ITALY Law and Practice Contributed by: Marco Valdonio and Gabriella Cappelleri, Maisto e Associati
2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Transfer pricing rules apply with respect to cross-border transactions carried out between an Italian resident enterprise and non-resident companies that are linked by a direct or indi - rect “control” relationship. Indeed, Article 110(7) of the ITC applies to cross-border transactions occurring between Italian and non-resident enterprises that “directly or indirectly control the Italian enterprise, or are controlled by it, or are controlled by the same company controlling the Italian enterprise” . However, Article 110(7) of the ITC does not provide a definition of “control” . The definition of “associated enterprises” is provided by Article 2, letter a), of the Ministerial Decree, as follows: “an enterprise resident in the Italian territory as well as non-resident compa- nies where: (i) one of them participates directly or indirectly in the management, control or capital of the other, or (ii) the same person participates directly or indirectly in the management, control or capital of both enterprises” . What Constitutes Control? Article 2, letter b), of the Ministerial Decree clari - fies that “participation in the management, con- trol or capital” means (i) a participation of more than 50% in the capital, voting rights or profits of another enterprise; or (ii) the dominant influence over the management of another enterprise, based on equity or contractual bounds. In this respect, it should be noted that Article 110(7) of the ITC merely refers to the concept of “control” , which was already present in the wording of Arti - cle 110(7) before the amendments introduced by Law Decree of 24 April 2017, No 50. In this regard, the 1980 Circular had specified that the concept of “control” must be characterised as
“all instances of potential or effective economic influence” . According to the 1980 Circular, the rationale of such interpretation lies in the fact that price differentials in commercial transac - tions often have their fundamental basis in the power of one party to strongly influence the will of the other party, thus altering the terms of the transaction. Such power can be effective with - out its possessor necessarily being a majority shareholder. On this point, the Ministerial Decree seems to follow the same approach of the 1980 Circular, confirming that the concept of “participation in the management, control or capital” includes “dominant influence” on the management of another enterprise based on constraints other than mere capital control, even if it introduced a reference to contractual bounds. Also, the 1981 Circular reaffirmed that the concept of control is strictly related to the actual existence of “domi- nant influence” . In the light of this, apart from voting rights, some other factors were identified, such as: • the exclusive sale of products manufactured by the other enterprise; • the use of the capital, products and technical co-operation of the other enterprise, including joint ventures; • the right of the other enterprise to appoint members of the board of directors of the enterprise; • the existence of members of the board of directors in common; • the existence of family relationships between the parties; and • in general, all the cases in which a potential or actual influence on business decisions is exercised.
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