Tax Observatory › Direct taxes and tax returns › Trade mark royalties charged to foreign subsidiaries: according to the Italian Court of Cassation, group needs alone do not justify reducing the royalty

Trade mark royalties charged to foreign subsidiaries: according to the Italian Court of Cassation, group needs alone do not justify reducing the royalty

In orders Nos. 23021 and 23024 of 10 July 2026 (ordinanze, decisions given in chambers) the Italian Court of Cassation upheld the adjustment of the trade mark royalties that an Italian company had cut from 2 to 0.5 per cent for the group’s internal needs. Group considerations count if they are shown to give a concrete advantage to the Italian company: in order No. 13136 of 7 May 2026 the Court held the transfer pricing rules inapplicable to a guarantee given free of charge that was supported by sound economic reasons established by the lower court.

The July orders: the reduced royalty

The two orders of the Fifth Civil Section, concerning the 2009 and 2008 tax years, deal with an exclusive trade mark licence granted to a US subsidiary and a Canadian subsidiary: royalties of 2 per cent from 1998, cut to 0.5 per cent from 2003 under an agreement made in 2002. In the Court’s view the tax authority does not have to prove an avoidance purpose, only transactions between associated enterprises at a price apparently below normal value; it is then for the taxpayer to prove that the consideration was at market level. The rules, the Court adds, tax income ‘regardless of the dynamics and needs of the corporate group’, as the Court had already held in proceedings between the same parties concerning 2006 (decision No. 1232 of 21 January 2021).

Weight was given to the fact that the parties themselves had originally regarded 2 per cent as appropriate, to the failure to review the royalty in later years, when the licensor was loss-making and bore research costs that benefited the foreign affiliates, and to the lower court’s preference for independent comparables over the taxpayer’s expert report.

The free guarantee: order No. 13136

In order No. 13136 of 7 May 2026, concerning 2009 and 2010, the Court dismissed the appeal on points of law brought by the Italian Revenue Agency (Agenzia delle Entrate) against the annulment of an adjustment on pledges and mortgages granted free of charge by an Italian subsidiary to secure a loan for the benefit of its US parent. The appeal court had found, as a matter of fact not reviewable by the Court of Cassation, an advantage for the subsidiary: future revenue, a positive interest-rate differential and the protection of its own survival, which was exposed to the parent’s liquidity crisis. The principle of law makes the transfer pricing rules inapplicable where the transaction is supported by sound economic reasons and by the parent’s interest in the success of the group companies. In our view the decisions do not conflict: they concern different facts, assessed on the evidence produced in each case.

The rule today and from 2027

All three decisions apply Article 110, paragraph 7, of the Consolidated Income Tax Act (TUIR) as worded before Decree-Law No. 50/2017, which referred to normal value under Article 9. Today paragraph 7 refers to the conditions and prices that would have been agreed between independent parties acting at arm’s length in comparable circumstances, and the guidelines are set out in the Ministerial Decree of 14 May 2018. From 1 January 2027 the rule will be in Article 119, paragraph 8, of the new consolidated Act on income taxes, with the same content.

In practice

• Licences of trade marks and other intangibles between group companies: the royalty should be supported by an up-to-date comparability analysis and reviewed when conditions change; a reduction decided solely for group needs, without a measurable advantage for the Italian licensor, exposes the company to an adjustment. For long-term licences the method for setting the royalty can be agreed in advance with the Revenue Agency through an advance pricing agreement (Article 31-ter of Presidential Decree No. 600/1973; from 2027 Article 115 of the consolidated Act on tax compliance and assessment).
• Guarantees and loans granted free of charge for the benefit of the parent: board resolutions and contemporaneous documents should state the concrete advantage for the Italian company, because the burden of proof lies with the taxpayer.
• Transfer pricing documentation: if it complies with the decision of the Director of the Revenue Agency, is handed over during the audit and has been notified as required, it excludes the inaccurate-return penalty on the adjustment (Article 1, paragraph 6, of Legislative Decree No. 471/1997; from 2027 Article 27, paragraph 8, of the consolidated Act on tax penalties).
• If an adjustment is proposed, the contraddittorio (prior consultation on the draft notice) and the dispute-avoidance procedures turn on comparability and on proof of the advantage.

Frequently asked questions

Are group needs enough to justify a below-market royalty?

No. According to the July 2026 orders the rules tax income regardless of group needs; what counts are sound economic reasons that translate into a proven advantage for the Italian company.

Who has to prove the market value?

The tax office must point to intra-group transactions at a price apparently below normal value, without having to prove an avoidance purpose; the taxpayer must then show that the terms were at market level.

Does documentation prevent the adjustment?

No: it prevents the inaccurate-return penalty, not the adjustment of income, and only if it is handed over during the audit and notified as required by the Revenue Agency’s decision.

Sources

Presidential Decree No. 917 of 22 December 1986 (TUIR), Article 110, paragraph 7, and Presidential Decree No. 600 of 29 September 1973, Article 31-ter (texts in force on 12 November 2026)

Decree-Law No. 50 of 24 April 2017, converted into law by Law No. 96 of 21 June 2017, Article 59

Ministerial Decree of 14 May 2018, guidelines on the application of Article 110, paragraph 7, of the TUIR

Legislative Decree No. 471 of 18 December 1997, Article 1, paragraph 6

Legislative Decree No. 117 of 19 June 2026, consolidated Act on income taxes, Article 119, paragraph 8, and Legislative Decree No. 141 of 5 August 2026, consolidated Act on tax compliance and assessment, Article 115 (from 1 January 2027)

Legislative Decree No. 173 of 5 November 2024, consolidated Act on tax penalties, Article 27, paragraph 8 (from 1 January 2027)

Court of Cassation, Fifth Civil Section, order No. 23021 of 10 July 2026, referring to decision No. 1232 of 21 January 2021 of the same Section

Court of Cassation, Fifth Civil Section, order No. 23024 of 10 July 2026

Court of Cassation, Fifth Civil Section, order No. 13136 of 7 May 2026