In a recent decision with significant implications for international taxation, the Italian Supreme Court (Judgment No. 18058, July 3, 2025) clarified the scope of the concept of “associated companies” applicable to transfer pricing regulations. This ruling clarifies the scope of control required for the transfer pricing rules to apply, particularly with regard to the retroactive effect of the Ministerial Decree of May 14, 2018.
Legal control vs. economic influence
Traditionally, the debate in Italy has revolved around two interpretations:
- Apply transfer pricing rules only in cases of legal control; and
- Extending their application also to situations of economic control, even if there is no formal shareholding relationship.
Circular No. 32/1980, still in force as interpretative doctrine, already held a broad view of the concept of control. According to this approach, control is not limited to the legal criteria set out in Article 2359 of the Civil Code, but also includes any actual or potential economic influence that can be inferred from specific circumstances, such as exclusive sales, financial dependence, or personal or contractual links.
Subsequent regulatory framework: Ministerial Decree of 2018
The Ministerial Decree of 2018 introduced a more specific definition of “associated companies” for tax purposes, establishing that a relationship exists when one entity participates directly or indirectly in the management, control, or capital of another, or when a third entity does so in relation to both. In quantitative terms, this translates into shareholdings of more than 50% or the exercise of dominant influence through contractual links.
The 2025 decision: no retroactivity of the new standard
In the case analyzed by the Supreme Court, it was questioned whether there was a control relationship between an Italian company and a foreign company in the 2015 fiscal year, based on the existence of two common directors. The tax authority alleged that this situation implied significant influence, triggering transfer pricing rules.
The Court, however, concluded that:
- The definition in the 2018 Decree does not have retroactive effect.
- For 2015, the existence of stable economic influence had to be assessed in accordance with the previous approach.
- The Italian company’s distribution activity was not exclusive or predominant with respect to the foreign company’s products.
- The mere presence of common directors does not automatically imply control or economic subordination, and in this case, no concrete facts were proven to show such subordination.
- The alleged contractual omissions were not considered indicative of dependence, as there were justified causes such as production capacity problems and high initial costs.
Implications for tax practice
This ruling reaffirms the need for a substantive, rather than merely formal, assessment of the relationships between companies in order to determine the application of transfer pricing rules. Furthermore, it sets a limit on the retroactivity of more restrictive subsequent rules, requiring that control relationships in previous years be assessed under the standards in force at the time.
It also highlights the Italian Supreme Court’s repeated criterion regarding the importance of concrete facts demonstrating real economic subordination or influence, beyond the corporate structure or simple administrative links.
Source: ITR