“Tele srl” was the parent company and central service provider for a multinational group operating in the energy and telecommunications cable sectors. The parent company licensed patents, industrial know-how and other intangible assets to an Italian sub-holding company, which then sub-licensed these assets to Italian and foreign operating subsidiaries. The parent company also provided group management and IT services under cost-sharing and IT service agreements. The assessments related to the FY 2015.
The tax authorities challenged two aspects of the intra-group arrangements. Firstly, they argued that the royalties paid by the Italian sub-holding company to the Italian parent company for the use of intangibles were not at arm’s length, and imposed a uniform royalty rate of 2.55 per cent. Secondly, they asserted that the services provided by the parent company should have included a mark-up of 5 per cent, rather than being charged at cost. Based on these arguments, the authorities issued transfer pricing adjustments.
The taxpayer appealed, firstly arguing that transfer pricing rules cannot apply to transactions between parties that are both tax resident in Italy. On the merits, the taxpayer also challenged the benchmarking analysis used to determine the royalty rate, arguing that the services represented mere cost reallocations for which no mark-up was appropriate. They also argued that the adjustments would lead to double taxation.
Decision
The Provincial Tax Commission upheld the taxpayer’s appeal in full and annulled the assessment.
The court held that Article 110(7) applies only to transactions with non-resident associated enterprises and cannot be extended to purely domestic transactions between Italian resident companies. As both the licensor and licensee were resident in Italy, the transfer pricing rules were inapplicable, rendering the assessment unlawful without the need to examine the arm’s length analysis. The court noted that the same conclusion had already been reached in prior judgments for earlier tax years.
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