The tax risks of intra-group transfers

Which rules change between Italian, EU, and non-EU transactions

When the transaction takes place between companies in the same group, both of them Italian, it must be examined critically from a tax, corporate-law, and commercial standpoint.

In this case, the Italian transfer-pricing rules in the strict sense are generally not the center of gravity of the issue, because no specific set of rules applies directly. However, the actual substance of the transaction remains relevant, as do the appropriateness of the consideration, the connection of the costs to the business, the deductibility of royalties, and the possible recharacterization of transactions lacking economic substance or economic advantage (as recently confirmed by Italian Supreme Court, No. 2777 of February 8, 2026, which reiterated the importance of being able to verify so-called “domestic transfer pricing”).

In a transfer from Italy to another company in the group within the EU, the existence of the single market and the free movement of goods and services does not eliminate tax scrutiny or the obligation to apply policies that correctly identify the transfer price. On the contrary, it often doubles that scrutiny, because the transaction may be reviewed by the authorities of both States involved in the commercial operation.

The key point remains to verify, and demonstrate, whether independent companies would have agreed on compensation – and, if so, how much – for that intangible asset, that license, or that service.

The Ministerial Decree of May 14, 2018 contains the Italian guidelines for applying Article 110, paragraph 7, of the TUIR (Italy’s Consolidated Income Tax Act), which sets out the tax rules for cross-border intra-group transactions. The Decree reaffirms at the national level the OECD arm’s length principle and incorporates the guidelines of the BEPS project (Base Erosion and Profit Shifting – the action plan promoted by the OECD and the G20 to combat tax avoidance by multinational enterprises), providing companies and the Italian Revenue Agency with defined parameters for assessing whether intra-group prices are appropriate.

There are also instruments for administrative cooperation between Member States, a common framework under certain tax directives, and often fewer issues relating to withholding taxes, currency controls, or documentary obstacles.

In an Italy–non-EU relationship, in addition to the transfer price, other factors may become relevant: treaties against double taxation, withholding taxes on royalties, the local rules of the destination country, possible customs issues where the intangible affects imported goods, controls on low-tax jurisdictions, and evidentiary difficulties connected with the exchange of information, as well as accounting regimes and drafting principles that may differ substantially between the two — or more — countries involved (for example, OIC in Italy, IFRS/IAS for certain companies, U.S. GAAP in the United States, PRC GAAP in China, and Ind AS or Indian GAAP in India). Without contracts, a functional analysis, and documentation, the same transaction may be read differently by the two tax authorities during an audit.

Audits, challenges, and penalties

When a transfer results in a change in taxable income for an Italian company, whether upward or downward, alarm bells go off at the Italian Revenue Agency and at the other competent authorities.

If the transfer is not justified by an economically defensible interest, and by an economically defensible counter-interest, the risk of challenges increases and, consequently, so does the risk of penalties.

The risks may range from an adjustment to the transfer prices, with the resulting recovery of unpaid taxes, to an additional demand for interest and penalties for an inaccurate tax return. Italian Legislative Decree No. 471/1997 provides that, where taxable income is lower than the amount assessed or the tax paid is lower than the amount due, an administrative penalty equal to 70% of the additional tax or of the difference in the credit used applies, and that penalty may increase from 105% to 140%.

But pay attention: if, during an audit, the tax authorities challenge the value attributed to the intra-group transaction, transfer-pricing documentation can play a decisive role. It does not eliminate the risk of an adjustment, nor does it prevent the recovery of the additional tax and interest; however, if prepared in the manner and within the time limits required, it may allow the company to access the penalty protection regime.

How to document the transaction to avoid penalties

The assessment of an intra-group transfer of intellectual property must start from an orderly reconstruction of the transaction, because the price cannot be separated from what is actually being transferred.

It is therefore necessary first to define the nature of the intangible, the parties involved, the States concerned, legal ownership, and the functions performed by each company in the group. In particular, the Italian Agenzia delle Entrate measure of November 23, 2020 requires the preparation of:

1. a Masterfile describing the group’s global strategy for the development, ownership, and exploitation of intangible assets, as well as the list of intangibles, their legal owners, license agreements, research and development agreements, and the relevant transactions that occurred during the tax period.
   It must explain, coherently, how the intangible fits into the group’s value chain (DEMPE analysis);
2. the National Documentation, in which the transaction must then be described in greater detail. The economic flows, the associated enterprises involved, any comparable transactions on the market with independent parties, the financial indicators used, and the comparability analysis must be described. The measure also requires the transaction actually carried out to be outlined precisely, including the functional analysis and any changes compared with previous tax periods.

In practice, before formalizing or reviewing an intra-group transfer of intellectual property, it is advisable to proceed on four levels:

• first, map the intangibles involved, including trademarks, patents, designs, software, databases, know-how, algorithms, manuals, procedures, and trade secrets;
• then characterize the transaction, distinguishing between a definitive assignment, an exclusive or non-exclusive license, technical access, commissioned development, evolutionary maintenance, an intra-group service, or a business reorganization;
• also verify ownership of the rights and the DEMPE functions performed by each company, with particular attention to software developed by employees, consultants, freelancers, or external suppliers;
• finally, collect operational evidence, such as contracts, repositories, software versions, manuals, access logs, tickets, timesheets, business plans, benchmarks, and calculation schedules.

Pay close attention, moreover, to the timing and form of the documentation. The Masterfile and the National Documentation must be prepared annually, signed with an electronic signature and timestamped by the tax return filing date, retained, and produced within twenty days of a request by the tax authorities.

Documentation is considered suitable when it provides the audit authorities with all the elements necessary to analyze transfer-pricing conditions and prices.