Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory capacity, resulting in repeatedly loss-making activities. Hence the various censures on the quantitative, qualitative and inherent deductibility of such costs.” (…) “In the present case, an asset in surplus and capable of producing income was transformed into a loss-making asset with the entry of a depreciation value capable of absorbing its profits; whence the repeated conduct of the loss-making activity legitimised the Office to recover taxation, disallowing a cost that it considered to be to the advantage of the group and not inherent (solely) to Tiger Flex, recalculating it in its amount, with reversal of the burden of proof to the taxpayer who was unable to give a different answer, re-proposing the payment value entered in the balance sheet. On the other hand, the board of appeal imposed the burden of proof of inherence and consistency on the Office, whereas it had long been held that the breach of the precept set forth in Article 2697 of the Civil Code It has long been held that a violation of the precept set forth in Article 2697 of the Italian Civil Code occurs when the judge has attributed the burden of proof to a party other than the one that was burdened by the application of said provision, whereas, where, following an incongruous assessment of the preliminary findings, he erroneously held that the party burdened had discharged such burden, since in this case there is an erroneous assessment of the outcome of the evidence, it can be reviewed in the court of legitimacy only for the defect referred to in Article. 360, no. 5, c.p.c. (Court of Cassation no. 17313 of 2020). And finally, with regard to the assessment of income taxes, the burden of proof of the assumptions of the deductible costs and charges competing in the determination of the business income, including their pertinence and their direct allocation to revenue-producing activities, both under the provisions of Presidential Decree No. 597 of 1973 and Presidential Decree No. 598 of 1973, and Presidential Decree No. 917 of 1986, lies with the taxpayer. Moreover, since the tax authorities’ powers of assessment include the assessment of the appropriateness of the costs and revenues shown in the financial statements and returns, with the denial of the deductibility of a part of a cost that is disproportionate to the revenues or to the object of the business, the burden of proof of the inherent nature of the costs, incumbent on the taxpayer, also relates to the appropriateness of the same (see Court of Cassation V, no. 4554/2010, followed, e plurimis, by no. 10269/2017). The judgment under examination did not comply with this principle, which, finally, in its last paragraph, performs a sort of “resistance test”, i.e. that even if the burden of proof is placed on the taxpayer, it remains undisputed that after a number of years commensurate with the economic effort made, the balance sheet profit was achieved. This is not the profile of the decision, since the Office disputes precisely that for many years there was repeated loss-making conduct, Tiger Flex having taken on burdens not (exclusively) its own, but for the benefit of the entire Gucci group, so that – if ritually distributed – they would have enabled correct profitable conduct, with the consequent discharge of tax burdens.” Click here for English Translation Click here for other translation ...

SAS Microchip Technology Rousset (former SAS Atmel Rousset) is a French subsidiary of the American Atmel group, which designs, manufactures, develops and sells a wide range of semiconductor integrated circuits. It was subject to an audit covering the FY 2010 and 2011 and as a result of this audit, the tax authorities imposed additional corporate income tax and an additional assessments for VAT. The administration also subjected SAS Atmel Rousset to withholding tax due to income deemed to be distributed to one of the Atmel group companies. The authorities invoked the provisions of Article 57 of the General Tax Code as the new legal basis for the additional corporate tax contributions and the social contribution on corporate tax, resulting from the reintegration of the capital loss arising from the sale of SAS Fabco shares and the assumption of responsibility for SAS Fabco’s social plan, instead of the provisions of Article 38(1) and Article 39(1) of the same code. The tax administration, which relies on the guidelines recommended in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Public Administrations, argued that the transfer of the production activity, materialised by the sale of the Rousset plant, is part of a global strategy. The parent company of the group will benefit from the gains made through the outsourcing of the production activity, and moreover initiated and conducted the negotiations, as demonstrated by the letter of intent to purchase dated 12 May 2009 from LFoundry GmbH, addressed to the group’s parent company. Similarly, the administration notes that the “Stock Purchase Agreement” and “Wafer Purchase Agreement” relating respectively to the transfer of shares in SAS Fabco, and to the terms of purchase of semiconductors sold by this same company, were signed by Mr A…, Atmel Corporation’s Director of Operations. It follows from all of these elements that the tax authorities must be considered as providing evidence of a practice falling within the scope of Article 57 of the General Tax Code, which establishes a presumption of indirect profit transfer. SAS Microchip Technology Rousset applied to the Marseille administrative court for a discharge of duties and penalties for the taxes to which it was thus subject for the years 2010 and 2011, and in a judgment of 21 June 2019, the administrative court decided in favor of SAS Microchip Technology Rousset and set aside the assessment. The Authorities filed an appeal to the Court of Appeal. Judgement of the Court of Appeal The court dismissed the appeal of the authorities and upheld the decision of the administrative court in favor of SAS Microchip Technology Rousset. Excerpts “…although the administration argues that this operation was entirely led by the group’s parent company’s operations manager, this circumstance, particularly because of the international scope of the project, is not such as to demonstrate that the interests of SAS Microchip Technology Rousset were not taken into account and that the transaction in question was concluded to the exclusive benefit of the American company. It follows from the above that the court was right to consider that the sum in dispute could not be considered as an indirect transfer of profits to the American company Atmel Corporation within the meaning of Article 57 of the General Tax Code. As a result, the tax authorities were not justified in increasing the profit subject to corporate income tax for the financial year ending in 2010 by EUR 72,062,567. “…Furthermore, it is also clear from the information provided by the respondent company that the cost of the additional costs generated by the Manufacturing Services Agreement was much lower than the costs that SAS Microchip Technology Rousset would have had to bear in the event of the restructuring of the Rousset manufacturing unit or its closure. It is clear from the documents in the file that the Flichy firm estimated that the redundancy costs alone would have amounted to EUR 176 800 000, while the community of the Pays d’Aix estimated at EUR 60 million the amount of business tax that would have had to be paid in the event of cessation of the activity. Finally, the fact that the director of operations of the parent company Atmel Corporation took the decisions relating to the transfer of the manufacturing activity of SAS Microchip Technology Rousset is not sufficient to establish that, by accepting the terms of the Manufacturing Services Agreement and by bearing the resulting additional costs, the respondent company did not act in the interest of the company. Consequently, the latter provided proof that the costs in dispute, which it had borne, had been justified by obtaining favourable considerations for its own operations and did not constitute an indirect transfer of profits. The administration was therefore not justified, as the administrative court ruled, in reintegrating the corresponding sum into the taxable profits of SAS Microchip Technology Rousset for the financial year ending in 2011.” Unless it establishes the existence of an abnormal act of management, the tax administration does not have to interfere in the management of companies. Under the combined provisions of Articles 38 and 209 of the General Tax Code, the profit subject to corporation tax is that which derives from operations of any kind carried out by the company, with the exception of those which, because of their purpose or their methods, are alien to normal commercial management. The assumption by an enterprise of costs for which it has no direct consideration or which are not directly incumbent on it is only normal commercial management if it appears that, in granting such advantages, the enterprise has acted in its own interest. It follows from the reasons set out in points 10 and 12, recalling the interest of SAS Microchip Technology Rousset in bearing the additional costs linked to the invoicing conditions provided for in the “Manufacturing Services Agreement” and “Wafer Purchase Agreement” relating to the purchase of wafers from LFoundry, that the administration does not establish an abnormal management act. Click here for English translation Click here for other translation ...