“Forward KT Limited” submitted a report on controlled transactions for 2013 to the tax authority on 13 May 2015. The tax authority found that Forward KT Limited had failed to submit the report within the filing deadline of 1 October 2014. In an appeal “Forward KT Limited” claimed that within the meaning of Article 39 24 of the Tax Code of Ukraine, transactions where one party is a non-resident registered in a country where the income tax rate is 5 percentage points or more lower than in Ukraine, provided that the amount of such transactions exceeds UAH 50 million during a calendar year, are considered controlled. The Republic of Cyprus was included in the list of such countries from 25 December 2013, and the total amount of transactions with a non-resident for the period from 25 December 2013 to 31 December 2013 was only UAH 25.5 million. The Administrative Court dismissed the claim in a ruling later upheld by the Administrative Court of Appeal. The lower courts concluded that transactions with the non-resident party for the period from 1 September 2013 to 31 December 2013 were controlled within the meaning of the Tax Code of Ukraine, and therefore the report on these transactions should have been submitted to the tax authority by 1 October 2014. “Forward KT Limited” then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal and upheld the challenged court decisions. Excerpts “(…)The courts of the previous instances found that the total amount of transactions between the plaintiff and the non-resident counterparty for the period from 23 October 2013 to 31 December 2013 was UAH 82,466,456.12. Given that the plaintiff’s counterparty is registered in a country included in the list of countries where the corporate income tax rate is 5 per cent or more lower than in Ukraine and the total amount of transactions for the relevant calendar year is more than UAH 50 million, the courts of previous instances concluded that the business transactions of the plaintiff and Ktonel Holdings Limited are controlled within the meaning of Article 39 of the Tax Code of Ukraine. In its turn, the plaintiff argues that in this case only those transactions that took place between 25 December 2013 and 31 December 2013, i.e. from the date of adoption of the Cabinet of Ministers of Ukraine Resolution No. 1042-р dated 25 December 2013, should be taken into account. According to the plaintiff, the amount of the transaction for the said period is UAH 25,495,054.92, i.e. the transactions are not controlled. Sub-clause 39.2.1.4. of clause 39.2 of Article 39 of the Tax Code of Ukraine stipulates that the transactions referred to in sub-clauses 39.2.1.1 and 39.2.1.2 of this Article are recognised as controlled provided that the total amount of the taxpayer’s transactions with each counterparty equals or exceeds UAH 50 million (excluding value added tax) for the relevant calendar year. The court agrees with the conclusion of the courts of previous instances that if the total amount of transactions between the taxpayer and a non-resident whose place of registration is a country included in the List exceeds or equals UAH 50 million in the period from 01.09.2013 to 31.12.2013, such transactions are controlled.” (…) “The court agrees with the argument of the court of first instance that the actions of the plaintiff in preparing and submitting to the controlling authority the report on controlled transactions for 2013 on business transactions with Ktonel Holdings Limited refute the plaintiff’s claim that there are no signs of a controlled transaction, since by its actions the plaintiff has actually acknowledged the fact that it has an obligation to submit such a report. In view of the foregoing, the court agrees with the conclusion of the courts of first instance and appeal that the plaintiff’s business transactions with Ktonel Holdings Limited for the period from 1 September 2013 to 31 December 2013 are controlled within the meaning of the Tax Code of Ukraine, and the report on these transactions should have been submitted to the controlling authority by 1 October 2014. The arguments of the cassation appeal have not been confirmed and are refuted by the case file and do not give grounds to believe that the courts of first instance and appellate courts violated the substantive and procedural law in making the contested decision. Pursuant to Article 350(1) of the Code of Administrative Procedure of Ukraine, the cassation court shall dismiss the cassation appeal and leave the court decisions unchanged if it finds that the courts of first instance and appellate courts did not misapply substantive law or violate procedural law in making court decisions or performing procedural actions. The Supreme Court, having reviewed the decision of the court of first instance and the decision of the court of appeal within the arguments and requirements of the cassation appeal and based on the established factual circumstances of the case, having verified the correct application of substantive and procedural law by the courts, sees no grounds to satisfy the cassation appeal”. Click here for English translation Click here for other translation ...

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation ...

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal (undue deduction of costs charged by the subsidiary Basitalia Leasing S.p.A.), rejecting all the other pleas in the main appeal and the cross-appeal. The judgment under appeal was set aside in relation to the upheld plea, and referred back to the CTR for reconsideration and also for the costs of these proceedings. In regards to the second plea in the appeal on deduction of costs based on an unauthenticated private contract “The tax appeal court based its decision on the point in question essentially on the use of a document that was unquestionably unregistered, therefore devoid of a certain date, and not even signed by the taxpayer company. As regards the first aspect, it is clear that Article 2704, paragraph 1, of the Italian Civil Code has been infringed, since it is documentary evidence that cannot be relied upon by the tax office precisely because of the lack of the “certainty” requirements provided for by such legislative provision (see Section 5, Sentence no. 7636 of 31 March 2006, Rv. 588675 – 01). In addition, the failure of the taxpayer company to sign the contract also makes the correlative contractual obligation uncertain and, in the final analysis, invalidates the judgment of the Lombardy Regional Tax Court in so far as it entails a misapplication of Article 109(1) of Presidential Decree 917/1985, with particular regard to the “certainty/determinability” of the negative income component in question.” In regards to the plea in the cross appeal on global tax consolidation “It is rather evident that these are autonomous legal provisions, which in their literalness do not contain direct elements of connection/coordination. This leads to the systematic hermeneutical solution that, in the case of intra-group sales of goods or services, taxation at “normal value” is not affected by the establishment of the so-called unified tax group, or, even better, that the unification of the income statement of the companies belonging to a group opting for the (global) consolidation, according to the logic of the algebraic sum of individual corporate income, is based on the prior – autonomous determination of the same according to the general rules. Moreover, investigating the rationale of the domestic rules on transfer pricing, this Court has repeatedly ruled, with a clearly prevailing orientation, that it should not be found in anti-avoidance purposes, but in those of preventing distortion of free competition and preserving the tax power of the EU member states (ex pluribus, in this sense, see Cass., 1232/2021, 16948/2019, 9673/2018, 18392/2015).” “Concluding on the decision points under examination, it is appropriate to formulate the following principle of law: “The rules on transfer pricing under Article 11O, paragraph 7, in relation to Article 9, paragraph 3, Presidential Decree 917/1986 and the “global tax consolidation” under 130, ss., Presidential Decree 917/1986 are distinct and autonomous, so that they do not interfere with each other and must be applied separately, since the effects of the option for group taxation are limited by the specific provision of Article 131 of the same TU.” Click here for English translation Click here for other translation ...