Transfer Pricing guide: Italy

 
In Italy, transfer pricing audits are conducted by comparing the prices declared by the taxpayer with those that would have been agreed upon between independent entities under comparable circumstances, in accordance with the arm’s length principle.

Although the preparation of transfer pricing documentation (namely the Master File and Local File) is not formally mandatory, its absence can have significant consequences during a tax audit. In fact, complete and properly structured documentation is strongly recommended, as it provides access to the penalty protection regime and helps support the taxpayer’s position. Without such documentation, it is not possible to reverse the burden of proof: the taxpayers must therefore demonstrate, at their own initiative and with adequate evidence, that the prices applied in intra-group transactions are in line with market conditions. Although not mandatory in Italy, transfer pricing documentation is strongly recommended for companies with significant intercompany transactions, as the absence or inadequacy of such documentation may result in a 70% penalty on the adjusted tax.

The Italian Tax Authority (IRA) places particular attention on high-risk areas, such as transactions involving intangibles, intercompany services, and dealings with related parties located in low- or no-tax jurisdictions. In these contexts, audits involve a thorough evaluation of the transfer pricing method selected, the functional analysis of the entities involved, and the comparability studies used to benchmark the prices. The tax authorities assess not only whether the chosen method is appropriate, but also whether it has been applied consistently and with sufficient economic rationale.

Furthermore, Italy actively cooperates in the exchange of information with foreign tax administrations as part of its commitments under both OECD BEPS initiatives and EU directives. This international cooperation enhances the ability of the Italian authorities to detect discrepancies and potential profit shifting schemes. As such, taxpayers engaged in cross-border operations must ensure the robustness of their transfer pricing policies and the defensibility of their documentation, particularly in light of the growing interconnectivity of tax administrations worldwide.
 

 
In Italy, taxpayers may request Advance Pricing Agreements (APAs) to obtain legal certainty on the transfer pricing methods applied to specific intercompany transactions. APAs can be unilateral, bilateral (BAPAs), or multilateral. In practice, bilateral APAs are the most frequently used, particularly when cross-border transactions involve treaty partners.

The procedures for APA application, evaluation, and conclusion are governed by Article 31-ter of Presidential Decree No. 600/1973, and further detailed in administrative circulars issued by the Italian Revenue Agency (e.g., Circular No. 21/E/2021).

In Italy, taxpayers facing double taxation due to cross-border tax disputes may access one of three distinct Mutual Agreement Procedures (MAP), depending on the legal framework involved.

The first mechanism is the MAP under Double Tax Conventions (DTC), governed by Article 25 of the OECD Model Tax Convention. It applies to issues such as transfer pricing adjustments, residency conflicts, or permanent establishment allocation. Taxpayers must submit a request to their competent authority within 3 years from the first notification of taxation not in line with the treaty. The two authorities then attempt to reach a resolution. While the process is collaborative, the states are only bound to make their best effort, and arbitration is available only if explicitly included in the relevant tax treaty.

The second option is the EU Arbitration Convention MAP (MAP AC), under Convention 90/436/EEC. It specifically addresses double taxation caused by transfer pricing adjustments and profit attribution to permanent establishments among associated enterprises in EU Member States. The procedure requires a 3-year submission period and guarantees binding arbitration if no agreement is reached within 2 years. It is an alternative to litigation and allows for the suspension of domestic proceedings, provided no final court decision has been issued.

The third mechanism is under EU Directive 2017/1852, which broadens the scope to cover all cross-border tax disputes within the EU. It applies to all taxpayers, including individuals and PEs. It offers a structured process, a 2-year resolution deadline, and mandatory arbitration through an Advisory Commission if needed. As with the AC MAP, domestic litigation must not be concluded to preserve eligibility.

Each mechanism ensures the elimination of double taxation while respecting treaty obligations and taxpayers' rights.
 

 
Italy is a member of the OECD/G20 Inclusive Framework on BEPS and has adopted transfer pricing legislation (Article 110, paragraph 7, of the Italian Income Tax Code – TUIR) that is fully aligned with the OECD Transfer Pricing Guidelines. This alignment is further reinforced by the provisions set out in the Italian Revenue Agency’s ruling on transfer pricing documentation (Provvedimento del 23 novembre 2020), which mirrors the structure and content of the OECD-compliant Masterfile and Local File.

