Tax controversies typically arise following tax assessments. Most assessments follow a tax audit, at the end of which the auditors issue a Tax Audit Report. The latter is a report of findings, delivered by the auditors to the taxpayer and to the Tax Agency, and does not qualify as an assessment. 

Generally, the Tax Administration cannot issue a tax assessment without a prior audit or formal request for information (some exceptions are provided for registration tax). A request for information may be addressed to the taxpayer and/or to third parties. 

If a specific issue arises with respect to a given fiscal year, the Tax Administration consistently applies the same finding across all the fiscal years open for assessment.

With reference to multinational entities (MNEs), corporate income tax and regional tax give rise to most tax controversies, given that transfer pricing claims are the most relevant in terms of amounts and frequency. Withholding taxes and value added tax (VAT) are increasingly scrutinised, as well as claims regarding the fictitious interposition of foreign entities. The sale and purchase of going concerns is often challenged with reference to the declared value of the transaction and its actual nature (ie, recharacterising the sale of a going concern as a sale of goods, and vice versa). Moreover, taxpayers are facing extensive assessment activities aimed at recovering the R&D tax credits granted in prior fiscal years.

The best way to mitigate the risk of tax controversies is to manage and control tax risks responsibly. A useful tool in this respect is the right of the taxpayer to file ruling requests with the Tax Administration. Such ruling requests may concern:

• the interpretation and application of tax provisions when there is an objective uncertainty on their correct interpretation;
• the existence of the conditions and the assessment of the suitability of the evidence required by law for the application of specific tax regimes;
• the application of the abuse of law principle;
• the application of transfer pricing rules and the existence of a permanent establishment; 
• the tax regime of new investments in Italy (if the investment exceeds a certain threshold and determines a significant occupational impact); and
• the eligibility for the substitutive tax on the foreign income of the new residents.

The ruling must refer to actual cases and must be filed prior to the execution of the transaction (or prior to its impact on the tax return of the taxpayer). The Tax Administration has to reply within 90 days; rulings on transfer pricing and international matters have no deadline. 

A fee is charged for requesting a ruling, depending on the type of taxpayer, its income and the complexity of the case.

In addition, before submitting a new request, “small” taxpayers will have to consult a newly instituted database that may suggest a solution to the interpretation issue based on previous rulings.

Over the past few years, many measures have been introduced against tax avoidance (ie, BEPS recommendations and especially the EU’s recent measures to combat tax avoidance, the “Shell Companies” Directive, anti-hybrid mismatch rules), with a consequential expansion of the Tax Administration’s operational field. While, on one hand, taxpayers are facing the complicated task of reshaping all their current structures accordingly (and may not always be able to adapt on time), on the other hand, since such measures are aimed at combating aggressive tax planning, taxpayers are likely to assume a more conservative approach to their business activities. The number of tax controversies is therefore likely to reduce over time.

All tax assessments require the payment of additional taxes by the deadline for appealing before the Tax Court. The deadline is 60 days from the date of service and is extended by law by 30 days (or 90 days in some cases) if the taxpayer lodges an administrative settlement request. If a settlement is not reached and the taxpayer lodges an appeal, down payment of one third of the assessed taxes, plus the related interest for late payment (but not the penalties), must be made. 

There are some exceptions: some registration tax assessments require the down payment of the whole amount, while the abuse of tax law claims does not require any payment while a first-degree judgment is pending. The taxpayer can ask the Tax Administration and the Tax Court to suspend the down payment. The above-mentioned suspension is almost never granted by the Tax Administration, unless extraordinary circumstances exist. The Tax Courts can suspend the payment if:

• after a brief analysis of the reasons for the appeal, the Tax Court finds that the appeal is in principle valid (fumus boni iuris); and
• at the same time, the payment could cause serious and irreparable damage to the taxpayer (periculum in mora). 

The latter requirement is theoretically subject to an assessment by the Tax Court of the amounts claimed in relation to the economical and patrimonial condition of the taxpayer. However, the Tax Courts often consider this requirement to be fulfilled if the amounts required are very high, regardless of the taxpayer՚s condition (periculum in re ipsa).

If a mutual agreement procedure (MAP), pursuant to Council Directive (EU) 2017/1852, has been opened and the relevant tax litigation has been suspended, the payment is suspended by law.

Under certain circumstances and subject to certain thresholds, both the infringement of tax payment obligations and violations related to income and VAT reporting may trigger a criminal proceeding.

The frequency of tax audits is established by law and internal regulations issued by the Tax Administration. For entities identified as “large taxpayers” (ie, annual turnover exceeding EUR100 million), audits are usually carried out within the year following the submission of the tax return, also takes into consideration the specific risk profile of the taxpayer. Theoretically, large taxpayers should be audited on a “continuous basis”.

Other taxpayers are selected for audit based on specific risk profiles and automatic cross-checks performed by the Tax Administration. The cross-checks are performed through dedicated software databases which monitor discrepancies in the taxpayers’ behaviour.

General risk profiles are identified by factors including:

• the absence of any tax audits in prior years;
• a loss position or low profitability for multiple consecutive years; and
• the risk of VAT avoidance. 

The guidelines also identify high tax-risk areas and positions that may potentially lead to aggressive tax planning, certain tax base erosion schemes through tax refund claims and undisclosed permanent establishments of foreign entities.

