The Italian Supreme Court’s judgment No. 11744 of April 29 2026 provides important guidance on the application of the beneficial ownership requirement to cross-border royalty payments.
Although the decision does not introduce a new legal principle, it confirms that the analytical framework developed by Italian case law in relation to interest payments and EU directives also applies to royalties paid under double tax treaties (DTTs).
In doing so, the court strengthens a line of jurisprudence that increasingly focuses on the economic substance of cross-border income flows rather than their formal legal structure.
The judgment concerned the application of Article 12 of the Italy–Luxembourg DTT to royalty payments made by an Italian company to a Luxembourg group company. The decision offers insights into how Italian courts are expected to assess beneficial ownership claims in treaty cases.
The case
The dispute arose from royalty payments made by an Italian publishing company to a Luxembourg-resident company under a licensing agreement.
The Italian tax authorities challenged the application of the reduced treaty withholding rate provided under Article 12 of the Italy–Luxembourg DTT, arguing that the Luxembourg recipient was not the beneficial owner of the royalties.
According to the tax authorities, the Luxembourg company merely acted as an intermediary because, under separate licensing arrangements, the royalties received from Italy were subsequently transferred to another group company acting as a franchisor.
On that basis, the Revenue Agency denied treaty protection and assessed withholding tax at the domestic rate rather than the reduced treaty rate.
The taxpayer argued:
The Luxembourg company was the legitimate recipient of the income;
The royalties were booked and taxed in Luxembourg; and
The company earned a taxable margin inconsistent with the profile of a mere conduit entity.
The taxpayer further maintained that the franchisor was a Swiss group company and that, even assuming the Swiss entity were regarded as the ultimate beneficial owner, the payments would have been entitled to treaty protection under the Italy–Switzerland DTT, which provided an even more favourable withholding tax treatment.
The first-instance and appellate tax courts sided with the tax authorities, concluding that the Luxembourg company lacked discretionary powers over the exploitation rights generating the royalties and therefore could not be regarded as their beneficial owner.
The taxpayer appealed to the Supreme Court.
The Supreme Court’s reasoning
The Supreme Court overturned the decision, finding that the appellate judges had failed to provide an adequate analysis of the beneficial ownership issue.
Importantly, the court took the opportunity to restate and systematise the principles developed in its recent case law.
Referring to decisions concerning interest payments, dividends, and royalties, the court confirmed that beneficial ownership cannot be assessed through a purely formal examination of contractual arrangements. Instead, the analysis requires a substantive review of the recipient’s economic role and actual powers in relation to the income received.
In this context, the court expressly endorsed the three-test framework that has emerged in recent Italian jurisprudence:
The substantive business activity test, which seeks to determine whether the recipient carries on a genuine economic activity or merely constitutes an artificial arrangement;
The dominion test, which examines whether the recipient has the power to use and enjoy the income received or is under a legal or factual obligation to pass it to another person; and
The business purpose test, which evaluates the commercial rationale for the interposition of the recipient entity and whether it performs a genuine function within the structure or merely acts as a conduit company established to obtain treaty benefits.
The court emphasised that these tests are autonomous and must be assessed case by case.
Significantly, the judgment reiterates that the dominion test remains the central element of the analysis.
According to the court, the decisive question is whether the recipient possesses genuine control over the income stream and can freely dispose of the royalties received. Onward payments within a multinational group are not, by themselves, sufficient to deny beneficial ownership. Rather, the relevant enquiry is whether those payments result from a legal or factual obligation that deprives the recipient of effective control over the income.
The court also reaffirmed that the taxpayer bears the burden of proving beneficial ownership, consistent with the principle of proximity to evidence. Once the taxpayer demonstrates that it satisfies the relevant tests, however, the burden shifts to the tax authorities to establish the existence of an abusive arrangement or an artificial structure.
The court’s approach to alleged treaty-shopping
One particularly interesting aspect of the judgment concerns the court’s treatment of the alleged tax advantage.
The lower court had accepted the Revenue Agency’s position without addressing the taxpayer’s argument that the purported ultimate recipient of the royalties was a Swiss company that would have qualified for treaty protection under the Italy–Switzerland DTT.
The Supreme Court criticised this omission.
While the court did not decide the beneficial ownership issue on the merits, it observed that the appellate judges had failed to consider a factual element capable of undermining the practical rationale of the alleged treaty-shopping arrangement.
The observation suggests that when evaluating whether a structure is abusive, courts should consider not only the existence of intermediary entities but also whether the structure produces a material tax benefit.
Although the judgment stops short of establishing a new anti-abuse standard, it reflects an increasingly economic and outcome-oriented approach to beneficial ownership disputes.
Implications
The decision is likely to have relevance well beyond the royalty context in which it arose.
Firstly, it confirms the convergence of Italian beneficial ownership jurisprudence across dividends, interest, and royalties. Taxpayers can therefore expect courts and tax authorities to apply a substantially uniform analytical framework regardless of the category of passive income involved.
Secondly, the judgment reinforces the importance of demonstrating genuine economic substance and operational autonomy at the recipient entity level. Groups relying on treaty benefits should ensure that recipient companies are able to document their business activities, decision-making processes, financial autonomy, and control over income flows.
Thirdly, the decision confirms that beneficial ownership analyses cannot be reduced to mechanical examinations of payment chains. The existence of subsequent payments to related parties is only one element of a broader factual inquiry and must be evaluated alongside the recipient’s overall economic profile.
Finally, the judgment illustrates the growing sophistication of Italian courts in addressing international tax disputes. Rather than relying on formal legal classifications, the Supreme Court increasingly focuses on the substantive economic reality of cross-border arrangements, consistent with developments in OECD guidance and broader international anti-abuse principles.
Judgment No. 11744/2026 does not radically alter the Italian beneficial ownership landscape. Its significance lies in consolidating and extending principles that have emerged over the past decade.
By expressly applying the three-test framework to royalty payments under a DTT, the Supreme Court has clarified the evidentiary and substantive standards that taxpayers must satisfy when claiming treaty benefits.
As beneficial ownership continues to play a central role in international tax disputes, the decision confirms that Italian courts will increasingly focus on substance, control, and commercial rationale rather than legal form alone.
The judgment reinforces the importance of substance over form, requiring taxpayers to evidence not only formal entitlement to income but also genuine economic activity and meaningful control over the relevant revenue streams.