There are no explicit thresholds for the preparation of the Local File or Master File, whereas the Country-by-Country Report (CbCR) obligation applies to multinational groups with consolidated revenues exceeding €750 million.

The Local File must be prepared in Italian, while the Master File may be in English, provided it includes additional sections beyond those required by the OECD Guidelines.

While the preparation of the Master File and Local File is not mandatory, it is required in order to benefit from the penalty protection regime in the event of a tax audit. The documentation must be electronically signed and time-stamped by the deadline for filing the corporate income tax return (CIT return), and must be submitted to the tax authority within 20 days following a  formal request.

TP documentation must be prepared contemporaneously with the CIT return and signed with a digital timestamp. Although there is no separate TP return in Italy, the CIT return includes a specific section in which taxpayers must report the amount of each intercompany transactions, regardless of whether they intend to access the penalty protection regime.

If the timestamp is not applied by the deadline, the penalty protection is forfeited; however, it may be restored if the documentation is finalized and digitally signed within 90 days through a supplementary CIT return, provided that the possession of the documentation was not declared in the original filing. Possession of the TP documentation must be declared through a specific checkbox in the tax return. To qualify for penalty protection, the documentation must comply with the format established by the Italian Revenue Agency, including required chapters and structure. Specific rules also apply to low value-adding services, which require dedicated documentation.

Ultimately, it is worth noting that in the event of missing or inadequate transfer pricing documentation, companies may face a 70% penalty on the adjusted tax, making it strongly advisable for those with significant intercompany transactions to prepare compliant documentation.

Alignment with OECD Guidelines

Italy’s TP legislation is widely aligned with OECD Transfer Pricing Guidelines. IRA adhere to the OECD’s arm’s length principle as the fundamental standard for assessing intra-group transactions. In alignment with the OECD/G20 BEPS framework, Italy has fully adopted the three-tiered documentation approach recommended by the OECD, which includes the preparation of a Master File, a Local File, and a Country-by-Country Report (CbCR). This structured documentation system is designed to enhance transparency, ensure consistency in transfer pricing practices across jurisdictions, and facilitate effective risk assessment and audit processes by tax administrations.

Italy actively engages in international cooperation frameworks, including the OECD's International Compliance Assurance Programme (ICAP) and initiatives promoted at the EU level such as Joint Audits and administrative cooperation mechanisms under Directive 2011/16/EU (DAC). This active participation reflects Italy’s strong institutional commitment to implementing OECD-aligned transfer pricing practices, particularly in the areas of risk assessment, tax certainty, and coordinated audit procedures. IRA are increasingly involved in simultaneous audits and in the exchange of advance pricing information with foreign counterparts.

However, Italian transfer pricing documentation requirements incorporate several specific elements that go beyond the OECD minimum standard, particularly as set out in the Italian Revenue Agency’s Provision No. 360494 of 23 November 2020. In particular, the Local File must contain a detailed functional and risk analysis for each controlled transaction, clearly identifying the roles performed and risks assumed by each party. Additionally, the documentation must provide a thorough explanation of the transfer pricing method selected, along with a justification for its appropriateness

Benchmarking Analyses Nuances or Preferences

In general, IRA adopts a case-by-case approach when assessing the reliability and appropriateness of transfer pricing documentation and benchmarking studies. Rather than imposing rigid criteria, IRA evaluates each transaction individually, taking into account the nature of the activity, the functional profile of the tested party, the availability of reliable data, and the specific facts and circumstances involved.

However, some general preferences and prevailing practices have emerged in the application of the arm’s length principle, particularly in relation to benchmarking analyses:

- Local vs Regional Comparables Set. In principle, IRA accepts the use of regional comparables, especially within the European Union, provided they meet the criteria of functional comparability and data reliability. Although Italian comparables are preferred when available, the use of broader regional sets is justified by the economic integration of EU markets and the harmonization of accounting and disclosure standards.

