The Italian Revenue Agency (IRA) issued important clarifications on March 30, on (merger) leveraged buyout transactions (MLBO/LBO) via Circular letter 6/2016 (the Circular). The Circular clarifies that an Italian acquisition vehicle (SPV) may deduct interest expenses (within the limits provided by the law and transfer pricing provisions) incurred in the context of MLBO/LBO acquisitions either in the case of a subsequent merger with the Italian target or in the case of an election for tax consolidation. The importance of this interpretation resides in the fact that in recent years, the IRA has often challenged the deduction of interest paid in connection with loans granted to Italian acquisition vehicles by banks, shareholders and other lenders in the context of MLBO/LBO transactions. Challenges were mainly based on the assumption that such transactions represented abusive schemes since they were specifically aimed at deducting interest expenses against the income of the target entity, without a sound business purpose. Now, the IRA takes the position that those structures should not be deemed as abusive since they are specifically governed by the Italian Civil Code and are often imposed by third party lenders.

A Tax Alert prepared by EY's Global Tax Desk Network, and attached below, provides additional details.

———————————————
ATTACHMENT