Section 482 and the regulations thereunder apply to all controlled taxpayers, whether the controlled taxpayer files a separate or consolidated U.S. income tax return. If a controlled taxpayer files a separate return, its true separate taxable income will be determined. If a controlled taxpayer is a party to a consolidated return, the true consolidated taxable income of the affiliated group and the true separate taxable income of the controlled taxpayer must be determined consistently with the principles of a consolidated return ...

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation ...