Heidelberg Italia S.R.L. sold goods at a lower mark-up (4% instead of a more appropriate 10%) to a subsidiary located in an Italian region enjoying certain tax advantages. According to the taxpayer the reduced mark-up served legitimate economic goals and furthermore the Italian transfer pricing rules in Article 110 did not apply to purely domestic transactions.
The tax authorities disagreed and issued an assessment where the price of the goods sold to the subsidiary had been adjusted upward to a 10% mark-up.
On appeal the court of first instance ruled in favour of Heidelberg and set aside the assessment of the tax authorities. However, this decision was later overturned by the Regional Tax Commission and the case then ended up in the Supreme Court.
Judgment
The Supreme Court held that the principles embodied in Article 9 TUIR require comparing the transaction to normal market conditions, even domestically, to ascertain whether the price deviates from the arm’s length standard.
Although a later legislative decree clarified that Article 110 TUIR on transfer pricing does not apply to domestic transactions, it did not affect Article 9 TUIR, which remained fully applicable.
The Court found that the Regional Tax Commission correctly used economic indicators—particularly the subsidiary’s profits while benefiting from tax breaks, and the subsequent incorporation of that subsidiary—to conclude that the low mark-up had no adequate economic justification. It also rejected the taxpayer’s additional arguments relating to insufficient reasoning and the alleged applicability of a more lenient penalty regime, ultimately dismissing the appeal and ordering the taxpayer to pay costs.
Excerpt in English
“Under these conditions, the reference to the verification of ‘price manoeuvres’ for the consequent tax audits remains valid, also with reference to the relationships between associated companies all resident in the national territory.
Therefore, with regard to the arm’s length principle, which undoubtedly underlies the provisions of art. 9 TUIR, as mentioned, not involved by the subsequent interpretation legislation and subject to the principle of law, the evaluation of the normal value – indispensable for verifying the transaction’s compliance with competitive logic and its correspondence or not to the price manipulation – pertains to the ‘economic substance’ of the operation that must be compared with similar operations stipulated in free market conditions between ‘independent’ parties (Cass. 27/04/2021, n. 11053).
In this perspective, therefore, in the case of ‘internal transfer pricing’, the assessment of the ‘uneconomic’ nature of the conduct must be evaluated, which constitutes a valid assumption of analytical-inductive assessment pursuant to art. 39, paragraph 1, letter d, of Presidential Decree 600/1973, in that it is based on the praesumptio hominis according to which anyone carrying out an economic activity should direct their conduct towards reducing costs and maximising profits. 600/1973, in that it is based on the praesumptio hominis whereby anyone carrying out an economic activity should direct their conduct towards reducing costs and maximising profits (in this sense the aforementioned Cass. no. 11093/2021 and also Cass. 10422/2023).
From this point of view, the evaluation of the so-called ‘group interest’ also comes to the fore, which cannot ignore the safeguarding of the profitability and value of the individual companies that are part of it (in this sense again Cass. no. 11093/2021).
To elaborate on what has already been said, although the interests of individual group companies may be sacrificed in order to pursue the collective interest of the group, this presupposes that the subsidiaries are granted the compensatory advantages referred to in Art. 2497 of the Civil Code and Art. 2634, paragraph 3, of the Civil Code. Therefore, if the act is prejudicial to the individual company of the group, it is up to those who invoke the group interest to justify the conduct of that company, to demonstrate that such prejudice is compensated by the unitary interest of the group itself (Cass., sez. un., 18 March 2010, n. 6538).
It follows that an operation that takes place outside of market prices, moreover within a situation of corporate control – which is not that referred to in art. 2359 of the Italian Civil Code, but consists of the ability of one company to influence the commercial strategies of another – ordinarily constitutes an anomaly, which justifies tax assessment, with the consequent burden on the taxpayer to demonstrate that it does not exist.
1.2. Applying the above principles to the case in question, it emerges that the legal principle stated by this Court, in the terms indicated, remains valid and that the CTR (Regional Tax Commission) complied with it, when it focused its judgment on the uneconomic nature of the intra-group transfers, on the basis of a factual assessment based on the elements already reported above, to finally deduce such unprofitability and therefore reach the acceptance of the appeal proposed by the Agency.”
Click here for English translation
Click here for other translation