(NON) INTEREST-BEARING LOANS AND TRANSFER PRICING

It is still uncertain how the arm’s length principle (see section 110 (7) TUIR) should be applied to noninterest bearing loans between companies of the same multinational group. Case law of the last two years illustrates yet again that the Italian Supreme Court has different and changing views on the matter. In fact, despite the lawfulness of noninterest- bearing loans in terms of private law being undebatable, as it is expressly stated in section 1282 in combination with section 1815 of the Italian Civil Code, lawfulness in tax terms is not that certain.

In this matter, we would like to draw your attention to the following case law:

i. Italian Supreme Court, 5th civil division, ruling 27087 of 19 December 2014: in this ruling the Supreme Court stated that a noninterest-bearing loan by an Italian lender was lawful in tax terms. A non-interest-bearing loan is inadmissible in tax terms in cases of fraud, unlawful loans as not matching economic reality as far as they were conceived for tax evasion, transactions represented as tax neutral and concealing taxable transactions and hence in case of tax avoidance in order to obtain an undue tax advantage.

ii. Italian Supreme Court, 5th civil division, ruling 15005 of 17.July 2015: in line with the previous one, this judgement rejected the appeal by the tax authority against a decision ruling by the appeal judges who had not considered it to be a transfer pricing case, as a noninterest-bearing loan is lawful in terms of private law as well as of tax law. Under this second aspect, the ruling refers to section 89 (5) of the Italian Tax Code which states that loans that can be defined as such under private law are to subject to statutory interest rate, except where the Parties agree in writing to a different interest rate, which hence can also be zero;

iii. Italian Supreme Court, 5th civil division, ruling 7493 of 15. April 2016. In this case the Supreme Court took an entirely different decision from the previous two cases. The tax authority wanted to requalify a sum of money paid by the Italian parent company to its Luxembourg subsidiary for a future capital increase as noninterest-bearing loan (in terms of private law), but to subject it to transfer pricing provisions notwithstanding the fact that the loan was free of charge, as it was considered an intercompany transaction. The Supreme Court ruled that (i) evaluation based on market value is independent from the transactions original ability to produce income and from any negotiating obligation of the parties on the fee and (ii) the fact, that a loan is free of charge is irrelevant, as it does non per se exclude valuation according to the arm’s length principle. According to the court “it would have been clearly unreasonable to assume that the tax authority is entitled to changes in case of transactions with a consideration that is lower than usual or even negligible, whereas changes are excluded for agreements free of charge.”

In addition to the above-mentioned judgments, the Supreme Court has recently stated that for the interest rate of financing transactions to be deductible the agreements must be made in writing and include an certain date, from which the applicable interest rate can be deducted (see ruling n. 4615 of 9 March 2016).