The tax system provides a set of mandatory deadlines for the tax authorities to issue and serve tax assessments. A tax assessment that is served beyond the expiry of the statute of limitations is considered null and void.

The statute of limitations expires on 31 December of the fifth year following the year in which the tax return was filed (31 December of the seventh year if no tax return was filed).

In cases in which the tax return has not been filed, the deadline is 31 December of the seventh year following the year in which it should have been filed.

If the tax return is amended (dichiarazione integrativa), the ordinary statute of limitations is calculated from the filing of the amended tax return but limited to the amended items.

However, due to the COVID-19 pandemic, all assessment activities and statutes of limitations were suspended for a period of 85 days (from 8 March 2020 to 31 May 2020). According to the Italian Tax Authorities, this rule meant that all the ordinary statutes of limitations for  fiscal years whose assessment periods were pending during that timeframe were extended by 85 days. In other words, for the fiscal years from 2016 to 2019, the statute of limitations will expire on 26 March (25 March in a leap year) of the fifth (or seventh) fiscal year following the year in which the tax return was filed (or should have been filed). Although this interpretation is questionable (and some case law declared null and void the assessment notice issued after the original deadline), the Supreme Court has recently upheld this interpretation.

Initiating and Completing a Tax Audit

There is no specific moment in time when a tax audit must be initiated but, given that the commencement of a tax audit does not interrupt the statute of limitations, tax audits rarely target fiscal years that are about to expire.

If a tax audit is carried out on the taxpayer’s business premises, it can last a maximum of 30 working days; the period can be extended by a further 30 working days. Such a limit must be verified, taking into account the number of days the tax auditors are physically on-site and not the calendar days since the beginning of the audit. 

There is no final time limit for the completion of the audit activities carried out by the Tax Administration in its own office. This means that a tax audit could theoretically last for years if the physical presence on the taxpayer’s premises is kept under the above-mentioned time limit (30 working days).

Tax audits can be carried out at the taxpayer’s premises as well as at the Tax Administration’s office, depending on the difficulty of the case, the need for evidence and the activity to be actually performed. Auditors analyse both printed documents and digital data as long as such documentation is helpful to investigate the taxpayer’s behaviour. One very effective tool is the forensic back-up of the taxpayer’s computers and/or server that is carried out by the auditors when investigating all the available documentation, including emails.

In any tax audit, the formal requirements, the mandatory fiscal books and the general ledger are scrutinised. There are no rules or limitations as to the substantive issues that the audit may address as they might vary depending on the purpose of the specific audit, the industry in which the audited taxpayer operates and the most recent developments in the Tax Administration’s audit activities. The Tax Administration usually issues yearly specific guidelines that identify the areas and the transactions to be audited.

There has been an increasing prevalence of rules concerning cross-border exchanges of information and mutual assistance between tax authorities, which increases the chances for the Tax Administration to challenge potential tax issues. Moreover, simultaneous and joint tax audits are both tools in the hands of the Tax Administration. The former are audits carried out: (i) towards different taxpayers located in different jurisdictions; and (ii) by different Tax Administrations (Italian with other European tax agencies). These audits are performed on a regular basis under the co-ordination of the Italian Central Directorate of the Revenue Agency jointly with the corresponding foreign body. 

In a joint tax audit, two or more tax administrations join together to examine one or several transactions or issues of one or more related taxable persons with cross-border business activities in which the tax administrations have a common interest. Such audits are ruled by Council Directive 2011/16/EU, as amended by Council Directive (EU) 2021/514. Italy adopted and published the relevant rules in March 2023, effective from fiscal year 2023.

As a general rule, a co-operative approach always pays higher dividends than an obstructive one. It is important to disclose data and to describe activities accurately, providing thorough responses and, as much as possible, replying in writing. A written answer is normally more accurate and precise, and avoids the risk that a brief oral description may paint a picture that involuntarily leads the tax auditors down the wrong path.

Moreover, it is important to bear in mind that all documents whose exhibition is refused can result in those documents not being used in favour of the taxpayer in future stages (administrative and litigation). Such prohibition applies only if the taxpayer voluntarily refuses to submit the documents, and it does not apply if the documents are lodged with the first-tier appeal and the taxpayer declares that it was impossible to produce them; documents (different from the mandatory books) that are not available to the taxpayer when the audit was carried out are not subject to such a rule.

Also, failure to disclose documents that are considered crucial to the court’s decision can preclude the taxpayer from recovering the litigation costs.

As a general rule, the administrative claim phase is mandatory before a tax assessment is issued following a tax audit. The Tax Administration is obliged to serve a draft of the tax assessment before issuing the final one. Then, the taxpayer can challenge the additional tax in one of two ways: by submitting their observations within 60 days from the draft serving date (contraddittorio); or within 30 days in a settlement procedure (accertamento con adesione). If the taxpayer fails to act within these timeframes, the Tax Administration delivers the final tax assessment. If the taxpayer has not filed a request for the settlement procedure after receiving the draft assessment, the submission of the request can be made within 15 days from the receipt of the final assessment. In this latter case, the deadline for lodging an appeal is postponed by 30 days.

