This case deals with a non-interest bearing intragroup loan granted by Pompea S.p.A. to a foreign subsidiary and deductibility of interest expenses incurred by Pompea S.p.A. to obtain the funding needed to grant this loan to the subsidiary.
The company was of the opinion that interest free inter-company loans were not covered by the Italien arm’s length provision at the time where the loan in question was established.
The Italien tax authorities claimed that the arrangement was covered by the transfer pricing regulations art. 110 paragraph 7, and that an arm’s length interest had to be paid on the loan. They also found that interest on the bank loan was not deductible.
Judgement of the Supreme Court
The Court found that non-interest-bearing loan, was covered by the rules laid down in Article 110(7) of the TUIR (the Italien arm’s length provisions).
Furthermore, the court found that the OECD 2010 TP Guidelines were unambiguous in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of loans as intragroup services, and 7.19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intragroup loan must normally take the form of the payment of an interest rate corresponding to that which would have been expected between independent enterprises in comparable circumstances’.
With regard to the deductibility of interest expense deriving from the bank loan, the Court found that these were related to the entire business activity carried out by the group and therefor deductible.27636_2021