ITALY Trends and Developments Contributed by: Paolo Ludovici, Luca Tortorella, Marlinda Gianfrate and Angelica Masciulli, Gatti Pavesi Bianchi Ludovici
a secondary corresponding adjustment relating to the surplus resulting from the transfer pricing (primary) adjustment, clarifying that an adjustment made pur - suant to Article 110 (7) of the TUIR does not automati - cally legitimise the taxation of such surplus under the same original legal qualification. In particular, the tax court excluded that the excess royalties at stake could continue to be treated as royalties for the purposes of withholding tax. The reasoning is explicitly based on the Commentary to the OECD Tax Model Convention (“OECD Com - mentary”), which is quoted verbatim by the tax court. According to the judgment, “treating the portion of the royalty exceeding the arm’s length value as a royalty would be contrary to paragraph 12.25 of the OECD Commentary, pursuant to which ‘with respect to the tax treatment applicable to the excess amount of the royalty, the exact nature of the excess must be deter - mined by reference to the facts and circumstances of each individual case’.” According to the tax court, the amount exceeding the arm’s length value must be viewed as something unconnected to the possibility of exploiting the intan - gible asset, but rather as constituting a transfer of value without consideration, which cannot be reclas - sified under the same category of income subject to the primary adjustment. In this respect, the tax court expressly states that “Italy has deliberately chosen not to introduce legislation providing for the taxation of the excess arising from a primary adjustment, as there is intentionally no domestic legislation specifically governing the taxation of the ‘secondary adjustment’ resulting from the determination of an excess value.” On this basis, the tax court finds the tax authority’s position to be unlawful, as the tax office had applied the domestic 30% withholding tax pursuant to Arti - cle 25 (4) of Presidential Decree No 600/1973 to the excess amount of the royalties. According to the tax court, the tax authority cannot create a secondary adjustment through interpretative means, nor can it retain the original nomen iuris for tax purposes. As stated in the judgment: “it follows that the tax author - ity cannot characterize the same amount under its original nomen iuris (royalty) and tax the excess as if it had remained within the original category of income.”
The judgment further examines the issue from a trea - ty law perspective. Referring to Article 12 (6) of the Italy–Switzerland tax treaty, the tax court clarifies that once the excess amount is excluded from the scope of royalties, it must be assessed under other relevant treaty provisions. In the case at hand, Article 7 applies, with the consequence that no withholding tax may be levied in Italy in the absence of a permanent establish - ment. As the tax court states, “the application of Arti - cle 7 of the Convention requires Italy not to levy any withholding tax on the excess portion of the royalty, as such profits are taxable exclusively in Switzerland.” Accordingly, the secondary adjustment is entirely excluded, both under domestic law and under the applicable tax treaty framework. This emerging case law – though not yet confirmed by the Supreme Court – reflects progressive judicial attention to secondary adjustments in the absence of a clear domestic legal framework. Noteworthy ruling on secondary adjustment When addressing secondary adjustments, a recur - ring concern is the risk of undue double taxation. Although as mentioned, Italian law does not contain any specific provisions governing secondary adjust - ments, the IRA publicly set out, for the first – and so far the only – time, its position on the matter through Ruling No 233 of 28 April 2022. In that ruling, the IRA effectively addressed the tax treatment of a second - ary adjustment by applying, in practice, a framework not expressly provided for under domestic legislation. The ruling issued by the IRA concerned the case of an Italian resident company (“Alfa”) that paid royalties to a Dutch related company (“Zeta”) for the use of a licensing and commercial model. Following tax audits, the Italian tax authorities challenged the arm’s length nature of the royalties under Italian transfer pricing rules. The dispute was settled through tax settlement agreements resulting in a primary adjustment, con - sisting of: • the partial non-deductibility of royalties exceeding the arm’s length value; and • a secondary adjustment, whereby the excess royalties were recharacterised, for tax purposes
121 CHAMBERS.COM
Powered by FlippingBook