During the settlement procedure, both parties (taxpayer and Tax Administration) are able to discuss the case and try to reach a compromise for the resolution of the dispute. Such a compromise must follow a legally acceptable rationale and therefore it is not possible to settle based simply on a forfeit amount. Any settlement must be justifiable and grounded on tax rules. If a settlement is reached, the penalties linked to the confirmed additional taxes are reduced to a third of the minimum amount. Therefore, they could range from 30% to 45% (depending on the nature of the claim) of the settled taxes (in most cases, this would result in penalties for tax return violations dropping to 30% of the additional taxes due). Each fiscal year is treated independently and it is theoretically possible to settle a case that has already been decided by a Tax Court. However, once a favourable decision has been issued, it is generally hard for the tax authorities to disregard its outcome.

See 3.1 Administrative Claim Phase.

A judicial tax litigation starts when the taxpayer challenges a tax-assessment notice served by the Tax Administration before the first-instance judge (Tax Justice Court of First Instance).

The litigation starts with an appeal served by the taxpayer to the tax office that issued the tax assessment (or refused to grant a refund).

The appeal must be filed within 60 days from the date of service of the challenged notice. If the tax administration does not reply to a request for a refund or to a request for an internal review in mandatory cases (autotutela obbligatoria) within 90 days of the submission, it is considered that the tax administration has implicitly refused the refund or the request for an internal review. The implicit denial of a refund may be challenged within ten years. On the other hand, the implicit denial of an internal review may be challenged within one year of the tax assessment becoming final. 

If at any time the Tax Administration adopts and serves a formal denial of the refund or internal review request, the ordinary 60-day deadline to file an appeal must be observed from the date the formal denial is served.

Once the appeal is notified to the office, it must be filed by the taxpayer before the Tax Justice Court within the following 30 days. A delay in filing the appeal or in submitting it before the Tax Court will make the appeal inadmissible. The Tax Administration has 60 days from the receipt of the appeal to submit its observations (controdeduzioni) before the Tax Justice Court in defence of its position. However, this deadline is not mandatory.

Documents and Hearings

Tax litigation is mainly a “documental” process: the decision of the court is based on the documents and pieces of evidence provided by the parties. Since 2023, it has also been possible to provide written testimonies, which can only be presented regarding facts and circumstances that are not otherwise proven by a report completed by a public official (which could only be disregarded through an ad hoc procedure – querela di falso). Their admission to the trial can be requested by one party, and the judge can admit them without the approval of the other party. They do not, therefore, assume value automatically, but rather need preliminary scrutiny by the Court as to their relevance. If the written testimony is admitted, the requesting party must create a form with specific questions and the witness must answer them all – or otherwise indicate the reasons for their inability to respond. 

A public hearing – in person or via remote connection – to discuss the case in front of the panel of judges is optional, in the sense that any of the parties may request it. If no such request is made, the case is decided by the Court based on the documental evidence and written arguments presented by the parties.

If one of the parties so requires, the procedure provides for a discussion hearing, during which the parties present the case and the related evidence, and the Tax Court may ask questions. Therefore, aside from exceptional circumstances, there is generally only one discussion hearing. After the hearing, the panel of judges deliberates and should issue the final decision immediately (or, in any case, within seven days; see 5.2 Stages in the Tax Appeal Procedure). The hearing is usually scheduled between six to 18 months after the appeal is lodged before the Court.

Both parties have the right to:

• file further documents, until 20 “free days” prior to the hearing; and
• file further written observations to highlight specific topics or to respond to the other party’s observations, until ten “free days” before the hearing. 

The “free days” period means a number of days excluding the first and the last day (ten free days are thus equal to 11 days in standard counting); moreover, if the period ends on a weekend or on a public holiday, the term falls on the previous working day.

Even though written testimony has been introduced, tax litigation is still mainly based on documentary evidence. Consequently, producing the appropriate documentary evidence is necessary to prove the accuracy of the taxpayer’s position. Third parties’ written statements, appraisal, evaluation, expert opinions as well as other information can be filed in Court to corroborate the party’s position. Relevant documents can be submitted directly either when filing the appeal at the beginning of the tax litigation or during the proceedings, up to 20 “free days” before the discussion hearing.

In general, the litigation system provides that the burden of proof should be borne by the party claiming its right. With the introduction of Law No 130/2022, the legislature has specifically clarified that the burden of proof is fully on the Revenue Agency. This element may seem redundant to some, but it is important to highlight that the Tax Administration must provide, during the trial – and not simply in the investigation phase – precise elements to identify why more taxes are due and especially the amount of tax owed. On the other hand, the taxpayer is not required to demonstrate the “inexistence” of the factual bases of the claim against them but can overturn the evidence provided by the Revenue Agency by presenting alternative facts and evidence. Indeed, it was common practice to consider certain elements – such as the ability to deduct costs – as a right for taxpayers, with the consequence that the related burden of proof of cost deductibility was placed on the taxpayer.

However, in refund trials, the burden of proof for establishing entitlement to a refund lies with the taxpayer. There are also some cases in which the law provides for an inversion of the ordinary rules on the burden of proof: for example, Italian citizens that have moved their fiscal residence to blacklisted countries are presumed to be Italian residents unless the opposite is proven.

In a criminal procedure, it is always the State (represented by the public prosecutor) that is required to prove the illegality of the taxpayer’s behaviour.

The way to manage a litigation process depends on the specific case. It is not possible to set a standard procedure, but experience helps in selecting the best course of action.

