Moratorium on loans: risks and opportunities

Davide Gabriele Savian - Partner Bernoni Grant Thornton

Addressees

The beneficiaries of this moratorium are small and medium enterprises (SMEs) as defined by the European Commission Recommendation n. 2003/361/EC, operating in Italy in all industry sectors. Basing on the European Commission definition, SMEs are enterprises which employ fewer than 250 persons and which have a turnover not exceeding Euro 50 million, and/or an annual financial statements total not exceeding Euro 43 million. As specified by the Ministry of Economics and Finance, self-employed workers having a VAT number also fall within the scope of the definition of SME.

Formalities related to the moratorium applications: applications to intermediaries

As specified in the note by the Ministry of Economics and Finance dated 22 March 2020, the applications to benefit from the moratorium on loans can be submitted by businesses starting from the entry into force of the so-called “Cura Italia” Decree, i.e. from 17 March 2020. Applications can also be sent via certified email (PEC) or other means allowing to keep track of the communication with a certified date. In said applications, businesses need to provide a self-declaration including indication of:

• the loan for which they are filing the moratorium communication;
• to have suffered from a temporary lack of liquid funds as a consequence of the Covid-19 outbreak;
• to meet all the requirements to be qualified as a microenterprise, small or medium enterprise.

Issues related to the issuance of the selfdeclaration certifying the compliance with the subjective requirement of SMEs and assessment relevant to the liquidity crisis

Once clarified the scope of the subjective application of the norm and the fulfilments necessary to benefit from the moratorium, it is now worth focusing on the risks related to the issuance of a false self-declaration attesting the existence of the subjective requirement to qualify as a SME and the liquidity crisis, also considering that the moratorium applications are not accepted automatically but are evaluated on the basis on the going concern outlook each business can guarantee.

To this end, it is worth specifying that according to criminal law, the issuance of a false selfdeclaration can constitute a criminal offence pursuant to art. 483 of the Italian Criminal Code, i.e. when a document is neither forged nor counterfeited, but contains a false statements.

From an analysis of the case-law of the merits courts ruling on the substance and the caselaw of supreme courts, it emerges that wilful misconduct is excluded in all cases in which the falsehood above is simply due to thoughtfulness or negligence, given that the Italian Criminal Code currently in force does not consider the negligent falsification of documents as a criminal offence.

More in detail, as specified by the Court of Cassation with judgement n. 33218 dated 31 May 2012, in order for the above to be classifiable as a crime, wilful misconduct cannot be considered to exist for the mere circumstance that the declaration contains an objectively untrue statement.

It is necessary, instead, to ascertain whether the falsehood is due to the thoughtfulness of the agent, or to a lack of knowledge and/ or misinterpretation of the legal provisions, or, again, to the negligent application of an administrative procedure, since the Criminal Code currently in force, as specified above, does not consider the negligent falsification of documents as a crime.

Therefore, in case of a self-declaration as required under art. 56 of the “Cura Italia” Decree certifying that the applicant company meets the dimensional requirements to be considered as a SME, as specified under the Commission Recommendation n. 2003/361/ EC, the applicant cannot be charged with the offence above, provided that the selfdeclaration is supported by an appropriate and thorough indication of the underlying regulatory requirements (the support of a specific legal/accounting opinion could be advisable in the more complex cases) basing on which it believes to meet the dimensional requirements to be considered as a SME.

On the above, we underline that it is advisable to carefully evaluate the possession of the dimensional requirement, especially in case the company belongs to a group of significant dimensions or is controlled by a holding or an investment company (or venture capital companies)1. Financial Statements items of all companies belonging to a group will actually be considered to assess the dimensional requirements, as clarified by the Ministry of Economics and Finance on 27 March 2020.

In these cases, the possibility of benefitting from the measure is not automatically excluded, there being a series of other conditions to be considered. Moreover, should the intermediary consider the moratorium just as a mean to further delay the emergence of an irreversible crisis, it should not be granting it, under penalty of committing the crime of fraudulent lending, for which imprisonment from 6 months to 3 years is provided for Directors and CEOs in case of concealment of insolvency.

This said, in order to provide evidence of the temporary liquidity crisis, the self-declaration and the moratorium application need to be supported by a business plan, carefully drafted, if possible according to the Guidelines for drafting business plans issued by the Italian Board of Certified Charted Accountants (CNDCEC). Of course, this document needs to carefully outline the impact of the Coronavirus emergency on the company’s specific business, focussing on the DSCR (debit service coverage ratio), i.e. on the ratio between future free cash flow from operations (or FCFO) and the loan instalments granted, or not, by the moratorium.

The business plan should demonstrate how the delay granted would allow to overcome the downturn, which must be a temporary and not a chronic one.

Conclusions

In the light of the remarks above, it is clear that though, on the one hand, the moratorium can bring short-term benefits, on the other hand, the relevant application needs to be supported by a careful strategic evaluation. We can actually presume that although benefitting from the moratorium does not automatically imply for a company being reported to the Risks Central Office, its position could nonetheless be subject to a specific monitoring activity by financial intermediaries as concerns its creditworthiness.

The condition to be met in order to be granted the moratorium is actually represented by the difficulties, though temporary, the company declares to face in terms of liquidity. This implies that possible future requests of new loans to the same banking institution, over a short time period, could be subject to a more stringent and stricter evaluation.

For this reason, as well as for the risk of committing a criminal offence when issuing a false declaration, companies should apply for a moratorium only in case of actual need, supporting said application by specific details proving that all subjective and objective requirements are met.

