ITALY Trends and Developments Contributed by: Paolo Ludovici, Luca Tortorella, Marlinda Gianfrate and Angelica Masciulli, Gatti Pavesi Bianchi Ludovici
Secondary adjustments and repatriation The repayment of excess funds by the entity that ben - efited from non-arm’s length pricing may represent a practical mechanism to align the financial effects of the transaction with the primary adjustment and to prevent, or limit, the application of a secondary adjustment. This mechanism, commonly referred to as repatriation, is expressly contemplated in the OECD Manual on Effective Mutual Agreement Procedures (MEMAP, with the first version issued in 2007 and recently updated in 2026). In this respect, the above-mentioned Ruling No 233 of 28 April 2022 appears to confirm that repatria - tion does not give rise to additional taxation, since the reimbursement of amounts corresponding to the secondary adjustment serves to neutralise its effects. Focus on certain topics during tax audits Certain topics are frequently investigated during tax audits. Both the IRA and the Tax Police are reviewing, among other things, the alignment of the applied TP model with the risk and functional profile; the origin of losses; the DEMPE functions in relation to intangibles; and, most recently, management fees and financial transactions. With specific reference to DEMPE, it should be noted that this concept was formally introduced into the OECD TP Guidelines only in 2017 and therefore repre - sents a relatively new analytical framework in transfer pricing practice. As a consequence, Italian case law on DEMPE is still very limited. However, as mentioned, tax audits are increasingly focusing on the effective performance and control of DEMPE functions. Situations involving income derived from intangibles require a consistent demonstration of the substantive role performed by the entity entitled to receive such income. In these cases, a robust analysis – focused on the performance and control of DEMPE functions and risks – may help support the overall factual analysis in disputes involving cross-border IP-related flows. In the absence of consolidated case law, this area cur - rently represents one of the most sensitive and evolv - ing aspects of transfer pricing audits in Italy.
only, as a notional interest-bearing loan (“figurative loan”) granted by the Italian company to the foreign subsidiary, with imputed interest taxable in Italy. Under the settlement agreement, the excess portion of royalties was treated solely for tax purposes, as a financial transaction rather than a deductible expense and the Italian tax authorities taxed notional interest income on the figurative loan. The figurative loan had no accounting existence as it was not contractually agreed and was not recognised as a financial asset in the Italian company’s statutory accounts. To stop the accrual of further imputed interest, Alfa and Zeta intended to retroactively amend the licence agreement so that royalties would align with the amounts accepted as deductible, and have Zeta refund the excess royalties, corresponding exactly to the amount of the figurative loan. From an account - ing perspective, Alfa would record the refund as an extraordinary income, since the figurative loan existed exclusively for tax purposes. The IRA confirms that for corporate income tax pur - poses, although the refund is booked as an extraor - dinary income for accounting purposes, it does not constitute taxable income and the refund must be considered as a financial transaction, namely the repayment of the figurative loan generated by the sec - ondary adjustment. Moreover, taxing the refund would result in double taxation, since the underlying royalties were already disallowed under the primary adjustment and the related imputed interest was already taxed. The IRA explicitly confirms that the reimbursement of an amount equal to the figurative loan arising from the secondary adjustment is suitable to interrupt the accrual of imputed interest. This conclusion is condi - tional upon the refund being clearly and directly linked to the transfer pricing adjustments covered by the set - tlement and the refund being effectively paid. Even though there is no internal legislation and regu - lations on secondary adjustments, through this ruling, the Italian tax authorities have clarified that secondary adjustments creating a figurative loan may be neutral - ised through repayment, and that such repayment is treated as a financial transaction, not as taxable income.
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