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.
SGL disagreed and brought the case before the Italien Courts. The Court of first instance ruled in favor of SGL but this decision was set aside by the second instance court. SGL then filed an appeal to the Supreme Court.
Judgement of the Supreme Court
The Supreme Court dismissed SGL’s appeal.
“In view of the above, it is – therefore – quite clear that in the application of the method of “price comparison” preference should be given to the so-called internal comparison, based on the price lists and tariffs of the entity that has supplied the goods or services in the relationship between such entity and an independent company, given that it is to the above-mentioned documentary elements of comparison that the Administration must first of all refer, “as far as possible”, and taking into account any “customary discounts”. Secondly, the Administration will have to refer to the price lists and price lists of the chambers of commerce, or to professional tariffs, when examining comparable transactions between independent companies (so-called external comparison) belonging to the same market, i.e. that of the supplier of the goods or services. Finally, and in a completely subsidiary and supplementary way, the Office may have recourse – pursuant to the first part of paragraph 3 of the aforementioned Article 9 – to the “average price” and in “conditions of free competition” for similar goods or services, “in the time and place where the goods or services were acquired or provided, and, failing that, in the nearest time and place”.”
All this being said, it is – consequently – quite clear that, in the concrete case, the Financial Administration has correctly applied the above criteria
On the basis of such data, therefore, the Office has ascertained that the average interest rate practised on the German financial-credit market, i.e. in the State of residence of the lender, “is lower than that adopted for the financing operation in question”. This leads to the conclusion – entirely correct, as explained above – of the fiscal non-deductibility, from the corporate income relevant for IRES purposes, of the costs represented by said interest, clearly increased in order to increase the profits of the German parent company, reducing those of the Italian subsidiary in order to avoid national taxation, in clear violation of Article 110, paragraph 7 of the CIT decree.”
Click here for English translation
Click here for other translation