All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Italy: Intercompany charges, cost inherence and deductibility

Sponsored by sponsored-firms-hager.png
intl-updates-small.jpg

In general terms, inherence can be described as the relationship between the cost and the enterprise, where the cost has a specific relevance to the determination of income; this is a result of its connection not to a specific revenue, but rather to an activity potentially able to produce income. Based on this assumption, in order to consider a cost deductible (i.e. inherent), the taxpayer is required to demonstrate clearly the connection with the activity, providing the tax authority with "sufficient" documentation.

The Italian Supreme Court recently ruled on this topic (decision no. 20113/18) regarding the deductibility of costs associated with the construction of swap bodies (casse mobili). The ruling involved Italian company ITA Co, which specialises in the manufacture of semi-trailers, containers, fittings for vehicles, ISO and special containers. The local tax authorities disregarded the deductions of costs incurred by ITA related to the construction of swap bodies, citing a lack of inherence. The adjustment filed by the tax authorities was challenged by the taxpayer, first before the local Court of First Instance, then before the Regional Tax Court (Commissione Regionale della Lombardia – sez. Distaccata di Brescia). In line with the latter's decision, the Supreme Court upheld the taxpayer's arguments and rejected those put forward by the tax authorities.

The case can be summarised as follows. ITA conducts all activities (and bears the related costs) necessary to build swap bodies. Then, it sells the finished products to a leasing company (or LCo). The LCo leases the swap bodies to a company controlled by ITA. The swap bodies are then rented by ITA, which gives them to its clients as a gratuitous loan for the period necessary to provide them with new swap bodies, which are regularly purchased and paid for. The price paid by the end client is sufficient to remunerate the initial rent under the gratuitous loan.

The Supreme Court stressed that – in line with the current jurisprudence – the judgment on the inherence of the cost refers to the corporate object of the enterprise "in the sense that it is deductible if it is functional to the single social activities or, in any case, if it brings to the enterprise a useful, objectively determinable and adequately documented".

Under this view, the inherence does not in essence integrate a link between costs and revenues, but is essentially related to the correlation between costs and company activity, even if only potentially capable of generating taxable income. Regarding intragroup relations, the inherence of the cost, within the limits of reasonableness and proportionality, is connected to the concepts of coherence and economic utility "interpreted as indexes of the existence or not of the inherence rather than essential requirements".

In conclusion, the inherence of the costs paid by a company belonging to a multinational group must be evaluated according to the criterion of coherence and the economic usefulness of the entire activity carried out by the group. Therefore, the application of these criteria must essentially bring out the advantages gained by all the companies belonging to the group and not only those gained by a single company.

More from across our site

Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
12th annual awards announce winners
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree