpone the fulfilment of their obligations at an often minimal cost – e.g., possibility to pay by instalments, voluntary settlement procedure, “write-off” of tax bills, and the many procedures to avoid litigation – up to reaching such a number of debts that cannot be borne.

However, in August 2023, the law set a limit to the excessive use of this instrument, by providing that the tax cram down could be requested only in case of non-liquidation plans and based on a minimum settlement of 30%-40% of tax and social security debts. 

This last amendment is analysed on the Focus On article of this TopHic issue.