Withholding of interest and royalties Directive 2003/49/EC – Cassazione guideline 2024


Cassazione inaugurates 2024 by confirming a fundamentally restrictive approach regarding the concept of “Benificial owner” for the exemption (or its refund) from withholding taxes on interest and royalties paid to non-residents, as provided by Directive 2003/49/EC.

This issue gained prominence with judgment No. 14756/2020, where the exemption from withholding tax (or its refund) was admitted, contingent upon demonstrating that the recipient of the interest not only acts as an intermediary company but also engages in a significant activity, generating an equally substantial profit, even if the functions are carried out within the group. Subsequent interventions followed, such as judgments No. 6005/2023 and No. 6050/2023, and notably ordinance No. 14905/2023, suggesting that the notion of “benificial owner” should be understood as a substantive rule aimed at redistributing the taxation, rather than an anti-abuse clause. Consequently, the legitimacy of denial measures for refunds is affirmed if documentation regarding the actual availability of interest is deemed insufficient.

The trend established by the aforementioned decisions is reinforced by judgments No. 510/2024 and No. 521/2024, which deemed the denial imposed by tax authorities on the refund request for interest withheld by the Italian subsidiary to the Spanish parent company as legitimate. In this regard, a mere declaration from the applicant attesting to the fulfillment of the requirements under Article 26-quater of Legislative Decree No. 600/73, including the status of “benificial owner”, followed by residence certifications issued by the foreign state, is deemed inadequate. Instead, comprehensive documentation evidencing such status is required, including, for example, the financing contract between the parties, the share purchase agreement for the Italian subsidiary indicating a minimum ownership of 25%, bank documentation of financial transactions between the parties, or the financial statements of the receiving company showing ownership of income from Italian sources.

According to the Supreme Court, the condition of “benificial owner is indeed a prerequisite for entitlement to benefits granted by the directive and should not be confused with the application of anti-abuse rules. Therefore, if the recipient cannot qualify as the “beneficiario effettivo” based on facts and circumstances, the benefits of the directive do not apply and can be denied without resorting to anti-abuse rules”.

Judgments No. 510/2024 and No. 521/2024 outline the tests to be conducted for this purpose, namely:

  • The substantive business activity test, aimed at determining whether the recipient is not an artificial construction;
  • The dominion test, evaluating the recipient’s ability to freely dispose of the received interests without being obliged to redirect the income flow to third parties;
  • The business purpose test, investigating the reasons for the deviation of the income flow to ascertain whether the “triangulation” is solely for tax savings or, conversely, has economic reasons.

Ultimately, the qualification of “Benificial owner” must undergo a substantively oriented verification and cannot be equated with a mere acknowledgment of the formal attribution of such a title.

The firm remains available for any further clarification.

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