With judgment No. 3223 of February 10 2025, the Italian Supreme Court once again ruled on the applicability of transfer pricing regulations under Article 110, paragraph 7 of the Italian Income Tax Code (TUIR) to interest-free intragroup loans.
The case concerns interest-free loans granted by an Italian company to its foreign subsidiary (in this instance, a Romanian entity).
Regarding these interest-free loans, the Italian Revenue Agency contested (for the 2007 tax year, as well as the previous year) the failure to apply transfer pricing regulations under Article 110, paragraph 7 of the TUIR.
The Italian Revenue Agency adjusted the taxable business income by imputing theoretical interest income that the parent company should have received, based on the arm’s-length principle (i.e., the rate that would have been applied between independent entities).
The taxpayer challenged the assessment before the relevant provincial tax commission, which upheld the appeal. This decision was subsequently confirmed by the appellate tax court, which deemed the tax adjustment unlawful since there was no proof that the Italian company had received interest income.
The Italian Revenue Agency appealed to the Supreme Court, arguing that the appellate tax court had erroneously placed an evidentiary burden on the administration that was not required under international transfer pricing rules.
The Supreme Court ultimately upheld the appeal, ruling that even an interest-free loan between companies within the same group cannot escape the application of the arm’s-length principle under transfer pricing rules, reaffirming a principle established in similar cases.
Following such approach, the transfer pricing regulations must apply not only when the agreed interest rate is lower than the arm’s-length rate in the relevant economic sector but also when it is zero (due to the interest-free nature of the transaction).
It is important to recall the existence of Supreme Court decisions that denied the applicability of transfer pricing regulations to interest-free loans granted to foreign subsidiaries. This was based on the premise that such regulations apply only in relation to an intragroup transaction that generates income to be evaluated through following the arm’s-length principle.
Establishing where the burden of proof lies
Premised on the above, Supreme Court judgment No. 3223/2025 clarified that, in the case of an intragroup loan (granted by an Italian parent company to a foreign ‘vehicle’ company), it is the responsibility of the tax authorities to prove that the transaction took place at an interest rate lower than the arm’s-length rate.
Additionally, the court stated that the burden then shifts to the taxpayer to provide counter-evidence, either by proving that the loan was granted at a market-aligned interest rate or, in the case of an interest-free loan, by demonstrating that it was motivated by internal commercial reasons within the group, linked to the parent company’s role in supporting its subsidiaries.
The same approach was adopted in Supreme Court Decision No. 7361 of March 19 2024. In the case examined in the ruling in question, the Supreme Court held that the lower courts did not adequately consider the particular insolvency conditions of the borrowing companies.
The lower court ruling merely stated that, in such cases, comparable conditions should be sought in “loans granted to independent enterprises, backed by a parent company guarantee” and, in any event, at a high interest rate.
Conversely, according to the Supreme Court, the lower courts should have verified whether the interest rate considered by the tax authorities corresponded to that applied to loans with sufficiently comparable characteristics, granted to entities with the same credit rating as the associated debtor company. Additionally, they should have assessed the counter-evidence provided by the audited company regarding similar financial conditions available on the market and any internal commercial reasons within the group.