Leveraged buy-out and foreign shareholder loans: issues from the recent approach of the italian tax authority

Recently, the Italian tax authority has analyzed Leveraged Buy-Out transactions, openly admitting the possibility to recharacterize shareholder loan agreements into capital contributions, by applying the principle set out in paragraph 1.65 of the OECD Transfer Pricing Guidelines for Multinational Enterprises, which allows tax authorities to disregard the structures adopted by the taxpayer and recharacterize them in accordance with their economic substance. This consideration gives rise at least to a couple of questions: is the criteria of “economic substance” fleshed out by the Italian tax authority compliant with the accounting and financial tenets? And further, is the “economic substance” recharacterization power still applicable, in light of the developments brought in place by BEPS Actions 8-10?

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