29. COMMITMENTS AND CONTINGENCIES

Commitments for purchase of property, plant and equipment

The commitments to purchase property, plant and equipment relate mainly to the Tyre Business and amount to euro 154.8 million (euro 197.8 million at December 31, 2010), mostly regarding companies in Russia, Romania, Brazil, Germany, Italy and Mexico.

Commitments for purchase of equity interests/fund units

These refer to commitments by Pirelli Finance (Luxembourg) S.A. to subscribe units of the company Equinox Two S.c.a., a private equity company specialised in investments in listed and unlisted companies with high growth potential, for a maximum countervalue of euro 5,100 thousand.

Guarantees given on the sale of Olimpia

On the sale of the equity interest in Olimpia S.p.A., the sellers (Pirelli and Sintonia) remained contractually liable for all the contingent tax liabilities regarding the years up to the date of sale.

The current tax litigation can be summarised as follows. At the end of 2006, the Italian Tax Authorities (“Agenzia delle Entrate”) served Olimpia S.p.A. with an assessment notice for 2001, concerning IRAP (regional tax on productive activity).

More precisely, on the basis of an assumption which is entirely groundless both legally and economically, the Agenzia delle Entrate had found that non-existent financial income had been realised on the Bell Bond Loan redeemable with Olivetti shares, with a consequent IRAP tax of euro 26.5 million (with euro 21.2 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount.

The Company appealed against this tax assessment, claiming that the ascertained taxable income was manifestly non-existent.

At the trial level, the Trial Tax Court accepted the Company’s appeal, cancelling the entire tax assessment.

The Agenzia delle Entrate subsequently appealed this decision.

The appeal by the Agenzia delle Entrate was also rejected by the Regional Tax Court.

Notwithstanding the double judgements against it, the Agenzia delle Entrate filed an appeal with the Court of Cassation, against which the Company has filed a cross-appeal. It is awaiting scheduling of the hearing before the Court of Cassation. As mentioned above, there are grounds to believe that the final judgement will be favourable.

In the assessment for the 2002 tax year, served at the end of 2007, Olimpia was characterised as a “shell company,” on the basis of perfectly arbitrary reclassification of items on its financial statements and arbitrary statutory interpretations. The Company’s appeal was not only accepted by the trial court, but the Agenzia delle Entrate was also ordered to pay all legal costs. The IRPEG (corporate income tax) claim amounted to Euro 29.3 million (with euro 22.8 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount.

Despite such a clear judgement, the Agenzia delle Entrate lodged its own appeal, which was heard before the Regional Tax Court. This court too ruled in favour of the Company.

At the end of 2008, a second notice of assessment was served for the 2003 tax year, in which Olimpia was once again characterised as a “shell company.” The IRPEG (corporate income tax) claim amounted to euro 28.5 million (with euro 22.8 million being the portion attributable to the owners of PIRELLI & C. S.p.A.), plus penalties for the same amount.

The Company appealed to the Tax Court of first instance against this tax assessment, which was, like the other ones, absolutely unfounded. The Tax Court of first instance ruled in favour of the Company. The Agenzia delle Entrate lodged an appeal to the Trial Tax Court against such decision. The Company is preparing its own counter-arguments against that appeal.

Finally, at the end of 2009, a third notice of assessment was served for the 2004 tax year, in which Olimpia was yet again characterised as a “shell company.”

The IRES (corporate income tax) claim amounted to euro 29.6 million (with euro 23.7 million being the portion attributable to the owners of Pirelli & C. S.p.A.), plus penalties for the same amount.

This assessment, just like the ones that preceded it, is absolutely unfounded. Therefore, the Company lodged an appeal against it too before the Tax Court of first instance, which ruled in favour of the Company just as it had done before. The Agenzia delle Entrate lodged an appeal against such decision to the Trial Tax Court. The Company has filed its own counter-arguments against that appeal. The Regional Tax Court appeal hearing is scheduled for May 30, 2012.

Other contingencies

As part of the investigation by the European Commission on the underground and submarine electric cable market, PIRELLI received notice on July 5, 2011 of charges against it in regard and limited to its status as controlling shareholder of Prysmian Cavi e Sistemi Energia S.r.l. until July 2005.

The notice contains the Commission’s analysis on the allegedly anti-competitive practices of Prysmian Cavi e Sistemi Energia S.r.l.. The Commission has not made any charge of direct participation by PIRELLI in the alleged cartel.

PIRELLI has submitted its own defence against the charges made in the aforementioned notice and will continue maintaining that it had absolutely nothing to do with the conduct criticised by the Commission in the subsequent phases of the proceeding before the Commission.