Oliver R. Hoor, Andrea Raschella and Rodrigo Ruberti of ATOZ Tax Advisers discuss a decision of the Italian Supreme Court on the interpretation of beneficial ownership which should have a far-reaching impact and contribute to legal certainty in the post-BEPS era.
The Italian Supreme Court released its decision in case no. 14756 regarding the interpretation of the concept of beneficial ownership on July 10, 2020. This concept was relevant when analyzing the potential application of a withholding tax exemption on interest paid by an Italian company to its Luxembourg parent company.
Under Italian tax law, interest payments made by Italian companies to nonresident companies are generally subject to a final withholding tax at a rate of 26%, unless a withholding tax exemption applies. Interest payments made by an Italian company to an associated company (two companies are “associated companies” if (i) one of them directly holds at least 25% of the voting rights of the other or (ii) a third EU company directly holds at least 25% of the voting rights of the two companies) resident in another EU member state may benefit from a withholding tax exemption in accordance with the domestic law implementing the EU Interest and Royalty Directive (IRD). This withholding tax exemption is, however, conditional on the recipient of the interest payment being the beneficial owner thereof (the relevant companies must have a legal form listed in the Annex of the Directive and be subject to corporate income tax. In addition, a one-year holding period is required).
The decision of the Italian Supreme Court follows a decision of the Court of Justice of the European Union (CJEU) which dealt with a number of Danish cases where the interpretation of the concept of beneficial ownership and the application of the IRD had to be considered by the CJEU in regard to the joined cases N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Denmark I (C-119/16) and Z Denmark ApS (C299/16), (“CJEU Decision of February 26, 2019”).