The first strategic decision concerns whether or not to pay the advance down payment (normally corresponding to one third of the assessed taxes). As stated in 1.5 Additional Tax Assessments, the taxpayer can request the Tax Court to suspend the advance payment obligation. If both requirements are met (fumus boni iuris and periculum in mora), asking for a suspension is probably the most appropriate strategy; otherwise, it is probably better to avoid filing a request that will most likely be rejected by the Court. The rejection of a suspension request (which is now challengeable) is not advisable for the following reasons:

• upon rejection of the request, the payment will qualify as a late payment and the taxpayer will face a higher payment, due to increased collection fees;
• although the decision on the suspension request does not usually address the merits of the case, it is never advisable to start a litigation judgment with a negative decision, even on a preliminary issue, as this might negatively influence the Court during the subsequent discussion on the merits;
• the Court could theoretically address the merits of the case if the appeal is manifestly well-founded, inadmissible, procedurally inadmissible, or without merit; and
• it is possible that the Court will charge the taxpayer the court fees associated with the suspension phase.

The timing for producing documents and evidence depends on their availability and on the complexity of the case. Generally, it is better to file all the evidence with the appeal to provide the judge with a more accurate and complete initial statement from the outset. This is particularly important since, from 2024, the judge could make a simplified decision when assessing the request for suspension of advance payment, based only on the evidence submitted with the appeal. However, if the case is extremely complex (and the appeal is a very long document), it could be helpful to summarise certain arguments and preserve part of the relevant documentation for a defensive brief later on. 

If a technical evaluation is needed, the Tax Court could appoint an expert; the taxpayer can ask the Tax Court to do this, but there is no obligation on the Court to satisfy this request.

Settlement

Even during the litigation phase, the taxpayer and Tax Administration may discuss and reach a settlement. The discount in terms of penalties is lower than that which applies if a settlement is reached prior to the start of the litigation process – a 40% reduction in first-degree judgments, 50% in second-degree judgments, and 60% in Supreme Court judgments.

While tax judges usually take into consideration domestic case law, especially rulings from the Supreme Court, and jurisprudence from the European Court of Justice, they are often reluctant to rely on international guidelines and jurisprudence.

The first-tier decision may be appealed before the competent Tax Justice Court of Second Instance. Both parties (the Tax Administration and the taxpayer) have to appeal the first-tier decision within the mandatory deadline of six months from the issuance date. The deadline may be reduced to 60 days if one party serves the decision on the other. The appeal can only be submitted once. The arguments of the appeal that were made during the first degree of litigation are considered lost if they are not repeated in the second degree.

The stages of the tax appeal procedure are almost identical to those provided for the first-tier judgment.

The appeal must be notified to the other party by the mandatory deadline (see 5.1 System for Appealing Judicial Tax Litigation) and then filed with the Tax Justice Court of Second Instance within 30 days. The opposing party can submit its observations to the Tax Justice Court of Second Instance within 60 days of receiving the appeal. 

The Tax Court then schedules the date of the hearing of the discussion, normally between one and two years from the submission of the appeal. 

Once the date of the hearing is set, both parties can submit further documentation until 20 “free days” before the hearing; it should be noted that, since 2024, it is no longer be possible to file new documents in the appeal procedure that could have been submitted in the first instance trial.

Likewise, both parties can submit further observations to highlight specific points in their defence or respond to the other party’s observations until ten “free days” before the hearing.

The parties have the right to request that the case is discussed in a public hearing before the Tax Court – physically in court or via remote connection. If such a request is not made, the case is decided by the judges based on the written arguments and evidence presented by the parties. See 4.2 Procedure for Judicial Tax Litigation.

Issuing a Decision

As of 2024, the Tax Court must deliver the verdict immediately after the hearing (or within a maximum of seven days). Thereafter, within 30 days, the Tax Court must issue the decision, together with the reasons for it.

However, as under the previous legal framework, there are no consequences if these deadlines are not met.

In practice, Tax Courts are reserving the right to communicate the verdict at a later date (even up to a month after the hearing), thereby disregarding the rationale of the legal provision. Delays in issuing the decision have been reported to vary from a few days to several months.

Decisions of the Tax Justice Court of Second Instance can be appealed before the Italian Supreme Court (Corte di Cassazione), which is the highest level of jurisdiction, and whose mission it is to ensure uniformity of jurisprudence and legal certainty. However, it is only possible to file an appeal if the decision of the Tax Court violates a law or contains major inconsistencies and a lack of reasoning. Conversely, it is not possible to submit a request to the Supreme Court for a full re-examination of the merits of the case.

The appeal before the Supreme Court must be filed by the same appeal deadline (see 5.1 System for Appealing Judicial Tax Litigation) and the other party has the right to file a counter-appeal within 40 days of the serving date. It takes a significant period of time before a decision is issued by the Supreme Court, ranging from six to eight years.

Tax disputes in the first two degrees have been dealt with by judges who are specialised in tax matters but not professionals (the role of a member of first and second-instance Tax Courts is honorary, not that of a full-time professional). In 2023, an important reform changed the way in which these judges are appointed: they are selected after a public competition composed of several tests, written and oral, to assess their knowledge and ability to apply tax law, civil or commercial law, and procedural law. The remuneration and pension treatment of tax judges is to all intents equal to that of ordinary ones. Those who are currently honorary judges can hold their office to guarantee a smooth transition to the new system. However, no new honorary judges will be appointed.

The selection process is still ongoing and, to date, no professional tax judges have been appointed.

Tax Courts of first and second instance are independent bodies, normally deciding in panels of three members. Since 2023, however, issues of minor value have been decided by a monocratic judge.

