Inter-company loans - interest free agreements avoid Italy's arm's length principle
In a recent, innovative decision (n. 27087/2014), the Italian Tax Supreme Court ruled that non-interest bearing inter-company loans do not fall under the arm's length principle.
In the case at issue, an Italian parent company leased funds - with obligation to return - to two foreign subsidiaries located in Luxembourg and the USA. The most relevant facts of the case can be summarised as follows:
- interest-free loans are expressly provided by the Italian Civil Code; therefore, the choice of this type of agreement is entirely at the discretion of the company
- notwithstanding the anti-abuse nature of the Italian transfer pricing rules applying the arm's length principle to inter-company transactions, these provisions are not intended to allow tax authorities to modify the nature of the agreements, ie changing it from interest-free to interest-bearing
- Italian transfer pricing rules operate - imposing market value in inter-company transactions - only when they give rise to revenues/costs of some kind.
Taking the above into account, crucial in the judgement of the Court were the proven business reasons for the interest-free loan, including temporary optimisation of the financial resources within the group, limitation of subsidiaries' indebtedness towards financial institutions, and increased resources available to defend foreign market shares.
Close attention will need to be paid to future Court decisions on this same topic.
For more information, contact:
Gian Luca Nieddu and Fiorella Franco
Hager & Partners, Italy
T: +39 02 7780711