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Small and medium-sized companies: 2020 news on transfer pricing

by Verbena Caravella | May 20, 2021 | Blog, new

Did you know that the Provision of the Director of the Italian Revenue Agencyof 23 November 2020, setting out the implementation rules on transfer pricing changed the requirements to access to the simplified regime of “small and medium-sized companies”?

The Provision of November 23, 2020, No. 0360494, setting forth the implementation rules on transfer pricing, has introduced significant changes with regard to the documentary regime applicable to small and medium-sized enterprises (“SME”).

In defining “SME”, the Provision established a “quantitative” requirement, according to which the enterprises with a turnover not exceeding fifty million euros for the tax period to which the transfer pricing documentation refers fall within this definition.


The “simplified” discipline for small and medium-sized companies

The Provision of November 23, 2020, in continuity with the previous Provision of September 2010, allow small and medium-sized companies to not update the information and data in the documentation relating to the comparability analysis and the application of the transfer pricing method, maintaining the same analyses for the two tax periods following the one in which they wereperformed, if no substantial changes have occurred in the company’s functional profile.

This simplification involves an important  benefit for less structured companies, which are encouraged to prepare compliance documentation in order to benefit from the so-called penalty protection, i.e., the exemption from penalties otherwise applicable in the event of a transfer pricing adjustment made as a result of the tax audit.


Limitations on the applicability of the regulations compared with the previous regime

The Provision of September 29, 2010, in regulating the access to the regime of “SME” established, in addition to the maximum threshold of annual turnover, equal to fifty million euros, the additional requirement of control, excluding from the perimeter holding and sub-holding companies if they controlled companies that did not qualify as “SME”.

The current Provision of November 23, 2020 further restricts the perimeter of applicability of the discipline by providing that not only parties that directly or indirectly control, but also parties that directly or indirectly are controlled by a party that does not qualify as a “SME” fall within this definition.

It follows that the reference to the requirement of control entails a significant limitation for companies belonging to multinational groups that, within the investment chain, are controlled by entities with an annual turnover exceeding the threshold of 50 million euros.


What are the application impacts of the changes on small and medium-sized companies?

On the basis of the new Provisions, in order to obtain the recognition of the compliance of the transfer pricing documentation, even companies which, despite having a turnover of less than 50 million euros, are controlled by or in turn control entities that do not qualify as “SME”, will be required to prepare new benchmark analyzes on an annual basis, since they are not allowed to only update the financial data of comparable companies identified as a result of the analyzes prepared for the previous financial year (or years).

Therefore, in assessing the information set to be prepared, it will be necessary to verify the shareholding structure, considering not only the direct controlling shareholdings, but the entire ownership structure. In thisway, it should be noted that even an indirect shareholding, held by a person exceeding the threshold provided for by theProvision, would result in the exclusion from the applicability of the simplified documental regime.

Finally, it should be noted that the inapplicability of the simplified discipline operates only in the case of direct and indirect control. Therefore, the simplified regime remains applicable in the case of mere associative shareholdings, i.e. when the requirements of art. 2359 of the Italian Civil Code for corporate control are not met.

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