The Tax Courts are divided into different chambers to which the judges are appointed. Each Tax Court has a president who is in charge of assigning the appeals to individual sections. The control over the general functioning of the Tax Courts (transfer of judges, assessments of incompatibility, disciplinary measures, legislative proposals, professional training) belongs to the High Council for Tax Judiciary, a self-governing body, the members of which are elected every four years between the Tax Court judges (11) and the members of parliament (four).

The third and last degree of judgment is managed by the Supreme Court and is divided into multiple chambers, each chaired by a president and specialised in a specific field of the law: ie, civil, criminal, labour. A specialised chamber for taxation issues was formally created by Law No 130/2022, reinforcing a specialisation which, to some extent, was de facto already happening. The tax chamber decides in panels of five members (who are all career judges).

Many ADR mechanisms are available to taxpayers, enabling them to resolve the dispute without resorting to litigation. 

• Before any assessment takes place, the taxpayer can opt for the voluntary correction of tax violations (ravvedimento operoso), which allows them to rectify any omissions or irregularities made when completing and submitting the income tax return, and when making the payments. A voluntary amendment of tax violations entails a reduction of the minimum applicable penalties (from one tenth to one fifth of the ordinary applicable penalty, depending on the circumstances). This tool can also be used after the draft tax assessment has been served. See 3.1 Administrative Claim Phase.
• Upon receipt of the draft assessment, the taxpayer can submit observations to the tax authority (contraddittorio) regarding their lack of liability regarding the additional tax.
• Once a tax audit report or a tax assessment has been served, or alternatively following the contradditorio, the taxpayer may request the opening of a settlement procedure (accertamento con adesione) aimed at settling the case. If the discussions have a positive outcome, the procedure ends with the signing of a settlement deed issued by the office and accepted by the taxpayer. The settlement grants the right to enjoy:
1. a reduction to one third of the minimum penalties calculated on the basis of the settled taxes;
2. the reduction of the penalties envisaged for tax crimes (up to one half) and the non-application of accessory sanctions, providing the settlement is signed and the amount due is paid before the criminal trial starts; and
3. the closing of the entire fiscal year for the relevant tax (unless new and material elements emerge).
• A negative outcome of the settlement procedure does not limit the taxpayer’s right to pursue the tax litigation without any material downside. However, if the parties do reach a settlement, the outcome of the settlement may not be appealed against by the parties.
• After an assessment deed is issued, in cases of blatant unlawfulness, any mistake must be self-amended by the Tax Administration, and this obligation is enforceable through judicial appeal; in other cases, the Tax Administration may review its assessment, possibly upon a specific request filed by the taxpayer.

Tax Mediation

Tax mediation was repealed in 2024. See previous paragraph or Judicial Settlement below.

Judicial Settlement

Judicial settlement (conciliazione giudiziale) is available during first-, second- and third-degree litigation and allows the parties to close a tax dispute. With the judicial settlement, the taxpayer obtains a reduction of the penalties equal to:

• 40% of the minimum if the litigation is pending before the Tax Court of First Instance;
• 50% of the minimum if the litigation is pending before the Tax Court of Second Instance; and
• 60% before the Supreme Court. 

The judicial settlement leads to a decrease of the penalties envisaged for tax crimes, avoids the application of accessory penalties and compensation of the expenses incurred for the judgment. A particularity of the judicial settlement with respect to the settlement procedure is that it allows the parties to carry out a partial settlement, ie, to settle only part of the claims in dispute and continue to litigate those that have not been resolved.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

The ruling (see 1.3 Avoidance of Tax Controversies) is an opinion issued by the Tax Administration; if the taxpayer acts in conformity with the ruling, the Tax Administration cannot challenge its behaviour. An advance ruling is therefore an effective tool for reducing tax litigations.

However, it is worth underlining that a ruling is just an administrative measure, and it could theoretically be revoked at any time by the Tax Administration. However, this occurs very rarely and, even where it does, no penalties would apply.

It is not possible to apply for an arbitration procedure. The only ADR mechanisms are those described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

There is no ADR mechanism specifically for transfer pricing that is different from those described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

Most tax claims involve the application of an administrative penalty, normally proportionate to the amount of additional taxes assessed. Some exceptions are provided, for example, transfer pricing violations are not subject to penalties if the taxpayer has duly drafted the specific documentation in a timely manner and applied for penalty protection (which requires a specific indication in the income tax return).

The criminal proceeding is independent from the administrative one and may be triggered only if the behaviour of the taxpayer infringes specific criminal statutes, which for certain criminal offences to be prosecutable also require that specific thresholds are met. If the tax auditors believe that the taxpayer under audit has committed criminal violations, they are required to report the case to the Public Prosecutor’s Office, which is responsible for analysing the case and potentially starting a criminal proceeding and subsequent trial.

The litigation process regarding the tax assessment and the potential criminal proceeding run in parallel. The criminal proceeding may move forward irrespective of the status of the tax appeal filed by the taxpayer against the assessment notice, and vice versa. In the past, it was possible for the outcomes of the two proceedings to differ. In 2024, a reform of the relationship between the two proceedings was approved and now: (i) the final decisions of the Tax Court will serve as evidence of the factual circumstances in the criminal proceeding; and (ii) the final decisions of acquittal by the Criminal Court will be binding on the tax courts.

