Conventional withholding tax subject to passing the tripartite test of beneficial ownership

by Davide Attilio Rossetti, Gabriele Angelini

In Judgment No. 26923 of 17 October 2024, the Supreme Court confirmed the legal principle that, for the purposes of applying the more favourable conventional withholding tax, the taxpayer must prove his status as the beneficial owner of the income received. The tax Authority can only prove the existence of an artificial construction following evidence of the test.

The case
The Italian Revenue Agency issued a tax assessment notice to an Italian company about the fiscal treatment of royalties paid to Luxembourg companies for the use of their trademarks. In particular, the tax authority has rejected the application of the reduced withholding tax provided for in Article 12 of the Italy-Luxembourg Tax Convention, considering that the beneficial owner was a US company (which exercised control functions over the Luxembourg conduits).

The Italian company appealed to the Tax Court, which ruled in its favour at both judicial degrees. In particular, the judges considered that the documentation submitted by the Luxembourg companies was sufficient to prove their status as beneficial owners and, consequently, justified the application of the reduced conventional rate (10%).

The tax Authority therefore appealed to the Court of Cassation, claiming violation and misapplication of Article 12 of the Italy-Luxembourg Convention.

The decision
The Supreme Court has rejected the tax Authority's appeal, confirming the following legal principle: for the conventional reduced withholding tax’ application, the taxpaying company has to prove its status as a beneficial owner by passing three independent tests:

  • the substantial enterprise test, it proves that the recipient company exercises a real economic activity;
  • the dominion test, proves the power to dispose of the income received;
  • the business purpose test, analyses the reasons justifying the distribution of the income.

In this case, the Court concluded that the company had passed the tests, considering that the documentation produced during the process has evidenced the beneficial ownership status of the Luxembourg companies.

This judgment confirms the tripartite test's relevance for the interpretation of the beneficial owner convention clause, which is no longer limited to the context of EU directives.