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Italy: The case law on non-interest bearing loans and the arm’s-length principle

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The decision stands against the trend adopted by the Supreme Court in recent years

Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners analyse a recent judicial decision which looks at the tax implications of inter-company transactions in Italy.

The Decision No. 55/2020 published by the Regional Tax Court (second degree) of Bolzano on December 4 2020 was focused on the existence of subjective and objective requisites in order to apply transfer pricing provisions. The takeaways from this decision can be summarised as follows:

  • The subjective circumstances must be identified by referring to Article 110, paragraph 7, of the Presidential Decree No. 917/1986 (Income Tax Code). The provision refers to transactions that occurred between an Italian enterprise and non-resident companies that “directly or indirectly control the Italian enterprise, or are controlled by it, or are controlled by the same company controlling the Italian enterprise”.

  • Additionally, only those inter-company transactions from which income is expressly derived, are subject to the transfer pricing provisions. Article 110(7) of the Income Tax Code refers to the inter-company transactions that may affect “components of income”.

The case under analysis - which refers to fiscal years 2011, 2012 and 2013 - involved an Italian company that granted a non-interest bearing loan to a Chilean company, whose 48% of shares is owned by the Italian company. The outcome of the tax inspection concerning the fiscal years in which the loan was granted was an assessment for direct taxes concerning transfer pricing issues. In particular, the Italian Tax Police challenged the non-interest bearing nature of the loan, arguing that the Chilean company should have paid interest to the lender (i.e. Italian company).

Based on the transfer pricing point of view, the tax inspectors argued that “no independent entity would have granted a loan equal to $1.224 million without interest”. Therefore, the Italian company filed the appeal to the Provincial (first degree) Tax Court of Bolzano which ruled in favour of the taxpayer. The Tax Office appealed to the second degree tax court, which accepted that the arguments of the Italian company related to the lack of subjective and objective requisites in order to apply the transfer pricing provisions to the case at stake.

To have a clearer picture of the subjective circumstances in a transfer pricing case, it is worth mentioning that the notion of control shall be firstly identified by referring to Article 110 (7) of the Income Tax Code. Accordingly, the Regional Tax Court noticed that the Italian company owned only 48% of the Chilean company’s shares and only one of the three Chilean company’s directors was appointed by the Italian company (more details regarding the notion of ‘associated enterprises’ are given in the Ministerial Decree May 14 2018, which provide practical guidance on transfer pricing).

Moreover, the second degree judges deemed that the ‘power of control’ cannot extend to every hypothesis of economic influence, even potential economic influence that had affected the circumstances of the case. In other words, a mere economic influence does not meet the notion of control provided by the transfer pricing rules. Therefore, the subjective condition was not met in the case at hand and thus the transfer pricing provisions could not be applied.

With regard to the objective circumstances of the case under analysis, they affect the possibility to grant (or not) a non-interest bearing loan. It seems that the interpretation of the Regional Tax Court of Bolzano is aligned with other case laws on the same object matter, according to which the transfer pricing provisions apply only in the case of inter-company transactions for consideration rather than for free of charge transactions.

Furthermore, the second degree court firmly rejected the Tax Office’s approach that would make reference to a fictious and hypothetic income (i.e. interest) that the Italian company should have obtained from the loan granted. In fact, such an approach does not meet the provisions of Article 53 of the Italian Constitution on the ability to pay and the progressiveness of taxation.

Finally, the judges noted that no Italian provision obliges the lender to apply an interest when a loan is granted.

As a last remark, even if this decision comes from a second degree tax court and can be still appealed before the Supreme Court, it is important to highlight that the position taken by the Bolzano Regional Tax Court stood against the trend adopted by the Supreme Court in recent years, when analysing the non-interest bearing loans and the arm’s-length principle for direct tax purposes. Consequently, it will be enlightening to see the future decision of the Supreme Court if appealed by the Bolzano Tax Office.

Gian Luca Nieddu



Barbara Scampuddu



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