Intragroup services under the microscope: the Italian Supreme Court sets the bar on cost deduction and benefit testing (Judgment No. 5753/2026)
In this judgment, the Supreme Court of Justice follows well-established case law on intra-group service costs and confirms that costs charged by a foreign affiliate to an Italian company can only be deducted if certain specific conditions are met.
- Proof of the existence of the costs
- The relevance of such costs
- The effective benefit of the services to which the costs relate must also be proven, as well as their objective determination and documentary evidence of such benefit.
The Court specifically criticizes the lower court's decision to hold the intra-group costs fully deductible (charged to the Italian company on the basis of two agreements, one relating to services provided in the context of centralized corporate functions and the other to research and development activities carried out centrally) on the basis of assertions of "manifest generality". Indeed, the second-instance judges had held that the costs were deductible insofar as they constituted "services of general utility … which the parent company, within the scope of discretionary choices that necessarily fall within the freedom and right of economic and business initiative, decided to decentralize by delegating them, in this specific case, to the consolidated entity, which, in turn, derived a direct benefit not only on an equal footing with all companies of the group but also specifically in relation to its own particular business activity".
Moreover, in the first-instance judgment, it was briefly held that “the documentation produced makes it possible to identify the connection between the various services acquired and the activity carried out by the company, their correspondence to an actual interest, and the economic benefit to the recipient company”.
Despite the two judgments in favor of the taxpayer, the Supreme Court of Justice ruled that the lower Courts had failed to verify the existence of a direct benefit for the Italian company for the purposes of costs deduction.
Ultimately, the judgment did not recognize the relevance or direct benefit that the company had derived from the services received, on the basis of the following reasons:
- The production of the contract and invoices was not considered sufficient; the judges required a specific demonstration of the elements necessary to determine the actual or potential benefit obtained by the company receiving the service.
- It was noted that the services duplicated those provided by another affiliate.
- It was held that the services were aimed more at satisfying the parent company's own coordination needs than at meeting the specific requirements of the Italian company's business.
It is worth noting that, for certain services relating to credit management, information technology and human resources activities, deductibility had already been recognized by the assessment deeds in light of the documentation produced (of which, unfortunately, the judgements provide no details)..
The significant volume of business generated by the Italian company, allegedly thanks to the services received despite its limited internal resources, was not considered a relevant factor for the purposes of the decision.
Regarding the burden of proof, the judgment confirmed the principle of proximity of evidence, which, by way of derogation from the general rule (Article 2697 of the Italian Civil Code), places the burden of proving a fact on the party with easier access to the evidence based on their sphere of action.
In general, the relevant domestic provisions on the deductibility of intra-group costs remain Article 109(5) of the Income Tax Code (according to which "Expenses and other negative components other than interest expense, except for tax, social security, and social utility charges, are deductible if and to the extent that they relate to activities or assets from which revenues or other income contributing to the formation of taxable income are derived") and Article 110(7) of the Income Tax Code (according to which "Income components arising from transactions with non-resident companies [...] are determined with reference to the conditions and prices that would have been agreed between independent parties operating under conditions of free competition and in comparable circumstances"). The Supreme Court reiterates that, under the transfer pricing rules, the relevance of the cost and its arm's length value "often arise together, while remaining distinct on a logical and legal level", as the existence, relevance and benefit of the cost "are therefore different questions, but logically precede its adjustment according to the arm's length value". This clearly implies that, despite the systematic differences between the two provisions, issues of effectiveness, relevance and economic rationality feed into one another during audits and subsequent assessments.
The ruling also aligns with OECD principles, particularly Chapter VII of the 2022 OECD Transfer Pricing Guidelines. Paragraph 7.6 states that an intra-group service is relevant only if the service rendered provides the recipient with "economic or commercial value to enhance or maintain its business position"; and adds that the test to apply is whether an independent party, in comparable circumstances, "would have been willing to pay" for that service, or whether it would have performed it internally. Paragraph 7.9 further clarifies that, when a service is rendered by a group company "solely because of its ownership interest" and therefore in its capacity as a shareholder, it "would not be considered to be an intra-group service". Paragraph 7.11 states that, as a general rule, an intra-group service does not arise when the activity "merely duplicate a service" already performed by the company itself or by third parties on its behalf.
While reaffirming well-known principles, the judgment provides important practical insights. For the purpose of deducting costs related to services received within groups, particular attention must be paid, and documentary evidence must be gathered that can illustrate the services actually received and the concrete benefit derived from them. It must also be proven that such services are distinct from the ordinary management and coordination functions exercised by the parent company.
In the context of documentation requirements and with particular regard to low-value added services, paragraph 7 of Provision No. 360494 of 23/11/2020 by the Director of the Italian Revenue Agency confirms the above. This paragraph requires documentation of the categories of services, the identity of the beneficiaries, the economic rationale, the benefits received or expected, and the allocation keys used, as well as the provision of contracts and the indication of the cost base and calculations performed for the purposes of the charge (consistently with paragraph 7.64 of the OECD Transfer Pricing Guidelines).
Therefore, it is necessary for Italian companies receiving services from foreign group affiliates to verify the completeness and robustness of the defence file supporting the deduction of the incurred costs, as well as the arm's length nature of the received services.
