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 ...

78. Company A owns a government licence for a mining activity and a government licence for the exploitation of a railway. The mining licence has a standalone market value of 20. The railway licence has a standalone market value of 10. Company A has no other net assets. 79. Birincil, an entity which is independent of Company A, acquires 100% of the equity interests in Company A for 100. Birincil’s purchase price allocation performed for accounting purposes with respect to the acquisition attributes 20 of the purchase price to the mining licence; 10 to the railway licence; and 70 to goodwill based on the synergies created between the mining and railway licences. 80. Immediately following the acquisition, Birincil causes Company A to transfer its mining and railway licences to Company S, a subsidiary of Birincil. 81. In conducting a transfer pricing analysis of the arm’s length price to be paid by Company S for the transaction with Company A, it is important to identify with specificity the intangibles transferred. As was the case with Birincil’s arm’s length acquisition of Company A, the goodwill associated with the licences transferred to Company S would need to be considered, as it should generally be assumed that value does not disappear, nor is it destroyed as part of an internal business restructuring. 82. As such, the arm’s length price for the transaction between Companies A and S should take account of the mining licence, the railway licence, and the value ascribed to goodwill for accounting purposes. The 100 paid by Birincil for the shares of Company A represents an arm’s length price for those shares and provides useful information regarding the combined value of the intangibles ...

69. Ilcha is organised in country A. The Ilcha group of companies has for many years manufactured and sold Product Q in countries B and C through a wholly owned subsidiary, Company S1, which is organised in country B. Ilcha owns patents related to the design of Product Q and has developed a unique trademark and other marketing intangibles. The patents and trademarks are registered by Ilcha in countries B and C. 70. For sound business reasons, Ilcha determines that the group’s business in countries B and C would be enhanced if those businesses were operated through separate subsidiaries in each country. Ilcha therefore organises in country C a wholly owned subsidiary, Company S2. With regard to the business in country C: Company S1 transfers to Company S2 the tangible manufacturing and marketing assets previously used by Company S1 in country C. Ilcha and Company S1 agree to terminate the agreement granting Company S1 the following rights with relation to Product Q: the right to manufacture and distribute Product Q in country C; the right to use the patents and trademark in carrying out its manufacturing and distribution activities in country C; and, the right to use customer relationships, customer lists, goodwill and other items in country C (hereinafter, “the Rights”). Ilcha enters into new, long-term licence agreements with Company S2 granting it the Rights in country C. The newly formed subsidiary thereafter conducts the Product Q business in country C, while Company S1 continues to conduct the Product Q business in Country B. 71. Assume that over the years of its operation, Company S1 developed substantial business value in country C and an independent enterprise would be willing to pay for that business value in an acquisition. Further assume that, for accounting and business valuation purposes, a portion of such business value would be treated as goodwill in a purchase price allocation conducted with regard to a sale of Company S1’s country C business to an independent party. 72. Under the facts and circumstances of the case, there is value being transferred to Company S2 through the combination of (i) the transfer of part of Company S1’s tangible business assets to Company S2 in country C, and (ii) the surrendering by Company S1 of the Rights and the subsequent granting of the Rights by Ilcha to Company S2. There are three separate transactions: the transfer of part of Company S1’s tangible business assets to Company S2 in country C; the surrendering by Company S1 of its rights under the licence back to Ilcha; and the subsequent granting of a licence by Ilcha to Company S2. For transfer pricing purposes, the prices paid by Ilcha and by Company S2 in connection with these transactions should reflect the value of the business which would include amounts that may be treated as the value of goodwill for accounting purposes ...

The requirement that goodwill and ongoing concern value be taken into account in pricing transactions in no way implies that the residual measures of goodwill derived for some specific accounting or business valuation purposes are necessarily appropriate measures of the price that would be paid for the transferred business or licence rights, together with their associated goodwill and ongoing concern value, by independent parties. Accounting and business valuation measures of goodwill and ongoing concern value do not, as a general rule, correspond to the arm’s length price of transferred goodwill or ongoing concern value in a transfer pricing analysis. Depending on the facts and circumstances, however, accounting valuations and the information supporting such valuations can provide a useful starting point in conducting a transfer pricing analysis. The absence of a single precise definition of goodwill makes it essential for taxpayers and tax administrations to describe specifically relevant intangibles in connection with a transfer pricing analysis, and to consider whether independent enterprises would provide compensation for such intangibles in comparable circumstances ...

Depending on the context, the term goodwill can be used to refer to a number of different concepts. In some accounting and business valuation contexts, goodwill reflects the difference between the aggregate value of an operating business and the sum of the values of all separately identifiable tangible and intangible assets. Alternatively, goodwill is sometimes described as a representation of the future economic benefits associated with business assets that are not individually identified and separately recognised. In still other contexts goodwill is referred to as the expectation of future trade from existing customers. The term ongoing concern value is sometimes referred to as the value of the assembled assets of an operating business over and above the sum of the separate values of the individual assets. It is generally recognised that goodwill and ongoing concern value cannot be segregated or transferred separately from other business assets. See paragraphs 9.68-9.70 for a discussion of the related notion of a transfer of all of the elements of an ongoing concern in connection with a business restructuring ...