How to Account for Deferred Tax (DTA / DTL) After Italy's 2026 Budget Law, Practical Guide for Accountants & Cfos

Italy’s 2026 Budget Law (Legge di Bilancio 2026) has introduced a series of tax measures, from tighter loss-carryforward limits and revised participation-exemption (PEX) rules to new provisions for converting deferred tax assets into tax credits, that directly alter the recognition, measurement and disclosure of deferred tax assets (DTAs) and deferred tax liabilities (DTLs) in both IFRS and Italian GAAP financial statements. For anyone responsible for deferred tax accounting in Italy, the FY2026 year-end close now carries materially higher compliance risk. This guide provides the step-by-step accounting treatment, worked journal entries and disclosure templates that in-house accountants, CFOs and small accounting firms need to navigate these changes with confidence.

It also addresses the Pillar 2 transitional deferred tax rules that affect multinational groups headquartered in or operating through Italy.

Immediate actions for CFOs (week 1):

• Inventory all existing DTA and DTL balances. Map each balance to the specific Budget Law provision that may affect its recoverability or measurement.
• Update the enacted-rate schedule. Confirm which new or amended tax rates are “enacted or substantively enacted” at the balance-sheet date for IAS 12 purposes, or enacted for OIC purposes.
• Commission a recoverability reassessment. Where the Budget Law narrows future deductible amounts (e.g., restricted loss carryforwards), reassess the probability of sufficient future taxable profits to support each DTA.

The 2026 Budget Law: Summary of Tax Changes That Affect Deferred Tax

The 2026 Budget Law, published in the Gazzetta Ufficiale and accessible via Normattiva, introduced or amended several provisions that create, modify or extinguish temporary differences between accounting carrying amounts and tax bases. Understanding each measure’s accounting implication is the essential first step in any deferred tax reassessment exercise. The key measures that affect deferred tax accounting in Italy for FY2026 are outlined below.

Loss-carryforward restrictions. The Budget Law tightened the annual limit on the amount of prior-year tax losses that may be offset against current taxable income. Where a company previously recognised a DTA on the full expected utilisation of tax losses, the new cap reduces the rate at which those losses can be absorbed. This creates a timing extension (the loss is still available, but over a longer horizon), which may affect both recoverability assessments and the discount-equivalent implicit in long-dated DTAs.

Participation exemption (PEX) adjustments. Amendments to the PEX regime changed the exempt percentage applicable to qualifying capital gains on equity participations. Where the PEX percentage increases, a larger portion of the gain becomes a permanent difference (no DTA/DTL), while the taxable portion shrinks. Conversely, any reduction in exemption creates new temporary or permanent differences that must be reflected in the deferred tax computation.

Fixed-asset depreciation and instalment changes. The law revised the allowable tax depreciation rates for certain categories of fixed assets and introduced accelerated instalment options for qualifying investments. Where the tax depreciation rate now differs from the accounting depreciation rate, a temporary difference arises, typically generating a DTL in early years and reversing in later years.

DTA-to-tax-credit conversion provisions. Building on mechanisms first introduced in earlier crisis-era legislation, the 2026 Budget Law extended and amended the rules allowing certain entities to convert qualifying DTAs into directly spendable tax credits. The accounting treatment of such conversions requires careful consideration: the DTA is derecognised, and a tax-credit receivable is recognised, with any difference taken through profit or loss or equity depending on the framework.

Temporary surcharges and sunset provisions. Certain temporary IRES surcharges introduced by the Budget Law have defined expiry dates. DTLs or DTAs arising from these temporary rates must be measured at the rate expected to apply when the difference reverses, which may not be the current headline rate.

