With ist ruling n. 27113/2016 issued on December 28, 2016, the Italian Supreme Court interpreted and applied the beneficial ownership provision of article 10 of the tax treaty between Italy and France, for the purpose of determining whether a French holding company, wholly owned by a U.S. corporation, was entitled to the imputed credit granted under that treaty in respect of dividends received from an Italian subsidiary.

The Italian Supreme Court held that the beneficial ownership provision of the Italy-France treaty requires that the recipient of the dividends has full dominion and control over the dividend, meaning, that it enjoys the right to receive and keep dividends, unconstrained by any legal or contractual obligation to pass the dividends on to its parent, and actually enjoys the economic benefit of the dividend, which it treats and reports as its own income on its accounting books and can dispose of without legal or contractual constraints. 

According to the Supreme Court, the fact that the French holding company did not have staff, offices and other significant sources of income, except for the dividends it received from time to time from its subsidiaries, and did not engage in any other activities except for holding the legal title to the shares of its subsidiaries, is consistent with a holding company’s typical functions and role, and does not negate the status of beneficial owner and eligibility to the tax treaty benefits.

The ruling is consistent with a previous decision of the Supreme Court, which we reported in the past on our blog, holding that beneficial owner is the person who has the legal control and economic enjoyment of the dividend (we refer to the Supreme Court’s ruling n. 10792  issued on May 25, 2016).

The interpretation of the term ‘beneficial owner’ as the person having the legal and economic dominion and control over the dividend, followed by the Supreme Court in ruling n. 27113/2016,  is also consistent with the clarification set forth at paragraph 12.4 of the 2014 Commentary to article 10 of the  OECD Model Income Tax Convention, according to which ‘beneficial owner’ is the person who has the full right to use and enjoy the dividend, unconstrained by a contractual or legal obligation to pass on the payment received to another person.

 The Supreme Court expressly rejected the notion that, in order to qualify as a beneficial owner of the dividend, the holding company is required to have a minimum level of organization, including employees and offices, and to engage in business activities generating operating receivables, aside from holding the legal title to the shares of its subsidiaries and receiving dividends therefrom.     

 Background

The case involved a French company, wholly owned by a US corporation, which received dividends from its Italian subsidiary in 2002. Dividends were distributed to the French holding company, net of a withholding tax charged at the reduced rate of 5% under the Italy-France income tax treaty. The French losing company claimed the payment of the imputation credit, for an amount equal to 50% of the underlying corporate income tax paid by the Italian subsidiary in Italy, as provided for under article 10, paragraph 4 of the Italy-France income tax treaty. The Italian tax administration denied the payment of the credit under two different theories, stating that: (a) the French holding company was not the beneficial owner of the dividend, and (b) the French holding company was not a resident of France, not having kits place of effective management and control there. The tax administration based it theories on the fact that the French holding company had no staff, employees and officers in France; it did not engage in any business activities generating receivables aside from dividends received from its subsidiaries, and it limited its role to that of holding the legal title to the shares of its subsidiaries, operating as a passive holding company.

Both the lower Tax Court and the Regional (appellate) Tax Court ruled in favor of the tax administration.

The Supreme Court reversed the decision of the Regional (appellate) Tax Court, holding that, with respect to the concept of ‘beneficial owner’,  the lack of organizational structure and employees, or the presence of limited operating costs on the holding’s financial books of account,  does not in itself prevent the holding company from qualifying as as the ‘beneficial owner’ of the dividend under a tax treaty. According to the Court, the beneficial ownership provision of the treaty should, instead, be interpreted and applied only by considering whether the holding company has the effective power to manage and control its subsidiaries, and has the legal and economic right to receive, use and dispose of the dividends.