Impacts of the ATAD directive on intercompany loans

Following the Legislative Decree implementing the Anti Tax Avoidance Directive (ATAD) set of rules, many changes regarding the interests’ deductibility have been introduced and will be applied starting from fiscal year 2019. Among these news one of the most important is the one related to the intercompany loans, especially those characterized by lower interest rates than the market rates.
Amendments to article 96 of the TUIR include that interest incomes from previous years exceeding interest expenses can be carried forward, and that interest expenses exceeding the interest incomes can be deducted within 30% of the EBIT, calculated according to fiscal rules and no longer according to civil rules.

The general rule for interest expenses, disciplined by OIC 19, states that the differences generated by the discounting of the debt, coming from the application of the amortized cost criterion, are accounted in the P&L as financial incomes or expenses.
Two cases are therefore outlined, characterized by different accounting and tax profiles.
Intercompany loans, with a strictly financial nature, agreed at a lower interest rate than the market rate, give rise to figurative financial incomes/expenses (the so-called “day one profit/loss”). The day one profit/loss comes from the discounted cash flow based on the market rate, rather than on the negotiation rate.

Financial incomes from day one profit, according to the revised article 96 of TUIR, are recognized as interest income and any excess is carried forward in fiscal years following the vesting period, for the purpose of the deductibility of interest expenses. The financial nature of the “day one profit/loss” differential is therefore confirmed in the explanatory report to the legislative decree implementing the ATAD regulations.
On the other hand, in case of intercompany loans with purpose of increasing the equity of the subsidiary, it accounts the discounting difference as equity reserve and the financial charges in the P&L, while the parent company increases the value of its share and accounts interest incomes.
According to fiscal rules, in this last case, there is no fiscal impact: neither the interest incomes or expenses accounted in the P&L, nor the figurative contribution are considered as relevant.
So, differences between fiscal and civil rules are resolved through an increase equal to the interest expense accounted by the subsidiary and a decrease in the interest income accounted by the parent company. These differences are due to a relationship of control; no differences between fiscal and civil rules are provided in case of minority shareholders.

Article 96 TUIR applicable to the figurative financial incomes/expenses must match with the transfer prices rules (Article 110, paragraph 7 of the TUIR) and, in this case, when an intercompany loan from a foreign entity exists, transfer pricing rules are the ones that must be applied for the Italian subsidiary.

For further information concerning ATAD directive, please read our previous article.

Our Professionals are available to provide further clarifications on the topic.