- Single-Year vs Multi-Year Analysis. Multi-year data, typically spanning three years, are preferred to smooth out short-term fluctuations and ensure that the benchmarking results reflect a consistent and sustainable profit level over time.

- Public vs Private Comparables. There is a marked preference for private company comparables in Italy, as these tend to be more representative of independent businesses and are less affected by group synergies, consolidation effects, or other distortions that typically impact public companies.

- Interquartile vs Full Range. The interquartile range (IQR) is the standard adopted in Italy to define the arm’s length range, as it helps to eliminate outliers and non-comparable results.

- Transaction Based or Aggregate Approach. The former is generally preferred when distinct and materially different transactions occur, while the latter may be acceptable for homogeneous, recurring transactions.

- How Often are Benchmarking Sets Renewed. For SME’s (i.e. entities with annual revenues below €50 million and not belonging to a multinational group) IRA accepts a full benchmarking study every three years. For all other taxpayers, especially large multinational groups, annual updates of both the benchmarking set and the financials are expected to ensure the analysis remains current and reliable.

Thin Capitalisation Considerations for Intercompany Loans

The concept of debt capacity in the Italian tax system emerged as a modern replacement for the former thin capitalization regime, which was repealed in 2008. Thin capitalization rules, previously in force, were designed as an anti-avoidance mechanism to limit the deductibility of interest expenses on loans received from related parties (particularly foreign ones) when the level of debt exceeded a certain ratio compared to the company’s equity. The goal was to prevent base erosion through excessive intra-group financing. However, this rigid mechanism was replaced with a more flexible and economically grounded framework.

Since the reform, the deductibility of interest expenses has been governed by Article 96 of the Italian Income Tax Code (TUIR), which introduced a general limitation based on the company's operating performance: interest expenses are deductible only up to 30% of the gross operating income, roughly equivalent to tax-adjusted EBITDA.

Within this framework, and in line with Chapter X of the OECD Transfer Pricing Guidelines, the notion of debt capacity plays a central role, especially in the context of intra-group financial transactions. It requires taxpayers to demonstrate that the financing conditions, particularly the amount and interest rate, are consistent with what an independent third party would have accepted. This typically involves performing a creditworthiness analysis of the borrower, often through the simulation of a credit rating, to support the arm’s length nature of the financial arrangement.

 
Transfer Pricing Primary Risk Areas in Jurisdiction

In Italy, one of the primary transfer pricing risk areas is intra-group financing and interest deductibility: as mentioned above, following the repeal of the thin capitalization regime, Article 96 of the Italian Income Tax Code (TUIR) now limits the deductibility of net interest expenses to 30% of the tax-adjusted EBITDA. While this rule applies generally, transactions involving related-party loans, especially cross-border, are subject to heightened scrutiny. The tax authorities require a robust assessment of the borrower’s debt capacity, often involving a simulated credit rating and benchmarking to justify the arm’s length nature of both the loan amount and the interest rate.

Another key risk area involves low or no substance entities: transactions with affiliates located in low-tax jurisdictions or entities that perform limited economic functions attract close attention. Italian tax audits focus on ensuring alignment between value creation and the functional profile of the parties involved, in line with OECD BEPS Actions 8–10.

With regard to intangibles and royalties: payments for the use of intellectual property, such as trademarks and patents, must reflect the actual economic contributions of the parties IRA often challenge the legitimacy of such payments if the recipient lacks the functions or control typically associated with ownership under the OECD’s DEMPE framework.

In the area of intercompany services: tax authorities expect clear documentation demonstrating that the services rendered provide a real benefit to the recipient. Risks arise when charges are not properly supported, involve duplicative or shareholder-related services, or lack an appropriate cost allocation methodology.

Lastly, business restructuring also represents a significant area of risk: reorganizations that transfer functions, assets, or risks—such as the conversion to limited-risk distributors or contract manufacturers—may trigger exit charges if not adequately supported. The authorities refer to Chapter IX of the OECD Guidelines to assess whether appropriate compensation for transferred value has been recognised.