Timeline of Enactment and Effective Dates

Who Is Affected: Entity Types and Thresholds

The loss-carryforward and PEX changes apply broadly to all corporate IRES taxpayers, including società per azioni (S.p.A.), società a responsabilità limitata (S.r.l.) and Italian permanent establishments of foreign entities. The DTA-to-tax-credit conversion is available only to entities meeting specified balance-sheet or revenue thresholds set out in the Budget Law text. Accelerated depreciation elections are generally open to all taxpayers investing in qualifying asset categories. Micro-entities following simplified reporting may be affected indirectly (e.g., changed tax bases), but their disclosure obligations under Italian GAAP remain minimal.

The Compliance Decision: Recognise or Derecognise DTAs/DTLs in Deferred Tax Accounting Italy

The central question for every entity after the 2026 Budget Law is whether existing DTA and DTL balances remain valid and whether new balances must be recognised. Both IAS 12 (for IFRS reporters) and OIC 25 (for Italian GAAP reporters) require a structured assessment of temporary differences and recoverability. The following decision tree translates these standards into practical steps.

Step 1, Identify all temporary differences and tax bases. Compare each asset and liability’s carrying amount to its tax base as revised by the Budget Law. Where the law changes the tax base (e.g., a new depreciation rate alters the future deductible amount), the temporary difference changes on the date of enactment.

Step 2, Determine the expected timing of reversal. Temporary differences reverse when the underlying asset is recovered or the liability settled. The new loss-carryforward cap, for example, extends the period over which a loss DTA will reverse. This matters because entities must be able to demonstrate probable taxable profits across the full reversal period.

Step 3, Assess probability of future taxable profits. For DTAs, IAS 12 requires that recognition be limited to the amount for which it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. Under OIC 25, the test uses the term ragionevole certezza (reasonable certainty). Where the Budget Law narrows future deductions (loss cap) or extends the horizon, updated profit forecasts are essential.

Step 4, Evaluate the effect of enacted law changes. A change in tax law that is enacted (or substantively enacted under IFRS) by the balance-sheet date must be reflected in the deferred tax calculation for that period. Budget Law measures enacted before year-end are captured in the FY2026 closing balance; measures enacted after year-end but before approval of financial statements are disclosed as non-adjusting events.

Retrospective vs Prospective Accounting, When Restatement Is Required

Changes in tax rates or tax bases arising from new legislation are generally accounted for prospectively under both IAS 12 and OIC 25. The remeasurement gain or loss is recognised in the income statement (or other comprehensive income / equity, if the original DTA/DTL was recognised there) in the period in which the law is enacted. Restatement of prior-year comparatives is not required for a change in tax law, this is not a change in accounting policy or a correction of an error under IAS 8.

However, if an entity discovers that a DTA was incorrectly recognised in a prior period (for example, based on forecasts that were unreasonable at the time), that correction is an error correction requiring retrospective restatement.

Interaction With Consolidated Group Rules and Pillar 2 Transitional Rules

Italian groups filing on a consolidated basis must reconcile entity-level deferred tax with group-level eliminations. The OECD’s Pillar 2 rules introduce a separate effective-tax-rate computation that references deferred tax. The IASB’s amendments to IAS 12 provide a temporary mandatory exception from recognising deferred tax arising from the top-up tax itself; however, entities must still disclose the existence of the Pillar 2 legislation and its expected impact. Groups should verify that the Budget Law’s domestic implementation of Pillar 2 transitional rules does not create unintended deferred tax balances at the consolidated level.

Measuring DTAs and DTLs After the Budget Law

Once an entity has determined which DTAs and DTLs to recognise, measurement requires selecting the correct tax rate and applying it to the relevant temporary difference. Under IAS 12, DTAs and DTLs are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on rates enacted or substantively enacted at the balance-sheet date. Under OIC 25, the rate must be the enacted rate applicable to future periods. No discounting is permitted under either framework.

Use of Enacted Tax Rate, Mechanics and Example

Where the Budget Law introduces a temporary surcharge (for example, an additional IRES levy applicable only to FY2026–FY2028), the rate used to measure a DTL that will reverse during that window must include the surcharge. A DTL expected to reverse after the surcharge expires should be measured at the standard rate. This requires a year-by-year reversal schedule.

