The Italien Supreme Court held that intra-group interest-free loans violates article 110(7); the Italien arm’s length provisions. Excerpt from the Judgement “…of the facts contained in the judgment under appeal, that the payments made by the parent company Edison spa to the foreign subsidiary Tanti Investimentos S.A, even though entitled ‘payments on account of future capital increases’, were not used for the declared purpose Instead, they were used for financial investments (which provided Edison with dividends subject to the reduced taxation provided for in Article 96 bis of Presidential Decree No. 917 of 22 December 1986 in force at the time), with the subsequent return of the capital to the company that paid Edison. Once it has been established that the reconstruction of the facts excludes the reason for the non-interest-bearing payment on account of a future capital increase and that the transfer of the sums of money must be attributed to the case of a loan (pursuant to Article 43 of Presidential Decree No. 917 of 22 December 1986 in force ratione temporis, now Article 46), the assessment carried out by the court of merit to identify the “business logic” pursued and to support the non-simulated but effective nature of the free loan contract becomes irrelevant. Since these are transactions with a foreign company controlled by the resident company, the rule on international “transfer pricing” established by the former Article 76, paragraph 5 of Presidential Decree No. 917 of 22 December 1986 (now Article 110, paragraph 7), according to which the amount of the loan is calculated on the basis of the taxable income, must be applied. In any event, the rule on international “transfer pricing” established by Article 76, paragraph 5, of Presidential Decree No. 917 of 22 December 1986 (now Article 110, paragraph 7), according to which the quantification of the income components must not be made on the basis of the ordinary parameter of the agreed consideration, but according to the derogatory criterion of the “normal value” of the goods sold or services rendered, defined by Article 9, paragraph 3, as the average price and consideration for the same goods or services sold or exchanged at the same time and place. In the specific case of sums given as a loan, which ordinarily bear interest unless expressly agreed otherwise (Art. 1815(1) of the Civil Code), the “normal value” is the average market interest charged at the time the money is given.” Click here for English translation Click here for other translation ...

This case is about an Italian company, ILPEA S.p.A, transactions with its US subsidiary. The company stated that there were substantial difference between the products sold to its subsidiary in the United States and the benchmark transactions considered by the Tax Administration – quality of the products, volumes of sales, terms of sale. These differences affected the pricing, so that these transactions could not be compared with other transactions with independent parties. The Court found that the transactions carried out with controlled companies must be evaluated according to the “normal value”, defined as the average price charged for similar goods or services with independent parties and at the same marketing stage. Therefore, “normal value” is considered to be the ordinary prices of goods and services charged at arm’s length conditions, referring in the extend possible to “pricelists” and “rates”. The Court also stated that the tax administration does not have to prove existence of tax minimization, but only the existence of transactions between affiliated companies. The taxpayer must prove that the transactions have been priced at market value. Click here for English translation Click here for other translation ...

This case is about methods applicable for determination of “normal value” in transactions between related companies; the Comparable Uncontrolled Price method (CUP). Click here for English translation Click here for other translation ...

Following an audit of the Italian company Solvay Italia, the tax authorities adjusted the amounts charged for sales of goods (soda ash and sodium bicarbonate) by that company to foreign companies belonging to the same group and, in particular, to the parent company Solvay s. a. a. in Belgium. According to the tax authorities the prices charged in relation to the aforesaid intra-group sales were considerably lower than the “normal value” of the sales determined in accordance with the CUP method and in particular, the prices charged in Italy by the seller company itself when dealing with independent parties, which were over 44% higher than those resulting from the aforesaid intra-group transactions. The tax authorities issue notice of assessment for FY 1997, in an amount of EUR 1,023,862. Solvay s.a. appealed against the notice of assessment. Solvay s.a.’s appeal was upheld by both the first and second instance courts, against whose decision the tax authorities then filed an appeal to the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favour of the tax authorities and set aside the decision of the lower court. Excerpts from the judgement “In view of the above, it is – indeed – quite clear that in the application of the “price comparison” method, preference should be given to the so-called internal comparison, based on the price lists and tariffs of the entity which supplied the goods or services in the relationship between the controlled company 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. Finally, and in a completely subsidiary and supplementary, the Office may have recourse – under the first part of paragraph 3 of Art. 9 mentioned above – to the price “averagely practiced” and in “conditions of free competition” for similar goods or services, “in the time and place where the goods or services have been acquired or provided, and, failing that, in the nearest time and place”; the latter could well be determined by foreign markets closer to the national market of the seller.” “Therefore, in order for the “normal value” criterion to be applicable, it is necessary and sufficient that a similar product is sold in Italy, in the absence of legal constraints on the determination of the price, i.e. that in the State of the seller there is no price established by the legislature for goods of the same kind as those subject to the transaction subject to verification (Court of Cassation 13233 (01)). ” Click here for English translation Click here for other translation ...