ITALY Trends and Developments Contributed by: Paolo Ludovici, Luca Tortorella, Marlinda Gianfrate and Angelica Masciulli, Gatti Pavesi Bianchi Ludovici
(“IRA”) challenged the non-application of interest rates in such intragroup loans, considering them inconsist - ent with the arm’s length principle under Italian trans - fer pricing law – Article 110 (7) of the Italian Income Tax Code ( Testo Unico delle Imposte sui Redditi or TUIR). In the assessments, the tax authorities recalculated notional interest income by applying market-based rates. The taxpayers’ appeals were dismissed both at first and second instance. However, the Supreme Court partially upheld the taxpayers’ appeal, quashed the contested judgment, and remanded the case to the regional tax court for reconsideration. The case raises several legal issues, including the relationship between transfer pricing and the taxation of interest income, the correct allocation of the burden of proof in transfer pricing cases involving intragroup financing, and the criteria for determining comparabil - ity and market interest rates in intragroup loans: • The court first clarified that, in the context of cross- border intragroup transactions, Article 110 (7) of the TUIR constitutes a special provision overriding the general rules on interest income, irrespective of the contractual terms agreed by the parties – in other words, agreements providing for interest-free or below-market loans fall in any case within trans - fer pricing principles. • On the burden of proof, the court reaffirmed its established case law, ie, that it falls on the tax authorities to demonstrate that intragroup trans - actions are carried out at prices or interest rates that are not consistent with market conditions, by identifying appropriate comparables and taking into account the borrower’s credit rating. Only once these elements are met, does the burden shift to the taxpayer, who may rebut the adjustment by proving that the conditions were consistent with those that independent parties would have agreed upon or that the deviation was justified by legiti - mate intercompany commercial reasons. • The court found that the regional tax court, while referring to these principles, failed to apply them correctly. In particular, judges did not properly assess whether the comparables selected by the tax authorities were appropriate, nor did they
evaluate the economic and commercial reasons expressed by the taxpayers (eg, subordination of loans, duration, lack of creditworthiness, and the strategic support of subsidiaries). The judgment also refers to the compatibility of Article 110 (7) of the TUIR with EU fundamental freedoms (Articles 49, 54 and 63 of the Treaty on the Function - ing of the European Union). The court dismissed the request for a preliminary reference to the Court of Jus - tice of the EU (CJEU). Relying on settled CJEU case law (including cases C-382/16 Hornbach-Baumarkt and C-558/19 Pizzarotti), it held that while in princi - ple transfer pricing rules may constitute a restriction on EU freedoms, they are justified by overriding rea - sons of public interest, notably the need to ensure a balanced allocation of taxing powers, provided that taxpayers are allowed to demonstrate reasonable commercial reasons for conditions deviating from the arm’s length principle. In another recent case, Judgment No 3223 of 8 Febru - ary 2025, the Supreme Court clarified the allocation of the burden of proof in transfer pricing cases involving interest-free intragroup loans. The court affirmed that Italian transfer pricing law implements the arm’s length principle and applies not only when the agreed price is lower than the market price, but also when it is zero, as in the case of an interest-free loan. Although interest-free intragroup loans may legiti - mately be granted where justified by internal com - mercial considerations, the Supreme Court held that, for transfer pricing purposes, the tax authorities are required to demonstrate that the transaction was carried out at an interest rate apparently lower than the arm’s length rate. Once this threshold is met, the burden shifts to the taxpayer, who must demonstrate that the financing reflects the parent company’s role in supporting its subsidiaries and is grounded in genuine business reasons. The case originated from a tax assessment issued against an Italian parent company in connection with an interest-free loan granted to a foreign subsidiary. Both the first and second tier tax courts ruled in favour of the taxpayer, holding that the IRA had failed to dis - charge its burden of proof, as it had merely inferred
119 CHAMBERS.COM
Powered by FlippingBook