Worked example, Measurement of a DTL on accelerated depreciation:

If the temporary difference is expected to reverse entirely after FY2028 (when the surcharge expires), the DTL would instead be measured at 24%, yielding €7,200. The reversal schedule therefore drives the measurement outcome. This level of granularity is critical for year-end tax adjustments after the 2026 Budget Law changes.

DTA Impairment and Indicators Specific to 2026 Changes

The Budget Law’s restrictions on loss utilisation and PEX scope directly introduce new impairment triggers for deferred tax assets in Italy. At each reporting date, entities must reassess whether sufficient taxable profits will be available to utilise recognised DTAs. Where the answer is no longer affirmative, the DTA must be written down, a process analogous to DTA impairment, though the standards frame it as a derecognition of the excess.

Key impairment indicators arising from the 2026 changes:

• Loss-carryforward cap reduces annual absorption capacity. If forecasts show the entity cannot utilise its tax-loss DTA within a reasonable horizon given the new annual cap, a write-down is required.
• Reduced PEX exemption increases the permanent-difference portion. DTAs previously recognised on the taxable portion of an expected gain may need recalibration.
• Low near-term profitability. Macro-economic conditions or sector-specific headwinds (exacerbated by the Budget Law’s cost impacts) may weaken profit forecasts.
• Expiry of temporary surcharges. DTAs measured at the surcharge-inclusive rate must be remeasured at a lower rate if reversal shifts beyond the surcharge window.
• Regulatory or entity-specific changes. Entities losing access to the DTA-to-tax-credit conversion mechanism (e.g., falling below size thresholds) lose a recovery avenue.

Practical Evidence List for Auditors

Auditors and finance controllers should document the following to support continued DTA recognition:

1. Board-approved profit forecasts covering the full DTA reversal period, updated for Budget Law impacts.
2. Tax-planning strategies, documented actions the entity would take, if necessary, to generate taxable income (e.g., asset disposals).
3. Binding contracts or committed revenues that underpin near-term profitability assumptions.
4. Historical track record, evidence that prior forecasts have been accurate and that tax losses have been utilised as planned.
5. Sensitivity analysis, showing the DTA balance remains recoverable under plausible downside scenarios.

Sample Impairment Journal Entry and Disclosure Wording

Journal entry, DTA write-down:

Sample disclosure: “During FY2026, the Group reassessed the recoverability of its deferred tax assets in light of the loss-carryforward restrictions introduced by the 2026 Budget Law. As a result, a write-down of €15,000 was recognised in income tax expense, reflecting the portion of tax-loss DTAs for which sufficient future taxable profits are no longer considered probable within the statutory utilisation period.”

Journal Entries and Worked Examples for Deferred Tax Accounting in Italy (IFRS & Italian GAAP)

This section provides the standard journal entry patterns required for the main DTA and DTL events after the 2026 Budget Law, followed by two worked numerical examples.

Standard journal entries:

• Initial recognition of a DTA. Debit: Deferred tax asset (Crediti per imposte anticipate). Credit: Income tax expense, deferred (Imposte anticipate).
• Initial recognition of a DTL. Debit: Income tax expense, deferred (Imposte differite). Credit: Deferred tax liability (Fondi per imposte differite).
• Remeasurement for rate change. If the rate increases, increase the DTA/DTL balance with the offsetting entry in income tax expense (or OCI/equity if the underlying item was recognised there). If the rate decreases, reverse accordingly.
• DTA-to-tax-credit conversion. Debit: Tax credit receivable (Crediti d’imposta). Credit: Deferred tax asset (Crediti per imposte anticipate). Any measurement difference is recognised in income tax expense.

Worked Example 1, SME Under Italian GAAP

An Italian S.r.l. has a provision for product warranties of €50,000 that is not deductible until claims are paid. The enacted IRES rate is 24% (no surcharge for this entity). Under OIC 25, the entity recognises a DTA because warranty claims are expected to be paid within three years, and the entity has consistently been profitable.