As a general remark, the settlement of the administrative proceeding results in a reduction of criminal penalties.

The tax authorities are legally obliged to report any potential criminal violations to the Public Prosecutor’s Office whenever they find evidence of such violations. This normally occurs during or at the end of a tax audit. Therefore, administrative tax audits often trigger both an administrative infringement process and a criminal tax proceeding.

With regards to the stages of a tax administrative infringement process, please refer to 4.1 Initiation of Judicial Tax Litigation, 4.2 Procedure for Judicial Tax Litigation, 5.1 System for Appealing Judicial Tax Litigation and 5.2 Stages in the Tax Appeal Procedure.

The courts in charge of criminal tax cases are different from those deciding the corresponding tax adjustment/assessment. Criminal tax cases are handled by specialised criminal courts and tribunals (Tribunale and Corte d’Appello) composed of professional judges.

The payment of the additional assessed taxes or the settlement of the administrative proceeding leads to a reduction in potential criminal penalties.

The payment of the assessed taxes, plus interests and penalties, can prevent or stop a criminal tax trial only with reference to cases involving the failure to pay:

• withholding taxes declared or certified by the withholding agent;
• VAT declared by the taxpayer; and
• taxes related to an undue compensation of a non-existent tax credit. 

In such cases, the taxpayer is required to make the payment before the declaration of the opening of the first-degree hearing of the trial (dichiarazione di apertura del dibattimento di primo grado). 

A criminal tax trial could also be prevented in cases of fraudulent tax returns involving invoices for non-existent transactions or other artifices and in cases of unfaithful or omitted tax declarations, if the taxpayer pays all the amounts due within the deadline for filing the tax return for the fiscal year following the one in which the violation occurred, provided that no access, inspection or audit has begun.

The first-tier decision may be appealed before the competent criminal courts (Corte d’Appello). Both parties (the public prosecutor and the taxpayer) must appeal the first decision by the mandatory deadline of 15, 30 or 45 days, depending on the time and formality required to write the justification of the decision.

The second-tier decision issued by the second-tier court (Corte d’Appello) can be appealed before the Supreme Court, which is the highest level of jurisdiction, and whose role is to ensure uniformity in jurisprudence and legal certainty. However, an appeal can only be filed if the decision violates a law or contains major inconsistencies or lack of motivation. Conversely, it is not possible to submit a request to the Supreme Court for a re-examination of the merits of the case.

The application of the general anti-avoidance rule (GAAR) and specific anti-avoidance rule (SAAR), as well as transfer pricing claims, does not lead to criminal charges. A criminal violation can only be challenged if the taxpayer did not record (and declare) revenues or recorded (and declared) non-existent costs,.

If a double taxation situation occurs, it is common to challenge the assessment notice before the Tax Court (a late challenge of the deed will imply its finality). Once the appeal is lodged, the taxpayer may require the opening of a MAP provided by the double tax treaty or by the European Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/463/EEC). 

As for the new international dispute resolution tools, Italy has not yet ratified the MLI, while the EU Tax Disputes Directive was transposed into the Italian regulatory framework in August 2020 and is applicable to fiscal years from 2018 onwards. Although the first cases ruled by the new Directive have been opened, it is too soon to assess its effectiveness. 

Furthermore, the taxpayer is entitled to request a unilateral adjustment of their income in the case of a transfer pricing claim if one of the following conditions is met:

• a specific agreement has been reached in a MAP;
• the claim is the outcome of an audit carried out in the context of an international co-operation activity and its outcome has been approved by the participating states; or
• the transfer pricing adjustment is final, compliant with the OECD transfer pricing guidelines, made by a foreign state with which there is in force an effective exchange of information, and a specific instance is filed.

There are no general mandatory guidelines for the application of GAAR and SAAR in cases where there is a bilateral tax treaty. There have been cases in which Tax Courts have acknowledged the treaty protection (non-discrimination clause) against the SAAR concerning the alleged non-deductibility of blacklisted expenses. On the contrary, the GAAR has been invoked for tackling cross-border schemes built on the treaty’s provisions and aimed at achieving an undue tax saving (ie, stock lending and dividend washing schemes). 

The Tax Courts have often confirmed claims grounded on the lack of beneficial ownership or, more generally, on treaty shopping, following a substance-over-form approach and, to some extent, regardless of the strict interpretation of the laws; the authors expect that the principle purpose test (PPT) and the amendment of the DTT preamble will significantly facilitate the ability of the tax authorities to prove the infringement of DTT provisions. It will therefore be paramount for taxpayers to adopt a conservative approach when relying on the DTT.

There is no specific rule regarding transfer pricing adjustments. Taxpayers usually open a MAP in cases involving EU member states in which the European Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/463/EEC) is applicable. Such a convention should provide a resolution of the case in a relatively short timeframe. For the implications of the MLI and the EU Tax Disputes Directive, please refer to 8.1 Mechanisms to Deal With Double Taxation.

Taxpayers are required to pursue tax litigation in all cases where it is not possible to initiate an international dispute resolution mechanism, as well as in cases where the counterparty is not a resident of an EU member state. In such cases, it might not be possible to achieve a positive outcome through a MAP in a reasonable timeframe.

Advance pricing agreements (APAs) are an effective means of avoiding or mitigating litigation in the transfer pricing (TP) field. They are becoming more common, but recently faced setbacks, mainly due to the time required to reach an agreement with the Tax Administration.

