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Transfer Pricing: documentation requirements for small and medium-sized enterprises

by Verbena Caravella | Oct 6, 2021 | Blog

Do you know the changes introduced by the Provision of 23 November 2020?

The Provision of the Director of the Italian Tax Authority of 23 November 2020 has provided for simplified documentation requirements for small and medium enterprises that choose to prepare the transfer pricing documentation, in order to be granted with the penalty protection regime as set forth by the Italian regulation (accordingly with Article 1, paragraph 6 and Article 2, paragraph 4-ter, Legislative Decree 471/1997).

The main news consist of the taxpayer’s right not to update annually the data relating to the comparability analysis, if that the economically relevant characteristics of the transaction and  the so-called functional analysis (i.e., analysis of functions, risks and assets) have not experimented changes with respect to previous years.

The provision of § 1.1., letter a) defines “Small and medium-sized enterprises” as those enterprises with turnover not exceeding €50 million in relation to the fiscal year to which the transfer pricing documentation relates. The provision also specifies that are also excluded from the above definition the enterprises which directly or indirectly control or are controlled by companies could not be qualified as “small and medium-sized enterprises”.


Clarifications provided by the Circular of the Italian Tax Authority

On 20 September 2021, the Italian Tax Authority published the draft of a Circular, still open for public consultation (until 12 October 2021), in order to provide clarifications on the issue of the transfer pricing documentation, focusing on such points that have raised doubts and uncertainties among the operators.

The Circular clarified the criteria for verifying the company’s positioning under or over the threshold of €50 million. In particular, it’s possible to identify three scenarios:

  • Companies that are resident in Italy and prepare the transfer pricing documentation accordingly with the Italian Provision requirements (taxpayer);
  • Italian companies directly controlling or controlled by the taxpayer;
  • Foreign companies directly controlling or controlled by the taxpayer.

In the first and second scenario, the turnover of the company must be considered the highest value between the VAT turnover and the company’s turnover as determined for corporate tax purposes (in Italy, the so-called “IRES”), and as indicated in the tax returns for the fiscal year under analysis.

In the third scenario, i.e. where the controlling or controlled entity is a foreign company, it should refer only to the second parameter, i.e., the turnover indicated in the company’s individual financial statement, prepared in accordance with the accounting rules applied in the Country of residence. The rationale is that if the foreign holding company/subsidiary has the legal residence extra-Europe: consequently, the Directive 2006/112/EC is not applicable, and the VAT turnover cannot be an alternative parameter to the company’s turnover.




How to identify directly or indirectly controlled/controlling companies?

The Circular clarifies that in order to identify directly or indirectly controlled entities, it must be considered the entire shareholder structure to the last level of equity stake, whereas for the identification of the controlling  companies, it is necessary to go back up the shareholder structure up to the entity at the head of the multinational group (the so called “ultimate owner”):

Based on the clarifications provided, companies which do not satisfy the definition of control provided by the Provision[1] would therefore be excluded from the application of the threshold calculation criteria, as:

  • Companies whose  participation in the capital or in the voting rights or profits of the other company is less than 50%;
  • Companies which not exercise a dominant influence over the management of the other company, based on shareholder or contractual obligations.

It should be noted that, as confirmed by the Italian Supreme Court [2], the definition of control for transfer pricing issues is broader than the definition provided by Article 2359 of the Italian Civil Code, as it is not limited to the existence of contractual obligations, but it extended to cases of influence on the management on the basis of shareholding obligations, which may exist even if the shareholder participation is less than 50%.

[1] Reference is made to the notion of control in subparagraph (j), Article 1 of the Provision of 23 November 2020.

[2] Italian Supreme Court, Section V, decision no. 8130/2016 and no. 27018/2017.



Even though the Circular purpose is to facilitate the interpretation of the provisions contained in the Provision, the operational difficulties arising from the specific cases should be addressed with a critical approach and possibly through the submission of ruling requests to the tax authorities in order to obtain official replies on detailed questions.

Considering the lack of practices on the issues discussed, a collaborative approach by the Tax authorities should be the fair balance for significantly more onerous documentation requirements charged to the Italian taxpayers, especially if compared to the transfer pricing requirements under the previous regulation (Provision of 29 September 2010).



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