Transfer Pricing and Intragroup Services: the Italian Supreme Court Reinforces the Taxpayer’s Burden of Proof

One of the most interesting aspects of the judgment concerns the relationship between Article 110, paragraph 7, of the Italian Income Tax Code, which governs transfer pricing, and Article 109 of the Italian Income Tax Code, which concerns the principle of business relevance and deductibility of costs.

The Supreme Court clarified that the assessment of the arm’s length value or arm’s length price does not exhaust the tax review. Even where an intragroup cost is determined according to criteria consistent with the arm’s length principle, it remains necessary to verify whether that cost is actually connected with the business activity of the company deducting it.

In other words, transfer pricing answers the question: is the price consistent with what independent parties would have agreed?

The principle of business relevance answers a different question: does the cost genuinely relate to the business activity of the company bearing it?

The two assessments may overlap in practice, but they remain distinct from a logical and legal perspective. The Supreme Court noted that, in intragroup relationships, the issue of business relevance of the cost and that of its arm’s length value often arise together, although they remain autonomous.

Belonging to a Group Is Not Enough

The principle stated by the Court is clear: belonging to a multinational group does not, in itself, justify the deduction of costs charged by a related company.

For a cost to be deductible, the beneficiary company must prove that it received a service useful to its own business. Such benefit must be:

effective, meaning connected to a service that was actually performed;

specific, meaning attributable to the company bearing the cost and not merely to the group as a whole;

objectively determinable, meaning capable of being verified on the basis of concrete evidence;

adequately documented, through evidence capable of proving the nature and benefit of the service received.

The Supreme Court referred to an already consolidated approach according to which, in relation to intragroup costs, deductibility requires that the controlled company obtains an actual benefit from the remunerated service and that such benefit is properly documented.

The Risk of Shareholder Activities

The judgment also addresses a well-known issue in international practice: the distinction between services rendered in the interest of the beneficiary company and activities carried out in the interest of the parent company.

So-called shareholder activities are management, coordination, control or supervision activities performed in the interest of the shareholder or of the group as a whole. If such activities do not produce a concrete benefit for the subsidiary, they cannot be recharged to the latter as deductible costs.

It is therefore necessary to distinguish between:

services actually received by the subsidiary;

general group coordination activities;

services duplicating functions already performed internally;

activities generating only indirect or incidental benefits.

The Supreme Court emphasized this point: the benefit arising from the service must be specific to the recipient company and distinct from the general control and coordination activity typical of a shareholder’s role.

The Burden of Proof Lies with the Taxpayer

Another key point of the decision concerns the burden of proof.

The Court reiterated that it is for the taxpayer to prove the existence, business relevance and benefit of the costs incurred. It is not sufficient to produce formal documents, such as framework agreements, invoices or cost allocation schedules. The taxpayer must prepare substantive documentation enabling the reconstruction of:

which services were provided;

who provided them;

during which period;

through which operating methods;

what benefit the Italian company received;

why the cost was allocated according to a specific criterion.

This approach is consistent with the increasing focus of the Tax Authorities and the courts on the economic substance of intragroup transactions, particularly where costs arise from centralized structures or cost sharing arrangements.

Practical Implications for Businesses

The judgment provides very practical guidance for companies belonging to multinational groups.

Transfer pricing documentation, while essential, should not be limited to describing pricing methods or cost allocation criteria. It should be supported by operational evidence capable of demonstrating the benefit received.

Useful evidence may include periodic reports, detailed descriptions of services, internal correspondence, deliverables, timesheets, presentations, analyses of results achieved, performance indicators, support requests, meeting minutes and any other evidence suitable to link the service to the activity of the beneficiary company.

Particular attention should be paid to low value-adding services, cost contribution agreements and recharges based on generic allocation keys, such as turnover, volumes or number of employees. Such criteria may be legitimate, but they must be consistent with the nature of the service and with the benefit actually received.

Conclusions

Judgment No. 5753/2026 confirms a principle of significant importance: in transfer pricing matters, it is not enough to show that the price is, in abstract terms, consistent with market conditions. When dealing with intragroup costs, it is essential to prove that the service was actually provided, that it was useful to the company receiving it, and that such benefit is properly documented.

For corporate groups, this requires a more rigorous approach to the management of intercompany relationships. Documentation should not be prepared merely as a formal or defensive exercise, but should reflect the economic substance of the services provided and the benefits obtained.

In this context, Studio Associato Baù Martini assists Italian companies and multinational groups in managing the legal and tax aspects connected with intragroup relationships, through an integrated approach combining corporate advice, international taxation and commercial contracts. The Firm assists clients in the drafting and review of intercompany agreements, cost contribution agreements, service agreements, group policies and supporting documentation evidencing the actual provision of services, helping to reduce the risk of challenges during tax audits.

Studio Associato Baù Martini’s experience is particularly focused on building documentation frameworks that are consistent with the company’s actual operations: not merely formally correct documents, but tools capable of clearly and verifiably demonstrating the economic rationale of intragroup transactions, the deductibility and business relevance of costs, and the concrete benefit for the companies involved.

Studio Associato Baù Martini also supports companies and groups both in the preventive structuring of intercompany relationships and in contentious phases involving the Italian Tax Authorities, including tax inspections, discussions with the authorities, tax assessments and tax litigation.