The procedure requires the taxpayer to file a specific application outlining the scope of the agreement. In the case of bilateral and multilateral APA applications, taxpayers are required to pay a fee ranging from EUR10,000 to EUR50,000, depending on the total turnover of the group to which the taxpayer belongs. Fees are halved in the case of a request for renewal of a prior APA.

The Tax Administration opens the procedure and verifies, including through interviews with the employees, the accuracy of the facts and circumstances described in the taxpayer’s application, the functional and risk profile of the taxpayer, and any other items that are relevant for TP purposes. 

Once the analysis is concluded, the parties reach an agreement that is binding on the Tax Administration for the fiscal year in which it is signed and the following four, unless it is proven that the factual circumstances are materially different from what has been agreed in the APA. Moreover, if the factual and legal circumstances underlying the APA are the same across all the open fiscal years, regardless of the filing date, the taxpayer is entitled to request a carry-back of the APA’s effects. In particular:

• for unilateral APA, the taxpayer has the right to ask for the retroactive application of the APA provided that no audit activity has commenced at the time of its execution; and
• for bilateral and multilateral APAs, in addition to the aforementioned condition, the taxpayer must request the retroactive application in the APA submission, and the competent authority(ies) of the foreign jurisdiction(s) involved must agree to extend the effect of the APA to prior years.

See 1.2 Causes of Tax Controversies.

The European Commission has repeatedly declared certain tax concessions incompatible with the ban on state aid. For example:

• the three-year income tax exemption for SpA majority held by local authorities (Commission decision 2003/193/EC of 5 June 2002); and
• the exemption from ICI (Real Estate Tax) granted by Italy to non-commercial entities which carried out, in buildings in their possession, certain activities such as educational or hotel services (Commission decision 2013/284/EU of 19 December 2012).

There is no general procedure for the recovery of state aid. Special rules are issued periodically to address the recovery of specific state aid. Sometimes, the recovery is carried out by the Revenue Agency according to the ordinary assessment and collection procedures applicable to income taxes; in other circumstances, the taxpayer is required to voluntarily refund the additional taxes due, without interest or penalties.

The taxpayer cannot challenge the legitimacy of a decision of the European Commission before national courts in a case concerning the enforcement measures taken by national authorities. It is possible to ask for the suspension of the recovery process if two conditions are jointly satisfied:

• there are serious reasons for the illegitimacy of the recovery decision, or an error in identifying the person required to pay back the state aid or in calculating the amount to be recovered (limited to the portion exceeding the amount due); and
• the payment would cause irreparable harm to the taxpayer.

Compensatory actions before national courts are allowed and may be claimed by:

• the beneficiary’s competitor against the State; 
• the beneficiary against the State;
• third parties against the State; and
• the beneficiary’s competitor against the beneficiary itself.

Italy has opted for mandatory binding arbitration.

Some of the DTTs signed by Italy include an arbitration procedure that can be activated only if:

• a proper exchange of notes between the contracting states has taken place; and
• both the competent tax authorities are willing to initiate the procedure with reference to a specific controversy. 

This has resulted in a wide discretion in handling the procedure, limiting the effectiveness of this tool in resolving tax disputes to date.

Italy has reserved the option to apply Article 19(12) of the MLI to its covered tax agreements, which grants Italy the right to refrain from submitting a case to arbitration or to terminate the relevant process if a decision on the same issue has already been issued by a court or administrative tribunal of either contracting state.

Italy opted for Baseball Arbitration and made a reservation under Article 23(3) of the MLI to exclude mandatory binding arbitration with parties that have not chosen the same option. In such cases, the competent authorities of the contracting states shall endeavour to reach an agreement on the type of arbitration process that shall apply to the relevant DTT. Until such an agreement is reached, mandatory binding arbitration will not apply.

It is likely that the reason for this choice is to pursue the simplest possible procedure. Indeed, the “baseball” or “final offer” arbitration process requires each party to submit its best offer to the arbitrator, who chooses one of the two, without the possibility of amendments. This process therefore encourages the parties to propose the fairest solution, while at the same time simplifying and expediting the arbitrator’s decision.

The EU Directive on Arbitration was transposed into the Italian regulatory framework in 2020. It applies to MAPs filed since July 2019 and pertains to fiscal years from 2018 onwards.

The MLI has not been ratified by the Italian Parliament.

See 8.1 Mechanisms to Deal With Double Taxation.

Italy is a member of the OECD/G20 Inclusive Framework on BEPS. With regard to Pillar One, a significant portion of it will be implemented alongside the MLI.

Pillar Two, on the other hand, was implemented at the EU level through Directive 2523/2022 in December 2022, and required member states to approve the relevant domestic legislation by 31 December 2023.

The Directive largely aligns with Pillar II of GloBE and provides for a Global Minimum Tax equal to 15% for multinational enterprises (MNEs) with aggregated revenues of EUR750 million or more. If the effective tax rate applied to the income of entities located in a given country does not reach threshold, the “top-up tax” is applied by the country of the ultimate parent entity through the enforcement of the Income Inclusion Rule – or, if necessary, by other entities in the group through the Undertaxed Profit Rule. 

The effectiveness of these measures for companies will begin in part after 31 December 2023, and in part after 31 December 2024; Italy transposed the EU Directive through Legislative Decree No 209/2023.

