ITALY Trends and Developments Contributed by: Paolo Ludovici, Luca Tortorella, Marlinda Gianfrate and Angelica Masciulli, Gatti Pavesi Bianchi Ludovici
a breach of the arm’s length principle from the inter - est-free nature of the financing, without conducting a proper transfer pricing analysis. The Supreme Court, however, upheld the appeal filed by the IRA, quashed the decision of the second tier tax court, and remanded the case for reconsideration in light of these principles. With regard to valid intercompany commercial rea - sons, some recent judgments by second tier courts have recognised the reasonableness of interest-free intra-group loans to support a company in financial or economic difficulty, provided that such circumstances In general, secondary adjustments refer to a “virtual transaction” that follows a primary transfer pricing adjustment. A secondary adjustment treats surplus financial resources available to the entity not affected by the primary adjustment as if they had been trans - ferred to it under a different legal basis for tax pur - poses (eg, distribution of dividends, granting of loans, capital injection). In this regard, the OECD Transfer Pricing guidelines define secondary adjustments as “an adjustment that arises from imposing tax on a secondary transaction” and secondary transactions as “a constructive transaction that some jurisdictions will assert under their domestic legislation after hav - ing proposed a primary adjustment in order to make the actual allocation of profits consistent with the pri - mary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.” Italy does not have specific domestic regulation on “secondary adjustments” and the authorities clari - fied in the Italian OECD TP country profile that sec - ondary adjustments are not applied in Italy. In prac - tice, however, secondary adjustment issues are not uncommon, particularly in cases involving intragroup royalty adjustments, where the tax authorities have attempted to apply domestic withholding tax to the portion deemed to exceed the arm’s length value. This divergence between the official position and audit practice has made secondary adjustments an area of controversy in Italy. Case law on the matter remains are adequately proven. Secondary adjustments
very limited. However, a recent decision (still poten - tially subject to appeal) has expressly challenged the approach of the authorities with respect to secondary adjustments. The first relevant case is Judgment No 328/2018 of Lombardy second tier tax court of 26 January 2018. Although the subject of the controversy was the co- ordination of penalties and arbitration and mutual agreement procedures in the field of transfer pricing, in the decision, the tax court expressly referred to European practice and soft law instruments, attrib - uting particular relevance to the European Commis - sion’s Final Report on Secondary Adjustments of 18 January 2013. In this context, the court observed that: “in case the tax effects of the secondary adjustments are eliminated and/or reduced through recourse to mutual agreement procedures, the Forum recom - mends the elimination or the proportional reduction of the related penalties.” Against this background, the judgment treats the secondary adjustment as a relevant reference con - cept for the purposes of co-ordinating penalties with the outcome of dispute resolution procedures, while stressing that its effects must be in line with the final, agreed transfer pricing. Accordingly, the second tier tax court treats the sec - ondary adjustment not as an autonomous conse - quence of the primary adjustment, but as a concept with effects that must be carefully co-ordinated with the primary adjustment, the corresponding adjust - ments, and the penalty regime. In this regard, the secondary adjustment is treated as an ancillary and potentially reversible effect, the tax impact of which must reflect the final, agreed outcome of the dispute resolution procedures. More recently, Judgments No 4698/2025 and 4699/2025 of Milan first tier tax court of 26 November 2025 addressed the issue of the secondary adjust - ment, denying its applicability within the Italian tax system due to the absence of a specific domestic provision. The tax court began from the theoretical distinction between the primary transfer pricing adjustment and
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