The Italian Supreme Court rules on the definition of beneficial owner
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

The Italian Supreme Court rules on the definition of beneficial owner

Sponsored by

sponsored-firms-hager.png
IRAS has published an e-guide to provide guidance on the tax framework.

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).



Background



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 

E: gianluca.nieddu@hager-partners.it



Barbara Scampuddu 

T: +39 02 7780711 

E: barbara.scampuddu@hager-partners.it

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article