The Italian tax authorities continue to challenge interposed conduit entities using the beneficial ownership test to deny withholding tax reductions or exemptions under EU Directives and double tax treaties.

In light of the CJEU’s decisions in the Danish conduit cases, the Italian Supreme Court concluded that an interposed conduit entity could be deemed to lack beneficial ownership status if it is an artificial arrangement devoid of any economic and commercial justification, with the essential aim of benefiting from an improper tax advantage.

In assessing the substance of a company for the purposes of the beneficial ownership test, one would consider the availability of premises and whether the company has an adequate number of employees and bank accounts in the relevant jurisdiction. One would also consider whether its day-to-day management is effectively performed in the relevant jurisdiction by the board of directors (i.e., whether the place of effective management is located in the relevant jurisdiction) and whether the establishment of the company is justified by an economic rationale and the company is engaged in a real economic activity.

In order to establish beneficial ownership, one also has to consider the dominion test which examines whether the recipient can effectively enjoy and dispose of the income or whether it merely transfers the income to another person.

Finally, one has to consider the business purpose test which looks at the reasons behind the interposition of the recipient with respect to the cross-border income flow and in particular, whether the recipient effectively performs a function in the context of the transaction or whether it acts as a mere conduit or pass-through entity whose interposition is aimed exclusively at obtaining a tax saving.

Where the recipient is not the beneficial owner of the relevant income, it is unclear whether one could look through to the actual beneficial owner, for example to apply the double tax treaty between Italy and the beneficial owner’s jurisdiction. There is neither case law nor specific guidance from the Italian tax authorities on the possibility of adopting such a look-through approach. But there are arguments in favour of this approach. Paragraph 12.7 of the Commentary on the interest article of the OECD’s Model Convention expressly states that, if all the other requirements are met, the application of the treaty is available “when an intermediary […] located in a Contracting State or in a third State, is interposed between the beneficiary and the payer but the beneficial owner is a resident of the other Contracting State”. Parts of the CJEU’s decisions in the Danish cases and certain provisions in the European Commission UNSHELL/ ATAD III proposal (see this earlier post) would point towards a look-through approach.

Moreover, in practice, the Italian tax authorities have agreed to apply a look-through approach in the context of tax settlements, for example, in respect of private equity investment structures, where foreign intermediate companies were disregarded for tax purposes.