On February 23, 2017 the Italian Government approved the final draft of the legislative decree (the "Decree") that is going to implement the provisions of the Directive (EU) 2015/49 of May 20, 2015 (the so called "IV Anti Money Laundering Directive"). The decree was sent to the Parliament for its review and with the consent of the Parliament it will become law.

One of the key concepts of the new anti money laundering legislation is the definition of "beneficial owner", meaning, the natural person who must be properly identified by the persons or entities obliged to carry out the  customer due diligence and report a transaction or legal arrangement whenever required under the anti money laundering law.   

Whenever the customer is an entity, as opposed to a natural person, article 20, paragraph 1 of the Decree provides a general definition of beneficial owner, as follows:

The beneficial owner of customers different from natural persons is identified with the natural person or natural persons to whom, ultimately, the direct or indirect ownership or control of the entity is attributable.

The definition of beneficial owner of an entity revolves around two concepts: ownership, or control, of the entity. Also, the ownership or control can be direct or indirect.  

The first test to apply is the ownership test. 

Article 20, paragraph 2 provides on direct or indirect ownership as follows:

When the customer is company:

a) it is an indicia of direct ownership, the ownership of an interest exceeding 25% of the capital of the customer, owned by a natural person;
b) it is an indicia of indirect ownership, the ownership of an interest exceeding 25% of the capital of the customer, owned through controlled entities, fiduciaries or intermediaries.
Beneficial ownership through indirect ownership in another entity requires that the tested natural person directly owns an ownership interest in another entity, which in turn holds ad ownership interest in the customer, ultimately making that natural person the indirect owner of the customer under the "more than 25 percent" test. 
The percentage of ownership owned in the intermediate entity, by the tested natural person, which should be required to qualify that entity as a controlled entity for the purposes of ultimately determine the existence of an indirect ownership interest in the customer, is not determined, and no attribution rules are set forth in the legislative decree for the purpose of applying the indirect ownership rule.
It would seem reasonable to assume that a direct ownership of more than 25 percent of the capital of the intermediate entity, could be sufficient to qualify that entity as a controlled entity, for the purpose of the indirect ownership testThe controlled entity, in turn, should directly own a sufficient percentage of the capital of the customer, as required so that, once percentage of direct ownership in the capital of the intermediate entity, owned by the natural person, is multiplied by the percentage of direct ownership in the capital of the customer, owned by the intermediate entity, the result would meet the "more than 25 percent" test for the indicia of beneficial ownership required for anti money laundering purposes.
Under that approach, when a natural person owns 50 percent of the capital of a company, which owns 51 percent  of the capital of another company, there would indication of beneficial ownership, because the natural person would indirectly own 25.5 percent of the capital of the customer.
Instead, if a natural person owns 20 percent of the capital of a company, which owns 100 percent of the capital of another company, there would be no indicia of beneficial ownership, because the intermediate ownership would be less than 25 percent. The same should be true when a natural person ones 100% of the capital of a company, which owns 24 percent of the capital of the customer.
Conversely, if a natural person owns 25.1 percent of the capital of two companies, each one of which owns 50 percent of the capital of the customer, there would indicia of beneficial ownership.
The control test applies whenever the beneficial owner cannot be identified through the application of the ownership test.       
Article 20, paragraph 3 defines the control test (that applies whenever the ownership test is insufficient to identify the beneficial owner of the customer) as follows: 
In the event that the ownership structure of the customer does not allow to identify in an unequivocal manner the direct or indirect ownership of the customer, the beneficial owner coincides with the natural person or persons to whom, ultimately, the control of the customer is attributable due to:
a) the control of the majority of the votes that can be exercised in the general meeting of shareholders, 
b) the control of a sufficient number of votes to exercise a dominant influence in the general meeting of shareholders
c) the existence of particular contractual constraints which allow a person to exercise a dominant influence (on the customer).
The control requirement is defined as control of the majority of the votes exercisable in the general meeting of shareholders, or dominant influence over the general meeting of the shareholders through voting power of contractual arrangements.  
When neither the ownership nor the control test are sufficient to identify the beneficial owner, article 20, paragraph 5 provides that the beneficial owner is the person who holds powers over the administration and direction of the entity. 
Article 20, at paragraph 5 provides that in case of private associations and foundations or other entities governed by Presidential Decree n. 361 of February 10, 2000 the definition of beneficial owner includes all of the following:
– the founder, when living;
– the beneficiaries, when they are identified or can be easily identified;
– the individuals with powers or authority over the administration or direction of the entity.  
No specific provision applies to trusts, which are not entities governed by Presidential Decree n. 361 of 2000, but are typically created under foreign law and recognized and made effective in Italy pursuant to the Hague Convention of July 1 1985 on Trusts. 

