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The Italian Supreme Court rules on the definition of beneficial owner

Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners analyse how the Italian courts are interpreting the idea of beneficial ownership and the notion of abuse.

The Italian Supreme Court recently ruled on the requirements for the identification of the ‘beneficial owner’ under Directive 2003/49/EC (Interest and Royalty Directive), clarifying the conditions for the application of the withholding tax exemption set forth by the Italian law (Article 26-quater of the Presidential Decree September 29 1973 No. 600).


The case (Decision No. 14756 published on July 10 2020) concerned an Italian company (Company A) which paid loan interest, in the context of a merger leverage buy out (MLBO) operation, to its direct controlling entity, a Luxembourg sub-holding (Company B). 

Company B, the group financial headquarters, transferred the interest received from the Italian company to another group entity, the controlling shareholder (Company C), applying a mark-up equal of 0.125%. 

Italian tax authorities claimed that the Luxembourg sub-holding was not the beneficial owner of the interest payments. Tax authorities argued that:
  • Company B transferred the interest received from Company A to the Company C applying too low of a mark-up (0.125%),
  • The Luxembourg sub-holding carried out only holding functions, without any independence or autonomy regarding strategic and management decisions.
Therefore, according to Tax authorities, withholding tax exemption set forth by Article 26-quater was not applicable because the Luxembourg sub-holding had to be considered a mere conduit company.

Developing the definition

In previous judgment degrees, both provincial and regional tax courts ruled in favour of the taxpayer. Then, the Supreme Court upheld the decisions of the tax courts, establishing that the Luxembourg sub-holding had to be considered as the effective beneficial owner. The Supreme Court highlighted that: 
  • Company B carried out financial and treasury activities independently, having a managerial and organisational autonomy that excluded it was a mere conduit company;
  • There was no contractual or legal obligation for Company B to transfer the income received from the Italian Company to Company C; and
  • In consideration of the activities carried out by Company B, the mark-up applied by the Luxembourg sub-holding was adequate.
The Italian Supreme Court relied on the principles adopted by the European Court of Justice (ECJ) (e.g. cases C-115/16, C-118/16, C-119/16 and C-299/16), recalling the notion of ‘abuse’ formulated by the ECJ. 

In particular, the Supreme Court said the notion of ‘abuse’ is based on two elements: (i) the existence of objective circumstances showing that, despite formal compliance with the conditions laid down by the Directives, the purpose pursued by the Directive has not been achieved, and (ii) the intention to obtain an advantage from the Directives by artificially creating the conditions required to obtain it. 

Turning points for the Supreme Court’s ruling were the challenged loan being part of a wider group reorganisation, so it does not have to be considered in isolation, and also the fact that Company B had full availability and legal ownership on the loan interest. 

The decision issued by the Italian Supreme Court seems to confirm the uncertainty on the conditions to meet the beneficial owner status according to the Italian law. In particular, the Italian tax authorities have not adopted a unique interpretation on this matter and also the orientation adopted by Italian courts, including the Supreme Court, has been rather varying over the years. 

In this context, leverage buy out (LBO) and MLBO operations deserve in depth scrutiny in order to forecast possible adverse interpretations of the Italian tax administration.

Gian Luca Nieddu
T: +39 02 7780711 

Barbara Scampuddu 
T: +39 02 7780711 

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