Following an audit, Mauser S.p.A. received four notices of assessment relating to the tax periods from 2004 to 2007.
These notices contested, in relation to all tax periods, the elusive purpose of a financing operation of Mauser S.p.A. by the non-resident parent company, as it was aimed at circumventing the non-deductibility of interest expense pursuant to Article 98 pro tempore of Presidential Decree No. 917 of 22 December 1986 (TUIR) on the subject of thin capitalisation. The loan, which began in 2004, had resulted in the recognition of €25,599,000.00 among other reserves, indicated as a payment on account of a future capital increase, as well as €55,040,474.29 as an interest-bearing shareholder loan, the latter of which was subsequently partly waived and also transferred to reserves. The loan had also contributed to the generation of losses in the years in question, which had been covered through the use of the aforementioned reserve (as a reserve), whose interest paid to the parent company had then been deducted from taxable income.
According to the tax authorities the payment on account of a future capital increase constituted a financial debt towards the sole shareholder and not (as indicated by the taxpayer) a capital contribution, which therefore would not have contributed to the determination of the relevant net equity pursuant to Article 98 TUIR; as a result, the equity imbalance between loans and adjusted net equity pursuant to Article 98, paragraphs 1 and 2, letter a) TUIR pro tempore (net equity increased by the capital contributions made by the shareholder) would have been configured. Consequently, the tax authorities had concluded that the financing transaction as a whole was elusive in nature, as it was of a financial nature and aimed at circumventing the prohibition of the remuneration of the shareholders’ loan in the presence of the thin capitalisation requirements.
With the notice relating to the 2006 tax year, Mauser S.p.A. was also charged with a second finding, relating to the infringement of the transfer pricing provisions pursuant to Article 110, paragraph 7 in relation to transactions involving the sale of intra-group assets. The tax authorities, while noting that Mauser S.p.A. had used the cost-plus computation method for the purpose of the correct application of the OECD rules on transfer pricing, had observed that following the merger of Gruppo Maschio SPA – for whose acquisition the above mentioned financing was intended – a merger deficit had resulted, partly allocated to goodwill of the target company. The tax authorities considered that the portion of goodwill amortisable for the year 2006 should be included in the cost base, increasing the percentage of overhead costs as a percentage of production costs, contributing to increase the total cost for the purpose of determining the arm’s length remuneration.
Mauser S.p.A. raised preliminary issues relating to the breach of the preventive cross-examination procedure and the forfeiture of the power of assessment, considering the provision of Article 37-bis of Presidential Decree No. 600 of 29 September 1973 to be inapplicable to the case at hand, and also considering the existence of valid economic reasons consisting in the purpose of the acquisition of the company, which was then effectively merged. He then deduced that the method of calculating the transfer prices was erroneous insofar as the Office had included the amortisation quota of the goodwill allocated to the merger deficit.
The C.T.P. of Milan upheld the merits of the joined appeals of Mauser S.p.A.
An appeal was then filed by the tax authorities and in a ruling dated 19 May 2015, the Lombardy Regional Administrative Court decided in favour of the tax authorities, holding that the loans “were not used in accordance with the rules envisaged in such cases, but were instead used to cover the company’s losses”, and then held that the transfer price recovery was also correct, on the assumption that the amortisation of goodwill was legitimate.
Mauser S.p.A. then filed an appeal with the Supreme Court, relying on six grounds. In the first ground of appeal Mauser S.p.A. points out that the grounds of the judgment do not contain adequate evidence of the logical path followed, also in view of the failure to transcribe the judgment at first instance and the arguments of the parties, as well as the statement of the facts of the case. Mauser S.p.A. observes that the confirmation of the finding as to the evasive nature of the financing transaction shows mere adherence to the position of one of the parties to the proceedings without any statement of reasons, nor does it consider what the regulatory provisions subject to assessment would be in relation to both profiles. It also observes how the reasoning relating to the confirmation of the transfer pricing relief refers to facts other than those alleged by the Office.
Judgement of the Supreme Court
The Supreme Court upheld the first ground of appeal and declared the other grounds of appeal to be absorbed; set aside the judgment under appeal and refered the case back to the Lombardy Regional Administrative Court, in a different composition.
Excerpts
“The first ground is well founded, agreeing with the conclusions of the Public Prosecutor. The two recoveries made by the Office presuppose – the first – the qualification (for the purposes of the financial imbalance referred to in Art. The two recoveries made by the Office presuppose – the first – the classification (for the purposes of the financial imbalance referred to in Article 98 TUIR pro tempore) of the future capital contribution made by the sole shareholder of the taxpayer company as a debt item and not as a capital reserve item (entered among the other reserves), a fundamental circumstance for the purposes of considering whether or not it contributes to the portion of adjusted shareholders’ equity ‘increased by the capital contributions made by the same shareholder’, capable of constituting the financial imbalance referred to in Article 98 TUIR cited above. Similarly (considering that the Office has moved in the direction of an overall elusive activity), proof is required of the financial purpose of the financing transaction (rather than for the purpose of the acquisition transaction, which was subsequently carried out), in relation to which the evidence of the alternative lawful conduct offered by the taxpayer company must then be assessed. All this, disregarding the preliminary issues raised by the taxpayer company. The second recovery, on the other hand, presupposes that, without prejudice to the use of the cost-plus method for the purpose of recovering the normal value of sales to intra-group companies (as is apparent from the documents in the case), that method also provides for the use of the amortisation quota of the (higher) post-merger goodwill among the expenses of ordinary operations eligible for determining the cost-plus. The judgment under appeal does not give any account of such circumstances, limiting itself to the general consideration that the financing was not used ‘in accordance with the rules laid down in such cases’ and was used to cover losses, without explaining whether it was a reserve or another balance sheet item. The assertion that the interest expense was unlawfully deducted (‘in reality, the financing in question was not used to cover the company’s losses, just as the significant interest expense borne by the company was unlawfully deducted, even though it was in reality deductible costs’) is also entirely apodictic, whereas the conclusion that the deduction of interest was unlawful presupposes in addition to the reconstruction of the overall financing transaction and the reclassification of the payment on account of a future capital increase as a debt item in respect of the sole shareholder (or at least its sterilisation for such purposes), also the reinterpretation of the overall transaction, at least prevalently, from a financial point of view and not also aimed at the extraordinary merger by incorporation transaction, as in fact occurred.
3. Equally apodictic is the further assertion – which is also the subject of the Public Prosecutor’s findings – according to which the accounting of the amortisation of goodwill “is also legitimate inasmuch as, moreover, such amortisation had been included in the financial statements pursuant to Article 2426 of the Civil Code, as, moreover, declared in the relevant notes to the financial statements”, the argumentative path concerning the circumstance in point of law for which a portion of the amortisation of goodwill may be included in the cost-plus method for the purposes of calculating transfer prices in accordance with the OECD Guidelines having to be made explicit (see points 2.45 – 2.61 of the 2017 Guidelines as to the cost-plus method), which constitute soft law rules for the purposes of the correct identification of the normal value referred to in Articles 9(3), 110(7), TUIR pro tempore (Cass, Sec. U., 25 March 2021, no. 8500; Cass., Sec. V, 10 August 2021, no. 22539; Cass., Sec. V, 1 December 2021, no. 37834). It must therefore be held that the grounds of the judgment under appeal are merely apparent.”
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