SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group.
The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. The interest rate was therefore determined based on external CUPs
SGL disagreed with the resulting assessment and brought the case before the Italien Courts.
Judgement of the Supreme Court
The Supreme Court ruled in favor of SGL.
“The first plea is well founded.
The Provincial Tax Commission, in fact, in its judgment at first instance held that the notice of assessment which is the subject of the present dispute was unlawful, on the basis of two distinct rationes decidendi.
In particular, the Provincial Tax Commission pointed out, first of all, the erroneousness of the criterion (so-called external comparison) employed by the Revenue Agency for the identification of normal value and, conversely, the legitimacy of the criterion (so-called of the internal comparison) applied by the taxpayer and consequent deductibility of interest: “the provision in Article 9 of Presidential Decree No. 917/1986 directs the case in preference for the comparison of interest rates towards the so-called internal comparison. The different procedure of the so-called external comparison, applied in this case, should have been accompanied by the Agency’s reasoning and argued with the assessment of the borrower’s reliability taking into account that the applicant closes its financial statements with a significant loss (… ) In relation to the monthly interest rates drawn by the Agency from the February 2006 Deutsche Bundesbank report for one-year loans to non-lenders, the Commission does not deny them a content of truth, but points out that such data would have required careful examination in order to identify the criteria of their formation, and allow the lode adjustment for comparison in a homogeneous context with the case at hand.” Secondly, the C.T.P. notes the non-existence of transfer of taxable income from Italy to Germany and, therefore, the non-existence of a condition for the applicability of the transfer pricing rules: ‘The Commission notes that the burden of financing borne by the parent company is greater than the burden borne by the appellant and this difference in burden makes it possible to verify the absence of transfer of income from Italy to Germany’.
Secondly, the C.T.P. notes the non-existence of transfer of taxable income from Italy to Germany and, therefore, the non-existence of a condition for the applicability of the transfer pricing rules: ‘The Commission notes that the burden of financing borne by the parent company is greater than the burden borne by the appellant and this difference in burden makes it possible to verify the absence of transfer of income from Italy to Germany’.“
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