The growth of the Italian videogames market has attacted the interest of tax authorities that are targeting distributors of videogames.

This is a guest post from our tax colleague Alessandro Martinelli, we are sure you will enjoy it!

Based on AESVI analysis, the Italian videogames market continues to grow, with a yearly increase around 7% and an aggregated value of € 1 billion, attracting the interest of the tax authorities.

It is worth mentioning that in this context, software distributors usually acquire the media (DVD/Blu-Ray discs), including the software containing it (e.g., videogames), and resells it to end-user clients (B2C) or local retailers (B2B).

Italian Tax Authorities have recently approached local distributors analysing the business model adopted in the context of cross-border transactions. In particular, on the ground that the payments made by the software distributors as consideration for the software acquired should be requalified as payments subject to royalty pursuant to article 12, OECD Model. As a consequence the local software distributor is addressed as having failed to apply Italian withholding tax (30%) on outbound royalty payments (or, if applicable, Interest-royalties EU Directive / Double Tax Treaty provisions).

In the Commentary to the OECD Double Tax Treaty Convention, reference is made to the fact that, very often, in the agreements executed between software houses and distributors/intermediaries, the latter are granted with the possibility to distribute copies of the programs without any transfer of the copyright. In particular, according to the Commentary, the rights transferred are solely those necessary and strictly related to the power to “distribute“, in the reference market, copies of the software product. Based on such interpretation, distributors shall pay a consideration for the acquisition of copies of the software rather than the right to also exploit the copyright and the related rights and, therefore, such consideration should not be treated as a royalty (but solely as a consideration paid for the activity of actual distribution).

In relation to such provision it is worth recalling the Resolution No. 128/E of 17 July 2008, in which the Italian Tax Authority interpreted a case not dissimilar from the one mentioned above. In particular, in the case addressed by the Italian fiscal authority, the distributor (a company controlled by the licensee) was in charge of:

  • marketing and distributing software products (including the updated version of the same) to end-users (licensees) under a licence including the right – non-exclusive and non-transferrable – to determine, invoice and receive any fee owed by the end users under the licence agreement executed between the latter and the distributor;
  • providing assistance service to end users; and
  • using the trademarks for the sole purposes of marketing and distributing the products in accordance with the conditions of use specified in the same agreement.

According to the Authority, in such cases, there would be a partial transfer of the copyright, i.e. a right limited to the distribution of the IT program to the end users (i.e. a right to which only the copyright holder would otherwise be entitled). According to the Tax Authority in fact, in the absence of a specific licence, the marketing of the software would in fact entail a copyright infringement.

In short, if the foreign Company (based on the clauses of the executed agreement), although retaining the power to control and give guidance on the management, grants to the Italian distributor (only in relation to the cases which are expressly provided for), non-exclusive and non-transferrable software licences, the considerations paid by the distributor would be treated as “royalties” rather than as costs for purchasing the products or distribution costs.

Such interpretation, however, appears in open contrast with the OECD Commentary position, according to which “distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyright“, and therefore the payments should be characterised as business income.

The videogame match is still far to see the end.