Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

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The Italien company had qualified a funding arrangement in an amount of Lira 500 billion classified by the parties as a non-interest-bearing contribution reserved for a future capital increase.

Judgement of the Supreme Court

The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle.

The court remanded the case to the lower court for further consideration.

Excerpts
“”In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5…”

In regards to the non-interest-bearing financing the Court states in paragraph 3.5:
“35…

It follows that the valuation “at arm’s length” is irrespective of the original ability of the transaction to generate income and, therefore, of any negotiated obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2).
In fact, it is a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these (cf, on the criteria for determining normal value, Court of Cassation no. 9709 of 2015): therefore, the qualification of the non-interest-bearing financing, possibly made by the parties (on whom the relevant burden of proof is incumbent, given the normally onerous nature of the loan agreement, pursuant to article 1815 of the Italian Civil Code), proves to be irrelevant, as it is in itself incapable of excluding the application of the criterion of valuation based on normal value.

It should be added that it would be clearly unreasonable, and a source of conduct easily aimed at evading the legislation in question, to consider that the administration can exercise this power of adjustment in the case of transactions with a consideration lower than the normal value and even derisory, while it is precluded from doing so in the case of no consideration.

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Italy Supreme-Court-15-April-2016-No.-7493.pdf

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