The European Court of Justice (ECJ) with its decision in the case C-277/09 issued on December 22, 2010 (RBS Deutschland Holdings) blessed an international tax arbitrage transaction whose final result has been to obtain a credit for input VAT charged on purchase of vehicles while avoiding the application of output VAT on rental payments from leases of those vehicles.

Under the facts of the case, RBS Deutschland Holdings GmbH, a Germany company, purchased cars in the UK through its VAT registered unit in the UK and leased the cars to a UK company, directly and through one of its German subsidiaries. In the UK the lease contracts were characterized as financial transactions, which for VAT purposes are supply of services that are taxable in the country of supplier (in the case Germany). However in Germany the leases where characterized as sales of goods which are taxable in the country of purchaser (in the case the UK).

RBSD claimed a credit for the input VAT paid on the purchase of the cars even though no output VAT was paid on the leases of those cars . The UK tax authority denied the VAT input credit and asked the Court to determine whether the general anti abuse principle embedded in EU VAT law would prevent a taxpayer from qualifying for an input VAT credit in circumstances in which sales are structured in a way to avoid output VAT.

The ECJ held that a taxpayer is not prohibited from exploiting the differences in national tax systems in a cross border transaction leading to a more favorable tax result, provided that the transactions in which the taxpayer is engaged are not entirely artificial and are not entered into for the sole purpose of avoiding taxes.

The Court acknowledge that taxes are a factor that is taken into consideration to determine the final form of a transaction, but when they are not the only factor and the transaction otherwise serves a legitimate business purpose, the final tax result should be respected event when if is predicated on an inconsistent tax treatment of the transaction under two different legal systems.      


On February 25, 2010 the European Court of Justice issued its ruling in X Holding (C-337/08 X Holding Judgment.pdf). Under the facts of the case, a Dutch parent wanted to be allowed to combine with its Belgian subsidiary under the Dutch tax consolidation rules to use the latter losses, which it would have been allowed to use had the subsidiary been a branch. The Dutch fiscal unit system, which disregards intra group transactions, is consolidation. Under Dutch tax law, the Netherlands does not tax a foreign branch’s profits, but allows a deduction for foreign branch’s losses subject to recapture of branch’s profits in the following years for an amount equal to losses allowed in prior years. The Belgian subsidiary could still use its losses in Belgium, so it was clear that the losses would not be deductible under Marks & Spencer holding and the case rested on a cash flow argument that the parent should be allowed to use the losses sooner in the Netherlands. The Attorney General’s opinion concluded that the denial of consolidation of foreign subsidiaries is justified under the balanced allocation of taxing powers, coherence of tax system and need to protect member state’s tax base and the restriction to the freedom of establishment is proportional and justified. The European Court of Justice upheld the AG’s opinion and ruled in favor of the Dutch government. The Court rejected the taxpayer’s argument that taxpayer should be allowed the same treatment granted in case of a foreign branch, on the ground that a foreign branch and a foreign subsidiary are not in a comparable situation, the former being subject in principle to the tax jurisdiction of the member state of origin, while the latter being an independent legal and tax entity subject only to the tax jurisdiction of the member state of destination.      

On March 4, 2009 the EU Court of First Instance issued a judgment in Italy v. Commission (T-424/04), in which it ruled that Italy’s favorable tax treatment for special investment funds violates state aid rule of the EC Treaty.  

