Italy vs Vibac S.p.A., January 2021, Corte di Cassazione, Case No 1232/2021

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Transactions had taken place between Vibac S.p.A. and related foreign group companies related to use of trademarks and royalty/license payments.

It was up to the Vibac S.p.A. to demonstrate that the remuneration received from related companies for use of the trademark of the products had been at arm’s length. According to the company the royalty had been set at a low price to ensure that the foreign subsidiaries were more competitive.

An upward adjustment was issued by the tax authorities rejecting the taxpayer’s argument that the below market royalty was explained by the need to enable its foreign subsidiary to penetrate more effectively the US market. The tax authorities argued that such a strategy could only be justifiable in a limited period. The tax authorities determined the arm’s length royalty payment by application of the Resale Price Method (RPM).
However, due to the uniqueness of the asset transferred, which hardly allows the identification of comparable transactions, the same circular, while not excluding that in some cases one of the basic criteria adopted for the transfer of tangible goods (comparison, resale or increased cost) may be applied, points out that it should not be overlooked that a licence agreement depends essentially on the forecasts of the result that may be achieved by the licensee in the territory to which the right of exploitation refers and that it is, therefore, necessary to develop subsidiary valuation methods, always inspired by the principle of the arm’s length price, i.e. the price that would have been agreed upon between independent undertakings. With regard to the determination of the fee concerning the use of intangible assets, the circular notes that it is greatly affected by the specific characteristics of the economic sector to which the intangible right refers and that, in general, it is commensurate with the turnover of the licensee, so that the reference to these indices is a valid initial data for the assessment of the “normal value”.
Vibac S.p.A. did not approve of the assessment an brought the case to court.

The court of first instance held in favour of the tax authorities. This decision was then appealed to Corte di Cassazione.

Judgement of the Court

The Italien Corte di Cassazione upheld the decision of the court of first instance and dismissed the appeal of Vibac S.p.A.


Indeed, the rationale of the abovementioned domestic tax legislation is to be found in the safeguarding of the principle of free competition, as set out in Article 9 of the OECD Model Convention, which is to be interpreted in the light of the specific features of tax law on tax arbitrage. In fact, the rationale of the domestic tax rules referred to above is to be found in the safeguarding of the principle of free competition, set out in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits arising from intra-group transactions that have been governed by conditions different from those that would have been agreed between independent companies in comparable transactions carried out on the free market; it is therefore necessary to verify the economic substance of the transaction and to compare it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and to assess its compliance with these (Court of Cassation no. 5645 of 2020, id. no. 9615 of 2019; id. 27018 of 2017). Thus, company policy, taken in itself, is not a necessary and sufficient cause of justification for derogating from the normal value rule. Since the normal value of a transaction is a function of the economic characteristics of the transaction, the transaction from which the normal value is to be derived will concern (a) goods and services of the same kind, (b) at the same marketing stage, (c) at the same time and (d) in the same market where the goods or services were acquired. In order to achieve the highest possible degree of comparability, the second part of Article 9 TUIR states that “for the determination of normal value”, reference should be made, “as far as possible, to the price lists or tariffs of the person who supplied the goods or services”. The presence of varied intra-group commercial transactions fully captures the estimative meaning of Article 9, as well as the OECD model. The adoption of the Resale Price Method is advocated, not only by Circular 22.9.1980 (No. 32/9/2267), but also and above all by the 1995 OECD Report.

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