Turin, Italy

Italy: Companies Making Losses on a Systematic Basis and Intra-Group Services

By Roberto M. Cagnazzo, Studio Tributario Cagnazzo

A decision of the Lombardy Tax Court examined the topic of repetitive losses in intra-group transactions under the domestic transfer pricing rules.

The Tax Authority, in a case of repetitive losses made by a resident subsidiary, belonging to a multinational group, commercialising products purchased from associated companies, claimed the existence of a hidden and unpaid provision of services by the company to the group, the value of which is the amount of its negative income.

The OECD Transfer Pricing Guidelines provide that, if a company is repetitively making losses while the group is profitable, it is correct to pay attention to the transfer pricing policy applied. A company belonging to a group may make losses for different reasons (economic conditions, ineffciencies, etc.), but while an independent company in the same situation for an indefinite period is destined to close down, it may remain in business as it could provide indirect benefits to the group.

An example is when a group needs to produce a complete range of products for strategic reasons, but some product lines are systematically loss making. In this case, an aspect to consider in the analysis is certainly the group’s business strategy. It is acceptable that losses suffered over a reasonable period are justified by a business strategy aimed to penetrate a market with an aggressive pricing policy or to protect the market from the entry of other competitors.

What the guidelines highlight is that the application of particularly low prices is acceptable, but only for a reasonably limited period because the long-term objective of a company must be to produce profits as an independent firm would do. Following these considerations, the Court did not accept the Tax Authority’s position since the company demonstrated that the substance of the losses did not depend on an improper transfer pricing policy but on external market factors.


Roberto M. Cagnazzo

Roberto M. Cagnazzo

GGI member firm
Studio Tributario Cagnazzo
Tax, Auditing & Accounting, M&A, Corporate Finance
Turin, Italy
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Studio Tributario Cagnazzo is a “boutique” firm mainly focused on providing integrated tax advice and assistance all over Italy to corporations, banks, multinational groups, and high-net-worth individuals on a wide range of domestic and international tax and corporate issues. The firm provides its domestic and international clients with specialist knowledge for strategic advice to resolve any tax and legal issue on a local or global scale ranging from corporate tax issues to extraordinary financial transactions, such as domestic and cross-border reorganisations, IPOs, takeover bids, and M&A.

Roberto M. Cagnazzo, Founder and Partner, is a Chartered Accountant and Statutory Auditor with considerable expertise in domestic and international taxation acquired as head of tax in some of the leading listed Italian multinational groups and as Professor of Tax Law and International Tax Law at the University of Turin.


Published: International Taxation Newsletter, No. 12, Spring 2020 l Photo: rh2010 - stock.adobe.com

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