Article 12 of Law Decree 269 of 2003 (converted into Law n. 326 of November 24, 2003) provides that collective investments funds which invest primarily in shares of  small and mid-capitalized companies are subject to tax at the rate of 5 instead of 12.5 per cent. The reduced tax applies on the increase of the fund’s net asset value at the end of each tax year.

For the favorable tax treatment to apply, the following requirements must be met:

– the regulation of the fund must provide that at least two thirds of the fund’s assets are invested in shares of small and mid-cap companies regularly traded in EU securities market;

– the fair market value of the qualified shares owned by the fund must be equal to at least two thirds of the value of fund’s asset for more than one sixth of non consecutive days in each calendar year.

Small and mid-cap companies are defined as companies whose market value computed on the basis of the average share price on the last day of each quarter has not exceeded 800 million euro.

The European Commission on September 6, 2005 ruled that such favorable tax treatment violated the state aid provisions of article 87 of the EC Treaty and ordered the Italian government to collect the balance of the tax (7.5 percent) from the funds. The Italian government appealed the decision of the European Commission and the EU Court of First Instance rule in favor of the Commission and rejected the appeal.

The Italian government now can appeal the judgment to the Eurpean Court of Justice or accept the decision of the First Instance Court.

The small and mid-cap investment funds are not really common in the market; however, in the present situation the market capitalization of many companies has dropped as a result of the crisis, and such type of special investments funds could become more popular due to the favorable tax treatment now in question.        

A similar judgment was issued on the same issues on the same date in the case Associazione italiana del risparmio gestito and Fineco Asset Management v. Commission (T-445/05).

Foreign investors resident or organized in qualifying jurisdictions are entitled to a refund equal to the tax charged upon the fund. If a higher tax is eventually collected from the fund, they would be entitled to a higher refund from the fund.   



Continue Reading Favorable Tax Treatment for Special Investment Funds Denied, EU Trial Court Ruled

With judgment issued on December 22, 2008 in Les Vergers du Vieux Tauves (C-48/07) the European Court of Justice (ECJ) held that Directive 90/435/EEC of July 23, 1990 (the EU parent-subsidiary directive), which exempts dividends paid by a EU subsidiary to its EU parent from withholding tax, does not apply to dividends paid to the holder of a right of usufruct on the shares for which the dividends are paid.

In the case decided by the Court, a Belgian company held a usufruct in the shares of another Belgian company, while a different Belgian company held legal title to the shares.

The usufruct conferred to the holder the right to receive the dividends paid on the shares, but it did not confer full legal title on the shares or the status of shareholder.

Article 3, paragraph 1 of the EU parent-subsidiary directive requires that, for the benefits of the directive to apply (exemption from withholding), the dividend recipient have a minimum holding of 25 per cent of the capital of the dividen payer (reduced to 15 per cent for dividends distributed from 1.1.07 and to 10 per cent for dividends distributed from 1.1.09).

The usufruct does not represent a participation to the capital of the company, and does not confer the status and rights of shareholder. As a result, the parent-subsidiary directive does apply to dividends paid to the holder of the usufruct on the shares.  





Continue Reading EU Parent-Subsidiary Directive Does Not Apply to Dividends on Shares Held in Usufruct, ECJ Ruled

On December 19, 2008, the Attorney General (AG) at the European Court of Justice (ECJ) filed his opinion in Aberdeen Property Fininvest Alpha (C-303/07).

The case concern Finnish taxation of dividends paid by a Finnish company to a Luxembourg SICAV investment fund owning 100 percent of the stock of the Finnish company.

Under Finnish law, the dividends paid to the Luxembourg fund are subject to Finnish withholding tax. The Luxembourg fund does not qualify for the dividend withholding tax exemption granted under the EU parent subsidiary directive, because it is not organized according to one of the corporate forms enumerated in the directive and is not subject to corporate tax in Luxembourg. 

Dividends paid to a Finnish company or investment fund are exempt from withholding tax to eliminate double taxation of corporate profits.

The Attorney General in his opinion took the position that the Finnish withholding tax violates the EC treaty.

