Italian Supreme Court applying beneficial ownership and abuse of right
In its July judgement, the Italian Supreme Court applied the principles formulated by the Court of Justice of the EU (CJEU) in the Danish cases clarifying certain preconditions for applying an exemption from withholding tax under the EU directive on a common system of taxation applicable to interest and royalty (the I+R Directive). The court also laid down the conditions under which foreign holding companies meet the status of beneficial owner.
Following Danish, Spanish and Dutch cases, the Italian Supreme Court also issued a judgement dealing with the beneficial ownership and abuse of right concepts. In the case brought before the court, Italian tax authorities challenged the application of the withholding tax exemption under the I+R Directive on interest paid by an Italian company to its Luxembourg parent. The interest related to a loan in group financing of a corporate acquisition.
The Italian tax authorities argued that the Luxembourg holding company could not be considered the beneficial owner of the Italian-sourced income, since shortly after receiving the interest the holding company passed it on to another group entity, retaining a very low margin (0.125%). According to the Italian tax authorities, this indicated that the holding company was a mere conduit entity. The Italian Supreme Court rejected these arguments, for the first time relying on the principles formulated in the mentioned CJEU Danish cases: It confirmed that the Luxembourg holding company qualified as the beneficial owner since it had the right to use and enjoy the interest income with no contractual or legal obligation to pass it on to another entity.
As for the abuse of right, the Italian Supreme Court confirmed that a foreign holding company shall not be automatically considered an entity lacking economic substance. Considering the specific nature and activities of a holding company, a light asset structure is not at odds with market standards. The key point is instead to verify whether a company makes independent management decisions, especially with regards to the income received.
The Italian Supreme Court held that there was no abuse of right since the Luxembourg holding company performed financial and treasury functions for the entire group and retained adequate profits. In this respect, the court specified that the functions performed by the holding company should be assessed globally, not just with respect to the Italian-sourced income. The court emphasised that in the case in question, the Luxembourg holding company managed the group’s cash flow and played a key role in a challenging and complex acquisition transaction.
The Italian judgment, as the previous Spanish and Dutch ones, indicates that the national courts are slowly starting to follow and align their decision-making practice with CJEU judgements.