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Deduction of shareholder activity expenses: proof of the effective benefit and adequate documentation

  • Italy
  • General

13-07-2020

In the recent decision no. 13085, issued on June 30, 2020, the Italian Supreme Court has stated once again on the conditions required for the deduction - both for corporate income taxes and VAT purposes - of the shareholder activity expenses, i.e. the costs incurred and charged by the parent company for centrally managed services, such as management, organization and coordination costs.

In line with the previous case law, the Supreme Court has confirmed that the deduction of the expenses at stake is allowed only if the subsidiary obtains an effective benefit resulting from adequate documentation, otherwise lacking of inherence.

In the decision at stake, two Italian subsidiaries, belonging to a multinational group, deducted the shareholder activity expenses charged by the parent company on the basis of their turnover. The supporting documentation consisted of the service agreements and the invoices issued by the parent company, which, however, did not specifically indicate the intra-group services provided.

The Italian Tax Authorities challenged that such costs were not deductible since the supporting documentation did clarify neither the kind of services received nor their actual relevance to the Italian companies’ business.

The Italian Supreme Court upheld the Italian Tax Authorities’ appeal, recognizing that such documentation was not sufficient to determine the actual or potential benefit obtained by the subsidiaries: what mattered in such a decision was not that the expenses were charged under a the flat percentage rate, but that the allocation method between costs and services was unclear, making thus difficult to evaluate the benefit obtained.

In a nutshell, the Italian Supreme Court confirmed the guidelines already set forth by the prevailing case-law:

  • the burden of proof of the existence and inherence of the intra-group service costs charged lies on the company that claims to have received the same services and deducted the related costs;

 

  • in order to deduct the costs and the related VAT paid, the company shall prove to obtain from the service received an effective benefit, which shall be objectively determinable and adequately documented.

In light of the above, according to the Supreme Court case-law, the deduction of intra-group costs charged by the parent company may be challenged whether supported by an adequate documentation aimed at assessing the actual benefit received.  

In this respect, the provision of the service agreement referred to shareholder activity expenses and the related invoices may not suffice in order to demonstrate the inherence and then the legitimate deduction of the costs at stake.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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