Tax, substance and reputational risk of distribution structures

The three lines of attack

A Swiss distribution or trading company that buys goods from an Italian group company and resells them abroad faces three distinct lines of attack from the Italian tax authorities. The first concerns the price: the Italian seller may have sold too cheaply, so that part of the Swiss company's margin should have been earned in Italy. The second concerns the presence of the Swiss company in Italy: it may carry on business through a fixed place or a dependent agent in Italy and therefore have a permanent establishment there, whose profit Italy may tax. The third concerns the residence of the Swiss company itself: if it is in substance managed from Italy, Italy may treat it as an Italian resident company taxable on its worldwide income. The three lines are cumulative in practice because the same facts about decision-making support each of them. The Kering settlement covered the first two.¹ Each line is examined here from the perspective of a company in Ticino, with the general corporate tax rules and Pillar Two left to Chapter F.II.

Transfer pricing

Switzerland has no comprehensive transfer pricing statute. The arm's length principle follows from the general rules on the determination of taxable profit, which add back hidden profit distributions, and from the double taxation conventions. In practice the Swiss tax authorities apply the OECD Transfer Pricing Guidelines.² Italy, by contrast, has a detailed statutory regime. Article 110(7) TUIR requires transactions with related non-resident enterprises to be priced at arm's length, and the Ministerial Decree of 14 May 2018 lays down the methods and the comparability analysis. Taxpayers who keep the prescribed documentation, consisting of a master file and a country-specific file, are protected against administrative penalties if an adjustment is made.³ The asymmetry has a practical consequence. An Italian manufacturer or design company that sells to a Ticino principal should document its own remuneration in accordance with the Italian rules. The Swiss company, for its part, should keep a functional analysis that shows which functions, assets and risks it controls in Switzerland.

The functional analysis is also the weak point of most principal structures. Consider a Ticino principal company that owns the inventory but whose purchasing decisions are made by the Italian brand team and whose prices are set in Italy. If its warehouse staff merely execute instructions, it will find it difficult to justify more than a routine return for logistics services. The OECD Guidelines, revised after the BEPS project in 2017, attribute the return from risk to the entity that controls the risk and has the financial capacity to bear it. In a group with a strong Italian brand team, that entity may well be Italian.⁴ Practitioners should therefore test whether the persons who take the key decisions on collections, quantities, pricing, inventory write-downs and customer relationships actually work for the Swiss company and in Switzerland.

Notes

1. FashionUnited (10 May 2019, above). ↩
2. Federal Act of 14 December 1990 on Direct Federal Tax (DFTA), SR 642.11, Art. 58(1)(b) (add-back of hidden profit distributions and of benefits to third parties not justified by business use), https://www.droit-bilingue.ch/fr-de/6/64/642.11-58-66.html. See Chapter F.II. ↩
3. TUIR, Art. 110(7) (above); Ministerial Decree of 14 May 2018 (above); Legislative Decree no. 471 of 18 December 1997, Art. 1(6) (penalty protection for documentation); Provvedimento of the Director of the Revenue Agency of 23 November 2020 on documentation. ↩
4. OECD, Transfer Pricing Guidelines (2022, above), chapter I, section D.1.2.1 (control over risk and financial capacity). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.