Federico Feroci - Partner Bernoni Grant Thornton

Tax benefits – Tax credit granted under the Cura Italia Decree

In the last few weeks, the Italian Parliament has been working on the conversion into law of Law Decree n. 18 dated 17 March 2020 (so-called “Cura Italia” Decree), while the Government issued a new Decree (so-called “Liquidity Decree”, i.e. Law Decree n. 23 dated 8 April 2020) introducing further measures to support the economy, businesses, professionals and families.

The “Cura Italia” Decree, which we analyse below, is the first systematic intervention - after the various Decrees of the President of the Council of Ministers issued first to face the healthcare emergency - issued by the Government with three priority goals in mind: protect public health, support the production system and safeguard the workforce. The key aim of this regulatory package is that of exponentially curb the epidemic while sustaining productive activities in order to avoid that the production slowdown (if not its complete stop) brings long lasting negative effects.

Support to business include, tax, financial and credit benefits aimed at injecting liquidity in the system in various ways, some specific for small and medium enterprises, others for bigger companies.

The norms provides for, in particular, the granting of the following tax credits, which allow for an immediate tax savings through offsetting:

• tax credit for the sanitisation of working environments (a new norm, valid only for FY 2020);
• tax credit for rentals of workshops and shops (a new norm, valid for March 2020);
• extraordinary tax credit for advertising investments (an amendment to the norms previously in force, valid only for FY 2020);
• tax credit for the transformation of deferred tax assets and liabilities relevant to the ACE (aid to economic growth) tax benefit (a new norm, valid only for FY 2020);
• tax credit for newsstands (an amendment to the norms previously in force, valid only for FY 2020).

The norms above were welcomed with interest, also due to the ease with which they can be applied, especially as concerns the tax credit for workshops and shops under point 2 above and included under art. 65 of Law Decree n. 18 dated 17 March 2020.

Tax credit for workshops and shops - Interpretations

The norm provides for the granting of a partial refund of the costs borne to rent the premises used to carry out the business activity in favour of retailers. Persons carrying out a business activity are thus granted, for FY 2020, a tax credit equal to 60% of the total amount of the rental paid for March 2020, provided they are lessees of premises falling within the C/1 cadastral category.

Circular Letter n. 8/E dated 3 April 2020 clarified that the tax credit is accrued once the rental is paid, although, as detailed below, amendments being analysed by the 5th permanent commission (budget) go in the opposite direction. The provision does not apply to those businesses considered as essential, among which pharmacies, para-pharmacies, newsstands and convenience stores.

The tax credit can be used to offset amounts due, pursuant to art. 17 of Legislative Decree n. 241 of 1997, through the F24 form, indicating the code 6914, i.e. “Tax credit for rental payments of workshops and shops – art. 65 of Law Decree n. 18 dated 17 march 2020”, created following to the Revenue Office resolution n. 13 dated 20 March 2020.

As concerns the scope of application of the norm, the Ministry of Economics and Finance clarified that it applies to shops and workshops, with the exclusion of contracts concerning other goods and services, such as leases of business units or other contractual forms regulating the relationships between tenants and lessors of commercial real estate. The norm soon originated an extensive debate due to the various limitations it contains. This are in particular, the limitation relevant to the C/1 cadastral category (workshops and shops) regardless of the type of activity carried out in the premises and of the retail area.

Limiting the norm to a sole cadastral category actually risks nullifying the beneficial effect by excluding subjects who have also been hit by the lockdown, such as private offices falling within the A/10 category (although professional activities have not mandatorily been closed) and even more so workshops for arts and professions (C/3), warehouses (C/2) and premises built or adjusted basing on the specific needs of a commercial activity and not likely to be used in other ways, unless following to major changes (D/8).

These cadastral units could also be used (as well as those under the C/1 category) to carry out retail activities (closed following to the Decree), but their lessees, in compliance with the norm, are required to pay the rental, not being entitled to any benefit.

The sole possibility for such lessees will therefore be that of asking their lessors to postpone and/or suspend the rental payment provided for in the relevant rental contract for the lockdown period (a request which has certainly been made by the majority of lessees of commercial real estate in Italy), pursuant to art. 91 of the “Cura Italia” Decree titled “provisions on late payments or breaches of contract further to the implementation of the measures reducing and anticipating the payments due under public contracts”.

The temporary impossibility to carry out one’s business activity (anything but obvious, but to be evaluated by the Judge on a case by case basis) should imply the exemption for lessees from the liability for the late payment of the rental. The impossibility of carrying out the business activity which should exempt the lessees from the payment of the rental would in any case be difficult to enact as it won’t concern the lessor who is regularly carrying out its activity (granting the availability of the premises). Reference is made, for these aspect, to the article by Carlo Saronni.

Given the above, it would be desirable for the Parliament, when converting Law Decree n. 18 dated 17 march 2020, to carefully evaluate the various amendments proposed on art. 65, all of them aimed at expanding the scope of the tax benefit.

Some of the submitted amendments, in particular, propose:

• to entirely substitute para. 1 and provide for the total exemption from the payment of rentals for lessees and for a tax credit equal to 60% of the uncollected rentals for lessors;
• to extend such measure also to leases of businesses or business units;
• to include also C/2, C/3, D/1, D/2, D/3, D/6 and D/8 cadastral categories, as well as professionals and self-employed falling within the A/10 cadastral category.

We are therefore looking forward to the conversion of the Decree into law, hoping that the inequalities outlined above will be overcome, notwithstanding the difficulties connected with the relevant streamlining and the limited public resources available.