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Italian courts consider costs deductibility for corporate income tax

The MTA have focused their TP audits on identifying the DEMPE functions

Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners explore the judicial decision which noted that costs deductibility is confirmed, even if the effective supplier and invoice issuer are different.

Costs paid for the purchase of goods are deductible for corporate income tax (CIT) purposes, even if the relating invoices are issued by entities different from the ones that had provided the products.

The principle has been reaffirmed by the Regional Tax Court of Puglia (Decision No. 464 of February 21 2020) which took the occasion to stress, once more, that the costs borne by a taxpayer are deductible whenever they are inherent to the activity carried on by the same taxpayer.

The case at stake concerns an Italian company (part of a multinational enterprise) which, in 2008, was physically supplied with goods by its Chinese related entity but was formally invoiced by its UK and Hong Kong SAR associated companies. Therefore, all commercial aspects of the business relation (for example, placement of ordered products, negotiation of terms and conditions for the supplies, shipment) were directly handled by the Italian and the Chinese companies, while those resident in the UK and Hong Kong SAR only intervened to issue the invoices relating to the goods supplied by the Chinese entity. 

At the end of the inspection, the Italian competent tax office challenged the deductibility of the costs paid by the Italian buyer to the associated entities in the UK and Hong Kong SAR. The tax office argued that the invoices issued by the latter would have been attributable to another party based in China, so thus would have generated a situation of fictitious interposition and subjectively non-existent transactions. The ultimate consequence of this interpretation of facts and circumstances led the tax office to deny the deductibility of the purchase costs for CIT purposes on the Italian subsidiary registered vis-à-vis the UK and the Hong Kong SAR companies. 

Following an unsuccessful attempt of tax settlement, the Italian company filed an appeal to the Provincial Tax Court (first degree of judgment) which ruled in favour of the taxpayer. Then, the Revenues appealed to the Regional Tax Court (second degree of judgment) but once more, the position of the Italian company was accepted and the Regional Tax Court duly confirmed the decision issued by first degree judge.

According to the second degree court, the tax office’s appeal was rejected as during the inspection of its premises, the taxpayer had been able to demonstrate with relevant documents (i.e. customs declaration, orders, bill of lading, e-mails and communications, etc.) that the shipment of the goods from China to Italy had effectively taken place. Furthermore, the account reflected the invoices received from its UK and Hong Kong SAR related entities. In relation to this, the taxpayer ultimately succeeded in proving a direct link between the transactions related to the purchase of products and its entrepreneurial activity. 

The Regional Tax Court stressed that this interpretation is aligned with other judgments on the same subject matter issued by the Supreme Court. According to the court, the deductibility of the expenses must be verified in light of the general requirements of effectiveness, inherence, competence, certainty and determinability of the costs, even if the invoices are issued by a company not effectively involved in the operations. 

In conclusion, the deductibility of costs reaffirms the judgments passed by the Supreme Court in several decisions and cannot be challenged by tax authorities if the purchased products were not used directly to commit a fraud (e.g., ‘carousel fraud’), but to be marketed.

Gian Luca Nieddu

T: +39 02 7780711 


Barbara Scampuddu

T: +39 02 7780711 


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