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Italian Supreme Court Holds Lack of Organizational Structure does Not, by Itself, Result in Lack of Beneficial Ownership for Treaty Benefits

A December 2016 decision of the Italian Supreme Court was recently published concerning the entitlement to treaty benefits of a sub-holding company for dividends received from Italy. The case involved a French company (FRCo) wholly owned by a U.S. company that acted as a sub-holding company for all European subsidiaries.

In 2002, an Italian company paid dividends to FRCo, for which FRCo claimed a partial dividend tax credit refund. FRCo would be entitled to such a refund under the 1989 France-Italy tax treaty. Subject to certain conditions, paragraph 4 of Article 10 (Dividends) provides that if a French company receives from an Italian company dividends that would be granted a "tax credit" if they were received by a resident of Italy, the French company is then entitled to a payment from the Italian Treasury equal to half of such "tax credit", less withholding tax. One of the main conditions for the credit payment is that the receiving company is the beneficial owner.

In its determination, the Italian tax authority found that the true beneficial owner was the U.S. company and therefore FRCo was not eligible for the partial tax credit refund. This determination was based mainly on the tax authority's conclusion that FRCo lacked the necessary organizational structure and that its role as a sub-holding company was merely to allow the partial refund of the tax credit. This decision was appealed, with the first level tax court finding in favor of FRCo and the second level court then finding in favor of the tax authority. The case was then heard by the Supreme Court.

In its decision, the Supreme Court found in favor of FRCo. The Court found that in determining beneficial ownership, FRCo's lack of organizational structure and wholly owned status are relevant, but that focus should be given to the level of autonomy in the use of the funds and where the key decisions are taken with regard to FRCo itself and the coordination of the Italian company paying the dividends. In this respect, the Court found that the French company had its legal and administrative seats in France; the directors of the company were resident of France; and based on available documentation, the key business decisions were taken in France. As a result, the decision of the second level court was overturned, and the case must be reconsidered based on the factors for beneficial ownership determination set out by the Supreme Court.

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