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Italian Authorities Release New Guidance on Transfer Pricing and Implementation of the Investment Management Exemption in Italy

Fabio Ilacqua


  • The definition of permanent establishment (PE) in Italy has been amended. Entities operating on behalf of a foreign investment vehicle, engaging in financial transactions, do not qualify under certain conditions.
  • Notable PE conditions include foreign investment vehicle and its controlled companies must be in a white-list country, and maintenance of transfer-pricing documentation supporting arm’s-length remuneration.
  • Italian tax authorities may use these principles for analyzing other intercompany transactions within the investment management industry.
Italian Authorities Release New Guidance on Transfer Pricing and Implementation of the Investment Management Exemption in Italy
Jerry Lee via Getty Images

On February 28, 2024, the Director of the Italian Revenue Agency released transfer pricing guidance (TP Guidance) related to the implementation of the investment management exemption (IME) in Italy. This article summarizes the key takeaways of the TP Guidance.

1. Introduction

The 2023 Budget Law amended the definition of permanent establishment (PE) set forth by the Income Tax Code (ITC). Under the new definition, an entity operating in Italy (in the name and on behalf of a foreign investment vehicle) and habitually concluding purchases, sales, and/or trading of financial instruments, does not qualify as a PE of the foreign investment vehicle, even if it exercises discretionary powers.

The main conditions for a PE are:

  1. the establishment of the foreign investment vehicle and its controlled companies in a white-list country;
  2. certain conditions to be complied with by the foreign investment vehicle;
  3. limitation in the roles assumed by the entity into management or supervisory bodies of the foreign investment vehicle and maximum thresholds of participation to the economic results of the foreign investment vehicle; and
  4. drafting and keeping transfer-pricing documentation supporting arm’s-length remuneration for the services.

2. Contents

The TP Guidance provides for criteria to select the most appropriate transfer pricing method to be applied.

The relevant services encompass two categories:

  1. investment management services; and
  2. services related and instrumental to investment management.

3. Methodologies

Regarding the investment management services, the TP Guidance identifies the Comparable Uncontrolled Price (CUP) as the transfer pricing method.

However, to the extent that:

  1. the CUP cannot be applied with the same reliability, and
  2. the parties involved in the transaction share the assumption of the same economically significant risks or assume separate economically significant risks which are strictly interconnected,

the most appropriate TP method is the transactional profit split, based on the contributions rendered by each of the parties.

Where neither the CUP nor the transactional profit split can be applied in a reliable way, entities shall select one of the other TP methodologies provided by the transfer pricing guidelines issued in 2022 by the OECD (OECD TP Guidelines) and the Italian regulations contained in a 2019 Decree (TP Decree), with the express exclusion of those featuring a profit-level indicator based on costs.

The selecting method guidance depicted above does not apply for those investment management services which do not imply an assumption of economically significant risks. In those circumstances, the most appropriate TP method shall be selected among those enumerated by and following the criteria set by the OECD TP Guidelines and the TP Decree.

Regarding services related and instrumental to investment management, the TP Guidance requires selecting the most appropriate TP method among those provided by the OECD TP Guidelines and the TP Decree. However, if the transaction involves the assumption of economically significant risks, entities shall apply the same order based on CUP, transactional profit split and, subsequently, the other methods for the determination of arm’s-length remuneration, as in standard case for investment management services.

Finally, the TP Guidance clarifies that investment management services and services related and instrumental to investment management shall be assessed together to the extent they are strictly interconnected and cannot be separated in a reliable way. The same hierarchical preference applies among CUP, transactional profit split and the other methods (excluding those featuring costs as denominator of the profit level indicator).

4. Compliance

In order to comply with the IME condition, the transfer pricing documentation of the entity (or its PE) operating in Italy shall duly analyze the transactions related to services listed in the TP Guidance. The documentation must comply with the Provision of the Director of the Revenue.

Intercompany transactions entered into by the entity (or its PE) are not required to be included in the transfer pricing documentation for IME purposes.

5. Preliminary Comments

The introduction of the TP Guidance is related to the implementation of the IME, addressing the arm’s-length requirement for certain specific controlled transactions.

Nevertheless, the Italian tax authorities may also rely on those principles to analyze intercompany transactions and dealings within the investment management industry in contexts other than the IME. Investment management companies, advisory companies, and other entities should consider assessing the implications of the TP Guidance on their current or future operations in Italy.

Foreign investment vehicles and their direct and indirect controlled entities are excluded from the definition of “group” relevant to the IME arm’s-length remuneration. This may lead the IME to apply its TP Guidance even when the arm’s-length remuneration of the transactions between foreign investment vehicles and the investment managers or advisors is not specifically verified.