Before the transposition of the EU Directive into the Italian legal framework, the outcome of a MAP was confidential. The new legal framework provides that, for MAPs subject to the EU Directive, the competent authorities may agree to publish decisions in full, provided the taxpayers and all the stakeholders consent. If consent is not given, a summary of the decision is published, including a description of the case, the subject, the date, the fiscal years concerned, the legal basis, the industrial sector, a brief overview of the final outcome and of the chosen arbitration method.

See 8.1 Mechanisms to Deal With Double Taxation.

It is common practice for an Italian taxpayer to hire a tax adviser specialised in this area to handle the procedure with the Italian Tax Administration. The Tax Administration, on the other hand, does not hire independent professionals and relies on its specialised officers.

There are no costs associated with the administrative litigation phase.

The mandatory unified contributions for first and second-tier judgments are identical and based on the value at stake in the proceeding. They range from EUR30 to a maximum of EUR1,500 (when the value exceeds EUR200,000). The contribution is paid by the party initiating the proceedings: 

• in first-tier litigation, it is paid by the taxpayer; or
• in the appeal before the Tax Court of Second Instance, it can be paid by the Tax Administration or by the taxpayer, depending on who is filing the appeal. 

The contribution must be paid at the beginning of the proceedings. 

The Tax Court must order the losing party to refund the expenses incurred by the other party; however, the judges must rule that the winning party bears (at least part of) its own costs if (i) there are serious and exceptional reasons that must be explicitly justified, and (ii) the party has won the case based on decisive documents that were produced only in the course of the judicial proceeding.

Without prejudice to the right of each party to seek reimbursement for the costs incurred, it is possible to ask for an indemnity if it appears that the unsuccessful party has acted or resisted in court in bad faith or with gross negligence.

In general, the use of an ADR mechanism after the commencement of a tax litigation means that each party bears its own costs, in particular with reference to the contribution paid at the start of the proceedings.

The average number of cases discussed in a hearing by a first-instance judge in 2023 was 128.6 (compared to 101.3 in 2022). The number of pending cases in first-instance courts as of 31 December 2023 was 158,468, and new cases total 138,372 with a total value of approximately EUR13.7 billion. The number of pending cases in second-instance courts as of 31 December 2023 was 95,144, and new cases 36,916 with a total value of approximately EUR6.7 billion.

The number of cases initiated in 2023 (first-instance judgments) was as follows.

• Individual income tax: 21,430.
• Regional tax on productive activities (Irap): 3,783.
• VAT: 10,884.
• Registration fee: 5,001.
• Mortgage and cadastral taxes: 2,589.
• Tax on corporate income: 5,785.
• Custom duties: 1,099.
• Tax litigation duties: 1,388.
• Others: 32,786.
• Taxes on real estate: 23,069.
• Waste taxes: 15,858.
• Road tax: 8,572.
• Advertisement tax: 683.
• Public soil taxes: 420.
• Other local taxes: 5,105.
• Total cases: 145,972.

The number of cases concluded in 2023 was as follows.

• Individual income tax: 20,797.
• Regional tax on productive activities (Irap): 4,379.
• VAT: 10,167.
• Registration fee: 6,019
• Mortgage and cadastral taxes: 3,588.
• Tax on corporate income: 6,019.
• Customs duties: 1,091
• Tax litigation duties: 1,562.
• Others: 25,031.
• Taxes on real estate: 28,292.
• Waste taxes: 18,275.
• Road tax: 8,241.
• Advertisement tax: 717.
• Public soil taxes: 467. 
• Other local taxes: 4,907.
• Total cases: 139,203.

For 2023 the trend in first-instance judgments shows:

• a 48.9% success rate for tax authorities;
• a 29.0% success rate for taxpayers;
• 8.9% as a partial success;
• 2.1% for judicial conciliation; and
• 11.1% for other outcomes.

The trend in second-instance judgments shows:

• a 49.4% success rate for tax authorities;
• a 27.6% success rate for taxpayers;
• 8.3% as a partial success;
• 5.3% for judicial conciliation; and
• 9.4% for other outcomes.

In order to define the most effective strategy in handling a potential tax litigation, the first crucial phase has to be a rigorous examination of the facts; it is paramount to understand whether the case involves merely a legal interpretation of the applicable rules or if it is also necessary to ascertain the facts in relation to the applicable rules (eg, effectiveness of and/or economic reasons for a given transaction, or beneficial ownership of a specific payment), or if it concerns a quantitative issue (eg, valuation of a going concern or a transfer pricing issue). Only once a rigorous analysis has been performed is it possible to assess the strengths and weaknesses of the taxpayer’s position. In carrying out the analysis, it is also important to review relevant case law, which – notwithstanding the fact that precedents in civil law systems, such as Italy, do not have the same weight as in common law systems – is often respected by the tax courts, especially if it is a Supreme Court decision.

Once the analysis of the strengths and weaknesses of the tax case is completed, it is recommended, even if the taxpayer’s position appears very strong, to initiate a dialogue with the Tax Administration; tax litigation can be lengthy and, to some extent, uncertain, and it is possible that the Tax Administration would be interested in avoiding a dispute and reaching a reasonable settlement. The issues that are litigated are often complex, especially if they involve multinational taxpayers and transnational issues. Such issues are a challenge even for the most experienced judges; and even though it would be  theoretically be possible for the Tax Court to appoint technical consultants to resolve complex technical issues, judges are usually reluctant to prolong the process and incur additional costs.