Privacy Policy

Tightening on management fees by Italian tax inspectors, the approach of the Italian Court of Cassation in the light of recent judgments

November 26, 2018  |   Blog,News   |     |   0 Comment

As regards management fees, the Italian tax authorities are traditionally reluctant. Depending on the case, they may take the position that services are not rendered or that the Italian subsidiary already has its own adequate structure.

Notwithstanding the above, inter-company charges for services are in principle allowed provided that taxpayers give evidence of the underlying substance.

On the basis of the latest Italian Supreme Court’s decisions, the approach of the tax authorities is getting more and more aggressive, since supported by what can be nowadays considered a consolidated approach by the Italian Supreme Tax Court.

The Supreme Court’s  hard-line on the deductibility of management fees is also confirmed by the recent judgment of 10/10/2018 no. 25025/2018, according to which the expenses relating to intra-group services provided by the parent company are non-deductible if documented only by the service contract, without providing any indication about the hours spent and the employment of staff.

In particular, in the above decision, an Italian subsidiary was denied the deductibility of costs relating to financial assistance and treasury management services, use of the industrial factory’s surface area, marketing and public relations services, human resources and assistance in the technical design of products. The services were provided by the parent company, against an annual charge of euro 100,000.

In order to justify the deductibility of this amount, the subsidiary only presented a service agreement with the parent company and (presumably) the related invoices, which, however, according to the Tax Authorities, were not sufficient to prove the existence of the requisite of inherence pursuant to Article 109, paragraph 5, of the Italian Consolidated Tax Act.

The Court of Cassation, after having reiterated that it always is up to the taxpayer to prove the inherence of the deducted costs and their fairness, has also reconfirmed that, in case of lack of this proof, as regards intra-group costs, it is necessary to demonstrate the benefits of the service received, to which the deducted cost refers.

In the case at issue, in fact, the company had merely provided the existence of a service contract without providing any documentation from which, according to the objection of the tax authorities, it was possible to understand the hours worked and the employment of staff. Hence the lack of inherence and the rejection of the previous degrees of judgment, according to which, instead, to determinate the costs, it would have been sufficient to show the contract and the entry in regular accounting records.

What countermeasures should be taken?

The charge of management service fees is common in intra-group transaction regularly employed by multinational companies and in principle also allowed by the Italian tax authorities, but, as mentioned above, on the condition that taxpayers prove the relating substance.

As a first step, it is vital to segregate the costs of support services from shareholder costs (i.e. expenses incurred on the exclusive benefit of the shareholder). In fact, these latter (addressed by the OECD as well as by the Italian transfer pricing guidelines as “shareholder activities”) reflect activities performed by the parent company (or by other related parties) solely because of the parent company’s interest (i.e., in its capacity of shareholder) and are non-deductible at the subsidiary level since no benefit arises for the Italian subsidiary.

In view of the above, if service fees are charged, it is crucial that the beneficiary Italian entity would be able to support:

  1. The actual performance of such services
  2. The effective use of the services, together with the actual benefit received by the Italian recipient from them
  3. The actual connection of the services charged with the activity carried out in Italy (principio di inerenza)
  4. Compliance with the arm’s length principle

In order to allow the Italian tax authorities to verify whether the above requirements have been duly respected, it is opportune to support the Group’s policy preparing any type of documentation (e.g. internal notes, e-mails, letters, opinions, reports, reporting systems capable of tracking working hours and number of personnel employed in providing such services etc.), that demonstrates how the subsidiary actually benefits from them.

It is worth pointing out again, in fact, that in Italy the burden of proof to give evidence of points 1 to 4 falls on the Italian taxpayer, but it is impossible to provide it, if the relative service provider has not adequately prepared and archived such supporting documentation for each fiscal year.

Accordingly, the Italian Tax Authorities too often challenge management fees a priori, since management fees typically lack the “specificity requirement”. In particular, Tax Authorities should ask taxpayers all the necessary documentation that could allow them to take a decision in relation to the inherence and fairness of the costs deducted. This documentation, possibly certified by independent auditors, should provide details not only on the actual performance of services rendered, on the structure of the costs allocated to the Italian branch, on the amounts effectively supported by the head office, and the allocation keys adopted, but should also provide evidence of the additional requirement of inherence, that is, the services provided must have a link of effective functionality with respect to the production of the recipient’s revenues (Judgment No 23698 of 01 October 2018).

Again, the Italian Supreme Tax Court has taken such a consolidated approach in many decisions (Cass. no. 25025/2018, Cass. no. 23164/2017, no. 23027/2015, no. 8808/2012,etc.)

According to the Court, the existence of a written agreement between group companies and the existence of periodic invoices cannot by itself be sufficient to deduct the amount of the service fees. Those principles can also be found in the judgment of the Court of Cassation No 16480 of 18 July 2014, in which it is stated that no deduction should be made for services costs charged by a parent company to its Italian subsidiary if the latter does not provide all the elements necessary to support the deductibility of the costs, i.e. effectiveness, inherence and the real advantage of the transaction for the recipient.

It is therefore up to the taxpayer to provide this information in order to receive deductibility of  these services provided by the parent company. For this purpose, it should be considered that the aim of the transfer pricing Italian Countryfile documentation is to support the arm’s length nature of the amount charged by the parent company (i.e. point 4 of the list above), but it is up to the subsidiary to provide, at request of the Italian tax authorities, further documentation in support of the remaining points, i.e. 1.  the actual performance of such services; 2. the effective use of the services, together with the actual benefit received by the Italian recipient from them; 3. the actual connection of the services charged with the activity carried out in Italy (principio di inerenza).

In particular, each year, we ask our customers to demonstrate evidence of the description of the services actually rendered (with examples that highlight the benefits, even if only potential for the Italian entity, which cover all types of services provided) in order to address in particular points 2) and 3) and to include them directly in the TP documentation Countryfile.

May we invite you to check our website to go through the activities representing our specialization and to evaluate if some of our services could be of any help to Your organization in the preparation of the transfer pricing documentation.

Specifically, may we invite you to read the details of our offer here: or to contact us by email:


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