Service companies play an important role in international corporate structures. Especially in the Italian market, many foreign companies establish their own service companies in order to manage operational tasks, customer relations, or market development directly on site.
A service company (Italian: società di servizi) is an independent legal entity within a corporate group that provides services to other companies within the same group. Typical activities include:
In Italy, such a company is usually incorporated as a limited liability company (LLC; Italian: Srl). It operates independently vis-à-vis third parties but works in close economic cooperation with the parent company or affiliated companies.
As an ATECO activity code, 82.99.99 is most commonly used, with the following description:
establishment of a customer network and development of the Italian sales market on behalf of the parent company.
This approach offers significant advantages in terms of operational management and the company’s accounting.
Since service companies often provide intra-group services or services to the parent company, transfer pricing is central to the tax assessment. Under Italian tax law, the transfer prices applied must comply with the arm’s length principle, as provided for in Art. 110(7) of the Italian Income Tax Code (TUIR – Testo Unico delle Imposte sui Redditi) and the OECD Transfer Pricing Guidelines.
In practice, service companies usually apply the cost-plus method. Under this approach, the company’s own costs (e.g. personnel, administration, infrastructure) are increased by an appropriate profit mark-up.
A typical approach is a mark-up of 5% or more, which in Italy and internationally is considered market standard for pure, low-risk service companies.
This method is particularly suitable when:
A flat mark-up can become problematic if the company effectively assumes entrepreneurial functions, for example:
In such cases, the pure cost-plus approach no longer satisfies the arm’s length principle. The Italian tax authorities (Agenzia delle Entrate) may then require a higher profit mark-up or a different method, such as the net margin method (TNMM – Transactional Net Margin Method). This method compares the net margin, i.e. profit in relation to turnover, of the affiliated company with that of independent companies carrying out similar activities. In the case of comparable structures, indicators between subsidiary and parent company may also serve as benchmarks.
In Italy, there is in principle no obligation to prepare transfer pricing documentation. In the tax return, it is only necessary to indicate whether such documentation exists.
If transfer pricing documentation is available, the tax authorities are bound by the method chosen therein. Both the content (master file and local file, clear functional and risk analysis, indication of the transfer pricing method, etc.) and the formal requirements (digital signature and time stamp) must comply with the statutory provisions.
In the absence of transfer pricing documentation, there is no binding to a specific method. Nevertheless, it is recommended to document internal transfer prices with affiliated or controlled companies. Irrespective of this, the tax return must always disclose the income (componenti positivi) and expenses (componenti negativi) arising from transactions with affiliated, controlling, or sister companies.
Service companies offer international businesses an efficient way to become active in the Italian market without operating a main operational establishment. However, it is essential that transfer prices are documented and appropriate, and that the company does not bear entrepreneurial risks. Otherwise, an excessively low mark-up or a de facto management function can quickly lead to tax adjustments and penalty payments.
Further information on the Italian LLC (Srl): https://www.graber-partner.com/en/international-companies/setting-up-a-subsidiary-in-italy.html