Internatio­nales Steuer­recht

Italy: Intra-group financing still under the spotlight of Italian tax courts

An analysis by Alma LED, Taxand Italy:

Diletta Fuxa and Giuseppe Ferrisi of Italian Taxand member firm, Alma LED, have analysed a recent ruling by the Lazio Tax Commission, examining intra-group financing for transfer pricing in case involving applying an external Comparable Uncontrolled Price (CUP) method.

The tax authorities found the taxpayer’s application of the external CUP unreliable due to control issues. In the ruling, the court emphasised the need to assess “economic influence” beyond formal ownership, considering factors like product sales, board appointments, or participation in cartels.

The ruling highlighted the importance of detailed intercompany agreements for transaction analysis, as per the OECD Guidelines. Additionally, the decision’s strict interpretation of CUP method, disregarding cross-border transactions, raised concerns given the uniformity of the European financial market under EU regulation.

Read the full analysis below

With Ruling No. 3187/22, the Lazio Tax Commission returned its judgement on intra-group financing for transfer pricing purposes. The Ruling is worthy of further analysis as it addresses, inter alia, the application of the external CUP and the relevance of the control requirement.

In the present case, the Italian tax authorities found the taxpayer’s application of the external CUP to be unreliable, as the transaction deemed to be comparable was requalified as a controlled one, and the requirement of independence of the parties was not met. As a matter of fact, the agreement taken as a basis for the application of the external CUP involved two entities (both resident in Italy) under the common control of another legal entity (i.e., the Italian Ministry of Finance). The 31.24% relative majority was deemed sufficient to consider the control requirement to be fulfilled according to local practice. This interpretation is in line with some recent rulings of the Supreme Court (Corte di Cassazione), which distinguish between control for transfer pricing purposes and the concept of control for civil law purposes, giving a substantive interpretation.

Further, a particularly strict application of the CUP method is noted, as deposit contracts between an Italian company and its Dutch subsidiary and a deposit contract between two entities resident in Italy were not deemed comparable (subject to the control considerations set out in the preceding paragraph). This interpretation does not take into account the uniformity of the European financial market, which is essentially subject to uniform EU regulation. Consequently, the rejection of a transaction due to the presence of a counterparty residing in a different State appears to be critical. A number of considerations may be drawn from the judgment under analysis:

  1. The assessment of the control requirement must not be limited to mere formalistic data (ownership of shares or quotas), but must extended to all hypotheses of “economic influence”, even if only potential. According to the Italian tax authorities economic influence (and, therefore, control) can occur in various circumstances (e.g., exclusive sale of products manufactured by other companies; right to appoint the members of the board of directors or of the company’s governing bodies; participation in cartels or consortia, series of contracts modelling a monopolistic situation, etc.).
  2. Although in the Ruling under review the judges endorsed the findings and analysis (based on ECB data) of the Italian tax authorities, there is no doubt that this analysis is simplistic (and oversimplified): while it is true that to a certain extent this analysis allows for the identification of average market values, it also does not seem to contain any consideration of the lender’s or borrower’s point of view or of the risks borne in the transaction and, consequently, has inherent limitations. It seems more capable of describing in general terms the average market trend for certain transactions, over a given period of time, rather than focusing on the specific transaction.
  3. The disputed intercompany transaction was analysed in the taxpayer’s Countryfile prepared pursuant to the applicable regulations. It should be noted that the Annexes to the Countryfile include copies of all intercompany agreements governing the intra-group transactions analysed. Taxpayers should bear in mind that the contractual terms represent the starting point for the analysis of transactions, according to the OECD Guidelines. Non-compliance with the provisions of local regulations may not only jeopardise the application of the penalty protection, but also hampers the delineation of intra-group transactions by tax authorities.

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