The subject matter in dispute in this case was the applicability of the deduction limit for interest expense as provided for under Art. 96, paragraph 5-b, TUIR (Italian Income Tax Consolidation Act), to negative differentials arising under reverse repurchase agreements, that is to say, differentials that arise where interest income earned by the purchaser of repayment securities during the period of the agreement is higher than that agreed in said agreement. According to the Italian Revenue Agency, the Bank had incorrectly considered such negative differentials as a reduction of the interest income earned on the repurchase securities acquired. Instead, they should have been taxed – independently of such interest income – as interest expenses, and consequently be subject to the deduction limit of 4 per cent as provided for under the TUIR.

The Provincial Tax Court of Turin (ruling of CTP Turin, chamber 10, no. 1997, handed down on 19 December 2016, for the purposes of IRES 2009) annulled the notice of assessment served on the Bank, holding that the latter had correctly treated for tax purposes such differentials without having applied the deduction limit provided for by the TUIR with regard to interest expense and other similar charges. The reason for this is that negative differentials arising from reverse repurchase agreements – i.e. from contracts used to invest funds (but not to raise funds) – are not subject to the same tax regime as for interest expense or similar charges, since they do not share the same economic function. The Judges of the CTP Turin stated, in particular, that the function of such differentials is to bring back the remuneration of an investment made by the purchaser of securities to the one agreed under the contract, with the consequence that such differentials are different from interest expense and similar costs that are aimed at remunerating the collection of capital. These same Judges affirmed, inter alia, that this conclusion is compliant with the accounting rules of such costs since they are recorded in the Profit and Loss account as a reduction of the interest income and similar proceeds and not as an increase of the interest expense and similar charges.

Acting from the Firm were partner Cristiano Caumont Caimi and associate Ilaria Cherchi.