Italy: News on the application of the arm's length principle

puplished on 8 May 2019

by Hans Röll, Rödl & Partner und Luca Schröder

In the context of a recently issued clarification of the Italian Tax Authorities concerning transfer pricing, it has been clarified that in case of business restructurings (including mergers&acquisitions), where a foreign company, or part of it, located in a European country or in a state included in the so called ”White List”, becomes part of an Italian company, its value is determined by applying the arm's length principle according to the Ministerial Decree of May 14, 2018. This means that chapter IX (i.e. Transfer Pricing Aspects of Business Restructurings) of the OECD Transfer Pricing Guidelines of July 2017 is applicable. If the foreign entity is not sited in the EU or in a state included in the ”White List”, a specific agreement with the Italian Fiscal Authorities is needed in order to determine the appropriate value from an Italian transfer pricing perspective.

Applicability of the interquartile range

According to the court decision 5445/3/2018 of the provincial fiscal commission of Milan and in line with the Ministerial Decree of May 14, 2018, all the values included in the interquartile range, and not only the median, have to be considered at arm's length. This court decision, centered around the sale of goods made by a German company to its Italian subsidiary, though not being the first to state this principle, is the first that explicitly cites the mentioned Ministerial Decree.