Tax Loss Carryforwards: New Rules, Intra-Group Transactions and Recent Clarifications
The rules governing tax loss carryforwards have undergone a significant revision, aimed at ensuring greater consistency in the provisions applicable to changes in control and extraordinary transactions, while preserving their anti-abuse purpose of preventing tax loss trafficking.
Basic rules
As a general rule, Article 84 of the Italian Tax Code (TUIR) allows tax losses to be carried forward without any time limitation, with the possibility of offsetting them against up to 80% of the taxable income generated in each tax period.
Tax losses incurred during the first three tax periods, if related to a newly established productive activity, may instead be fully utilized.
Specific limitations apply where circumstances arise that may potentially result in the transfer of tax attributes from one economic entity to another. In particular, these include the so-called business vitality test and net equity test, which apply:
where the legal control of the company carrying forward the losses is transferred and this is accompanied by a change in the main business activity actually carried out (as provided for under Article 84, paragraph 3);
in the case of mergers, demergers and business transfers (pursuant to Articles 172, 173 and 176 of the TUIR), where the relevant conditions are met, affecting not only the carryforward of tax losses but also other transferable tax positions, including excess deductible interest expenses.
It is within this regulatory framework of limitations that the newly introduced rules operate.
Change of business activity: the activity actually carried out is relevant
With regard to the limitation provided for under Article 84, paragraph 3, the reform has further clarified the meaning of a change in business activity for tax purposes.
The following principles remain unchanged:
the main business activity must be identified based on factual circumstances and the activity that is quantitatively predominant, regardless of formal elements (such as the company’s articles of association or ATECO code);
the tax periods to be monitored, in addition to the year in which the transfer of control takes place, are the two preceding and the two following tax periods.
The reform has clarified that a change in business activity is deemed to occur in any event where there is a change in the relevant sector/merchandise segment or in the event of the acquisition of a business or business branch.
Therefore, the criterion based on the predominance of revenues, as previously supported by the Italian Revenue Agency in Circular No. 320/1997, appears to have potentially lost its primary relevance and may now only have a residual role.
Similarly, the legislator has narrowed the scope of application in the case of business leases, a transaction that had previously been considered outside the concept of a “change in business activity” in Ruling No. 214/2022.
In this respect, further interpretative guidance from the Italian Revenue Agency would be desirable, in light of the revised wording of the legislation.
Tax losses in intra-group transactions
Article 177-ter of the TUIR introduced the disapplication of the tax loss carryforward limitations provided for under Articles 84, 172, 173 and 176 of the TUIR for extraordinary transactions carried out within the same group.
In particular, Ministerial Decree of 27 June 2025 clarified that:
the above limitation relief applies only to tax losses generated from the tax period starting on or after 31 December 2024;
the term “group” refers to the set of companies between which a control relationship exists, as well as companies subject to the same controlling entity, provided that such relationship has existed from the first day of the tax period to which the losses relate;
tax losses generated before the tax period starting on or after 31 December 2024 (or losses of a company entering the group) remain subject to the business vitality test and net equity test. Once these tests have been passed, the losses benefit from the same relief (the so-called “approved losses”).
MLBO: Italian Revenue Agency Tax Ruling No. 160 of 12 August 2026
A further clarification was provided by Tax Ruling No. 160 of 12 August 2026, concerning a merger leveraged buy-out (MLBO) transaction involving the acquisition of a minority shareholding.
The acquisition vehicle, specifically incorporated for the transaction, had generated tax losses and excess interest expenses arising from the acquisition. Due to its nature as a newco, the vehicle was not ordinarily able to satisfy the tests required under Article 172 of the TUIR.
The Italian Revenue Agency acknowledged the disapplication of the relevant limitations, emphasizing the instrumental role of the acquisition vehicle and the absence, in the specific case, of any tax loss trading scheme.
