For some years now, the Revenue Agency has contested all merger leveraged buyout transactions (hereinafter MLBO) with the aim of preventing the taxable base, established by the company involved in the acquisition (hereinafter Target), from being reduced as a result of the interest payable associated with the loan taken on to carry out the acquisition.
To this end, the Agency used various arguments which can be summarized below:
– Inherence of the cost pursuant to art. 96 TUIR;
– Elusiveness of the maneuver;
– Application of the legislation related to the Transfer price.
The essential features of MLBO transactions are as follows: most frequently these are transactions carried out by private equity or foreign funds to purchase Italian companies (Target). The Fund, also by virtue of regulatory provisions, sets up a vehicle company under Italian law (Newco) which is supplied with the necessary resources through equity, capital and share premium, provided by the fund itself, as well as a portion of debt made available by the banking class and essentially guaranteed by the shares of the Target company.
The Newco acquires control or the entire share capital of the Target company and merges with the latter. From a civil point of view, the legitimacy of the operation is no longer in doubt as a result of the law of 31 October 2001 n. 366 which delegated the Government to issue the reform of the civil code which, among other things, provided for in art. 2501 bis operations of this kind, accompanying them with a series of precautions concerning the economic and financial balance of the operation as well as adequate disclosure obligations, all inspired by the principle of reasonableness.
With the introduction of art. 2501 bis, the Legislator wanted to expressly declare the legitimacy of MLBO operations, clearly overcoming all the perplexities in this regard. As a result of regulatory developments and the maintenance of art. 2358 of the Civil Code. (which has nothing to do with MBLO operations) it must be concluded that the classic debt transfer scheme on the Target must be considered lawful and that operations that pursue the same objective but in different ways must also be considered lawful, provided that they are carried out in compliance with the methods and principles indicated in art. 2501 bis of the Civil Code.
On the subject of the inherent nature of interests, a recent sentence of the Cassation section court 25 November 2011 no. 24930 has reopened a debate that seemed closed by now thanks to a consolidated jurisprudential orientation that had formed over the years. In this regard, in order not to fall back into instrumental applications of individual pronouncements, it is important to briefly recall the regulatory evolution that has led to the current structure of art. 63 of the TUIR which regulates the discipline of passive interests for IRPEF subjects, subject to the union of the pertinence, and of the art. 96 of the TUIR which for IRES subjects determines the amount of deductible interest expense, not subject to the syndicate of inherence, at a percentage equal to 30% of the gross operating result of the characteristic management.
Failure to refer to the discipline of pertinence in the context of art. 96 TUIR cannot be attributed to a simple oversight but it is a deliberate choice of the Legislator. In fact, the flat-rate mechanism pursuant to art. 96 TUIR has identified a unique parameter for determining the deductibility of interest expense resulting from accounting records and related supporting documentation.
It is also easy to understand the different mechanism envisaged for IRPEF subjects (individual entrepreneurs) where the personal sphere is more easily superimposed on the entrepreneurial one, hence the need to "maintain" the pertinent trade union. In any case, in the analysis relating to the deductibility of interest expense in MLBO operations, should the thesis relating to the union of inherence prevail in a residual manner, it seems really difficult to deny it in the present case.
In fact, it does not appear possible to deny the pertinence of the interest paid for the loans taken out for the purchase of shareholdings or for the investment activity falling within the investment activity falling within the company's ordinary operations. There is no foreclosure, in terms of pertinence, to the deductibility of the interest expense incurred by the holding company in relation to the debt contracted for the purchase of the equity investment, it would in any case be deductible within the scope of the consolidation. This institute allows the unexploited ROL of other group companies to be used (including foreign ones if the conditions are met) and art. 96 TUIR confirms that interest can be deducted by referring to the overall income capacity of the "consolidated".
The tax administration has also gone down the road of avoidance and abuse to challenge the validity of MLBO operations. Having asserted the legality of the operation according to the scheme outlined by art. 2501 bis, as the regulatory evolution has definitively clarified that the transfer of the debt, contracted for the acquisition, to Target itself does not violate the prohibition of financial assistance established by art. 2358 of the Civil Code, it should be deduced that operations conducted outside the scheme indicated by art. remain equally lawful. 2501 bis but equally respectful of all the procedural and information obligations envisaged by the aforementioned art. 2501 bis of the Civil Code.
Having said this, the issue of alleged elusiveness remains difficult to understand since the decision to proceed with the merger pursuant to art. 2501 bis does not generate any undue tax benefit: in fact, it is undisputed that the application of the institution of tax consolidation would result in the same level of taxation. It remains to examine the concept of "reasonableness" of the economic and financial programs as a further motivation, albeit extremely weak having ascertained the absence of any undue tax advantage deriving from the merger.
The syndication of subjective behaviors of the entrepreneur, a legal person, appears irrelevant in the presence of the obligations established by art. 2501 bis which require the expert's report and in some cases the intervention of the independent auditors. It follows that in the presence of a balanced debt structure and a reasonable economic-financial plan that demonstrates the sustainability of the operation, the valid economic reasons are a logical consequence. In most cases, it is the lending banks themselves who request that the debt be transferred as close as possible to the flows so as to obtain a greater guarantee for the security package that accompanies all "acquisition finance" operations, so that the realization of the merger pursuant to art. 2501 bis becomes the only way to complete the operation.
In the case of MLBO transactions carried out by non-resident subjects, the Financial Administration justified its findings by referring to the legislation on transfer prices. In this circumstance, the deductibility of the interest expense was not contested but the company resulting from the merger was charged with higher revenue equal to the cost of the debt transferred as consideration for the service that Newco/Target would have provided to the non-resident parent company. Precisely the non-resident nature of the parent company would justify, according to the tax authorities, the application of the regulation on the matter of "transfer price" contained in art. 110 paragraph 7 of the TUIR.
According to an erroneous interpretation of the OECD guidelines, this would involve an activity of the Italian subsidiary in favor of and in the exclusive interest of the non-resident parent company in relation to "shareholders activities". Through this interpretation, the Tax Administration completely overturns the indications provided by the OECD which in the specific case indicates which costs the parent company cannot charge to the subsidiaries for the activities carried out in favor of the latter as shareholders. Basically, the topic dealt with in the OECD Guidelines concerns the services rendered by the parent company to the subsidiary with the intention of establishing when the charge of a cost for a service provided can be justified. It follows that if it were demonstrated that the parent company had provided its services to the subsidiary in relation to a purchase of an equity investment made by the latter, entitlement would ensue for the parent company to charge a cost and not vice versa. According to OECD principles, the costs of debt must be borne by the person who uses it for his business.
More precisely, paragraph 7.10 lett. c) of the OECD guidelines precludes the parent company that intends to acquire a stake from charging the investee the costs incurred to raise the funds necessary for the acquisition. Again the same paragraph in the second paragraph establishes that a company belonging to a group that intends to acquire a stake using resources procured and made available by the parent company must bear the related debt costs, thus determining the responsibility of the person who carried out the purchase using the resources provided, the collection costs included and, if provided, the cost of the service from the parent company. Also in this case, in the presence of a resident Newco and a resident Target, all the conditions for consolidated taxation would be met.