If the Budget Law subsequently raises the IRES rate to 25% for FY2027, and the entity expects the warranty provision to reverse in FY2027, the DTA is remeasured at year-end FY2026: €50,000 × 25% = €12,500. An additional €500 is debited to the DTA and credited to income tax expense.

Worked Example 2, Group Reporting Under IFRS (IAS 12) With Pillar 2 Considerations

An Italian listed group has a subsidiary with €200,000 in unused tax losses. The loss-carryforward cap introduced by the Budget Law limits annual utilisation to €40,000 per year. The group’s forecast shows taxable profits of €60,000 per year for the next five years at the subsidiary level. The enacted IRES rate (inclusive of temporary surcharge) is 27.5% through FY2028, then 24% from FY2029.

If the forecast showed taxable profits of only €30,000 per year, utilisation would be limited to €30,000 annually (below the cap), and the entity would need to extend the reversal horizon or write down the excess DTA. For Pillar 2 purposes, the group applies the IASB’s mandatory exception and does not recognise deferred tax on the top-up tax itself, but discloses the expected Pillar 2 impact in the notes.

Year-End Practical Checklist and Disclosures Required for Deferred Tax

The following 12-item checklist covers the critical year-end tax adjustments and disclosure actions for FY2026.

1. Obtain the final enacted text of all Budget Law measures from the Gazzetta Ufficiale.
2. Update the deferred tax rate schedule with any surcharges and their sunset dates.
3. Reconcile every DTA/DTL balance to its underlying temporary difference.
4. Recalculate loss-carryforward DTAs using the new annual utilisation cap.
5. Reassess PEX-related balances for changes between temporary and permanent differences.
6. Test DTA recoverability against updated board-approved profit forecasts.
7. Document tax-planning strategies available to support DTA recovery.
8. Prepare the reversal schedule (year-by-year) for all material DTAs and DTLs.
9. Process journal entries for any new recognition, remeasurement, impairment or conversion.
10. Draft note disclosures: composition of DTAs/DTLs, critical judgments, sensitivity analysis.
11. Disclose the impact of the Budget Law as a significant event affecting deferred tax.
12. For groups: confirm Pillar 2 exception applied and prepare the required Pillar 2 disclosures.

Sample disclosure paragraph (IFRS): “The Group has reassessed its deferred tax balances as at 31 December 2026 in light of the Legge di Bilancio 2026. The key judgments relate to the recoverability of deferred tax assets on tax losses carried forward, which are now subject to an annual utilisation cap. Management has concluded, based on five-year profit forecasts and available tax-planning strategies, that the recognised DTA of €X is recoverable. A 10% reduction in forecast taxable profits would reduce the recoverable DTA by approximately €Y.”

Conclusion and Recommended Next Steps

The 2026 Budget Law has materially changed the landscape for deferred tax accounting in Italy. Every IRES taxpayer, from listed groups reporting under IFRS to SMEs following Italian GAAP, must reassess DTA and DTL balances, update reversal schedules, test recoverability against revised forecasts and prepare enhanced disclosures. The journal entries, worked examples and checklist provided in this guide offer a practical starting framework for the FY2026 year-end close. Given the complexity of the new provisions and the risk of misstatement, early engagement with a qualified accounting adviser familiar with both Italian tax law and international standards is strongly recommended. To find an Italian accounting specialist, consult the Global Law Experts directory.

Sources

1. Gazzetta Ufficiale della Repubblica Italiana
2. Normattiva
3. Ministero dell’Economia e delle Finanze (MEF)
4. Agenzia delle Entrate
5. Organismo Italiano di Contabilità (OIC)
6. IFRS Foundation, IAS 12 Income Taxes
7. OECD, Pillar 2 / International Tax Framework
8. University of Cagliari, Academic Research on Deferred Tax in Italy