Deductibility of losses on receivables from settlement agreements: Court of Cassation Order no. 27096/2025

Managing unpaid receivables represents one of the most complex challenges for Italian businesses, not only in terms of liquidity but also regarding tax implications. Very often, when faced with a debtor in financial distress, the most pragmatic choice is to reach a settlement agreement, accepting a sum lower than the amount originally due in order to recover at least a portion of the credit. However, the tax authorities have traditionally viewed these partial waivers with suspicion, challenging their tax deductibility. The Court of Cassation has addressed this delicate issue with the recent order no. 27096 of October 9, 2025, offering significant clarifications in favor of taxpayers.

The case and the decision of the Supreme Court

The matter originated from a dispute between the Financial Administration and the taxpayer E. D. V. regarding the deductibility of a loss on receivables arising from a settlement agreement. The Italian Revenue Agency (Agenzia delle Entrate) challenged the deductibility of the loss, arguing that the creditor had not provided sufficient evidence of the debtor's insolvency, such as through the initiation of enforcement or judicial proceedings. The Regional Tax Commission of L'Aquila had ruled in favor of the taxpayer, a decision that has now been definitively confirmed by the Court of Cassation.

The judges of legitimacy rejected the appeal filed by the State Attorney's Office, establishing that the decision to settle cannot be scrutinized by the tax authorities if it meets criteria of economic reasonableness and is supported by objective elements, such as an analysis of the debtor company's financial statements.

The principle of law from the Cassation: when a loss is deductible

To fully understand the scope of this decision, it is essential to analyze the principle of law expressed by the judges of legitimacy:

Regarding the taxation of losses on receivables, a settlement reached with the debtor allows the creditor to deduct the resulting loss based on objective facts that make the taxpayer's choice to settle for an amount lower than the original credit reasonable and justified; to this end, it is not necessary for the creditor to provide proof of having actively sought a judicial declaration of the debtor's insolvency, as it is sufficient that the losses are documented in a certain and precise manner, in accordance with Article 101, paragraph 5, of the TUIR.

This ruling represents an important turning point. The Court clarifies that the tax authorities cannot impose on the creditor the burden of undertaking costly and often futile legal actions before being able to deduct the loss. What matters is the presence of certain and precise elements, as provided for by Article 101, paragraph 5, of the TUIR (Presidential Decree 917/1986).

Requirements for deductibility without judicial proceedings

In light of this ruling, what elements must companies collect to secure tax deductibility in the event of a settlement? Here are the main supporting factors:

• Analysis of the debtor's financial position: consulting the debtor's financial statements, which highlight a state of crisis or significant losses, represents objective proof of the advisability of settling.
• Cost-benefit assessment: demonstrating that initiating legal action would have entailed costs exceeding the potential recovery of the credit.
• Written documentation of the settlement: the agreement must result from a written instrument with a certain date, specifying the reasons for the reduction of the credit.

Conclusions and practical implications for businesses

Court of Cassation Order no. 27096/2025 adopts an approach based on entrepreneurial pragmatism. By recognizing that a settlement can be a perfectly rational business choice to limit losses, the judges relieve companies of the obligation to promote pretextual legal actions solely for the purpose of obtaining a tax benefit. To avoid disputes, however, it remains essential for taxpayers to pre-constitute a solid documentary dossier that attests to the debtor's objective situation of difficulty at the time the settlement agreement is signed.