Look through approach: the State of the art in the European and national context

Abstract
With its ruling no. 4427/2025, the Italian Supreme Court reaffirmed the centrality of the look-through principle toward the beneficial owner of income, even in the presence of interposed vehicles. The Court confirmed the applicability of the exemption under Article 26, paragraph 5-bis, of Presidential Decree no. 600/1973 to financing arrangements indirectly granted by qualified foreign entities. This approach, aligned with the “Danish cases” of the CJEU and the OECD Model, may also apply to dividend distributions in favour of EU/EEA UCITS. International tax treaties and administrative practice further support this substantive interpretation, aimed at preventing abuse and double taxation by giving importance to the actual ownership of income flows.

The look-through approach in the EU context: the “Danish cases”

The application of the look-through approach under this exemption regime was introduced judicially by the EU Court of Justice (CJEU) in cases C-116/16 and C-117/16 and in joined cases C-115/16, C-118/16, C-119/16, and C-299/16 (collectively referred to as the “Danish cases”).

Particularly significant is the CJEU’s statement in the joined cases C-115/16, C-118/16, C-119/16 e C-299/16, where the Court held: “it should also be stated that the mere fact that the company which receives the interest in a Member State is not its ‘beneficial owner’ does not necessarily mean that the exemption provided for in article 1(1) of Directive 2003/49 is not applicable. It is conceivable that such interest will be exempt on that basis in the source State when the company which receives it transfers the amount thereof to a beneficial owner who is established in the European Union and furthermore satisfies all the conditions laid down by Directive 2003/49 for entitlement to such an exemption”.

In other words, the CJEU expressly allows the application of the look-through mechanism when the first recipient lacks the necessary characteristics to qualify as the beneficial owner and the income flow is transferred to another group entity that qualifies as the beneficial owner and meets the other requirements of the relevant EU directive.

The conclusions reached by the CJEU in the above judgment, although related to the exemption from withholding on interest and royalties under Directive 2003/49/EC (“Interest and Royalties Directive”), are clearly extendable to the Parent-Subsidiary Directive, given the similarity of the legal frameworks, especially considering that the Interest and Royalties Directive explicitly limits the exemption to cases of direct shareholding.

Supreme Court case law

In its recent ruling no. 4427/2025, the Italian Supreme Court dismantled the stance previously held by the Italian Revenue Agency, ruling that in cross-border indirect financing arrangements, when the entity receiving the interest is not the actual beneficial owner, the subjective requirements for exemption from withholding under article 26, par. 5-bis, of Presidential Decree 600/1973 must be assessed with reference to the latter, through application of the look-through mechanism.

The case involved an Italian company that requested the reimbursement of withholding taxes paid on interest related to a loan it had received from its Luxembourg-based parent company. The parent had in turn sourced the funds from a Luxembourg investment fund, the actual lender and beneficial owner of the interest, and an entity qualifying for exemption. The Italian company had initially exempted itself from withholding under article 26-quater (implementing Directive 2003/49/EC) but later paid the taxes voluntarily following a tax audit and subsequently sought a refund. After two lower-court rulings in favour of the taxpayer, the Supreme Court rejected the Revenue Agency’s appeal, affirming the primacy of the “beneficial owner” concept over the “direct recipient,” consistent with the OECD Model and the principle of ability to pay. 

The principle established by the Supreme Court is of critical importance, as it may also apply to dividend distributions to UCITS established in EU or EEA countries. In such cases, the exemption under article 27, par. 3 of Presidential Decree 600/1973 is often denied by the tax authorities when the investment is made “indirectly” through interposed vehicles. However, the Supreme Court rejected a purely literal interpretation similar to the one often used to deny dividend exemptions, highlighting that article 27(3) adopts the same wording as article 26(5-bis). In line with the OECD Model, tax benefits should be granted to the beneficial owner, even if dividends are received via an interposed entity, by applying the look-through mechanism.

Double taxation convention

Unlike the regime under the Parent-Subsidiary Directive, tax treaties (in line with the OECD Model) expressly allow the application of the look-through approach. For example, article 10 of the Italy–UK tax treaty states: “Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: 5% of the gross amount of the dividends if the beneficial owner is a company which controls, directly or indirectly, at least 10% of the voting power in the company paying the dividends […]”.

In other words, the treaty allows the application of the reduced 5% withholding rate even when entities interposed between the payer and the beneficial owner are involved, provided that such interposition does not result in an abusive tax advantage.

This interpretation is confirmed by the practice of the Italian Revenue Agency, which has consistently acknowledged the operation of the look-through mechanism in treaty contexts (see, among the earliest rulings, Resolutions no. 431/1987 and no. 86/2006). This position has also been reaffirmed recently in Italian case law[1].

Conclusion

The look-through principle, focused on identifying the beneficial owner of income flows, remains a key instrument for a purposive application of the Parent-Subsidiary Directive and for preventing abuse or double taxation. The development of both European and national case law, particularly the recent shift by the Supreme Court, shows that a purely formal evaluation based on the direct recipient and the literal text of domestic provisions is no longer sufficient. Therefore, even where interposed vehicles are involved, withholding tax exemptions should be granted where the beneficial owner meets the relevant legal requirements.

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