According to the AG, the EC treaty still applies to inter-company dividends that fall outside the scope of the parent-subsidiary directive. The treaty freedom of establishment and free movement of capital prohibit member states from taxing outbound dividends less favorably than domestic dividends. The position of a Luxembourg investment fund Sicav is comparable to that of domestic company or fund, even though the Luxembourg fund Sicav is not subject to tax in Luxembourg.

The opinion is not binding on the ECJ, even though the Court tends to rule according to AG opinions in most of the cases. If the ECJ accepts the AG opinion, the case would be a major step ahead towards the elimination of dividend withholding tax in the EU.

Continue Reading Withholding Tax on Outbound Dividends to a Luxemburg Investment SICAV Illegal, AG of the ECJ Says

On December 11, 2008 the European Court of Justice ("ECJ") issued its decision in case n. C-285/07 dealing with the tax treatment of a cross-border EU transfer of shares under German law.

The Court held that the requirement imposed under German law, according to which the shareholders of the transferred corporation ("target") are not taxed on the gain from the exchange of their shares in the target for the shares of the acquiring corporation, at the condition that the acquiring corporation takes a tax basis in the shares of the target equal to the transferring shareholder’s tax basis in those shares prior to the transfer (carryover basis), violates the EU directive n. 90/434/CEE of July 23, 1990 (the "Mergers Directive") and EU law. 

The facts of the case concern a German public company which transferred a majority shareholding in a German private company to a French public company solely in exchange for stock of the French company. The German transferor took a tax basis in the stock of the French acquiring company received in the transaction, equal to the tax basis it had in the shares of the German transferred company (substituted basis). The French acquiring company carried the shares of the German acquired company at their fair market value at the time of the transaction. 

The EU mergers directive prescribes that, in order to qualify for tax free treatment and defer the tax on the gain from the exchange of stock in the target for stock of the acquiring company, the shareholders of the target company must take a substituted basis in the stock of the acquiring company received in the exchange. The directive is silent as to the tax basis at which the acquiring company should carry the stock of the acquired company received in the transaction. 

German law prescribed that the acquiring company took a carry over basis in the shares of the target (so called "double carry over basis requirement"). The position of the German government on the issue was that the EU directive is silent and the matter falls within the authority of the Member States.

The Court rejected the argument and held that the double carry over basis requirement imposed by German law violates the EU mergers directive and EU law in that it result in an undue restriction of a cross-border exchange of shares between to EU companies.

Continue Reading ECJ Ruled That Restriction to Tax-Free Treatment of Cross-Border Transfer of Shares is Illegal

On November 27, 2008 the European Court of Justice ("ECJ") issued its judgment in Ministry of Finance v. Société Papillon (C-418/07). The questions referred to the Court was whether the French national tax laws, which do not allow a French parent company to form a French consolidated tax group with its French subsidiaries (and reduce its tax liability by offsetting its profits with the losses of other members of the group and disregarding intra-group transactions), when the French subsidiaries are owned indirectly through an EU holding company (in the case, a Dutch BV) not subject to tax in France, violates  Article 43 of the EC Treaty.  

The Court ruled that such restriction is discriminatory and constitutes a violation of the freedom of establishment, because a French parent company that exercises its freedom of establishment by incorporating a holding company in another EU Member State through which it owns stock in its French subsidiaries is subject to a less favorable tax treatment in France than a French parent company that owns stock in its French subsidiaries directly or through other French intermediate holding companies. Indeed, the latter is able to offset its profits with the losses of the French subsidiaries while the former is not.

Contrary to the Advocate General’s opinion, the Court refused to apply the coherence of tax system  justification to sustain the restriction, on the ground that the restriction goes beyond what is strictly necessary for that purposes and fails the proportionality test.

Société Papillon provides legal support to taxpayers who intend to challenge national tax laws that restrict access to consolidated tax regimes in EU cross border situations.

Italy permits consolidation of foreign subsidiaries, but sets more restrictive requirements that those that apply to consolidation of domestic subsidiaries. The ECJ ruling in Société Papillon puts in doubt the validity of those restrictions under EU Law.

Continue Reading ECJ Ruled That Restrictions to Tax Consolidation Violate EC Treaty