Interactions between the beneficial owner, the abuse of law and the Parent-Subsidiary Directive

Edited by Carlo Romano and Maurizio Foti

The Supreme Court, in its judgment no. 16173/2023 published on 8 June 2023, provided important clarifications on the interactions between the notion of beneficial owner and the abuse of law with respect to the dividend exemption regime set out in the Parent-Subsidiary Directive.

Main facts at stake

The controversy originates from the Revenue Agency’s denial to refund the 27% withholding tax applied pursuant to Article 27, paragraph 1, of the Presidential Decree 600/73 in force at the time in Italy, to the profits distributed by an Italian subsidiary to its parent company resident for tax purposes in Luxembourg, in the light of the Council Directive 90/435/EEC of 23 July 1990 (the “Parent-Subsidiary Directive”), then transposed into the Directive 2011/96/EU, implemented in Italy by Article 2, paragraph 1, letter b), of the Legislative Decree no. 136 of 6 March 1993, which introduced Article 27-bis of the Presidential Decree no. 600/1973.

In particular, the Luxembourg company requested, firstly, the refund of the entire withholding tax arguing that the application of such withholding tax was in breach of Article 27-bis of the Presidential Decree 600/73 and the Parent-Subsidiary Directive; in the alternative, (i) the refund of the difference between the amount of the withholding tax paid (i.e. 27%) and the amount of the withholding provided for by Article 27, paragraph 3-ter, of the Presidential Decree 600/73 (i.e. 1.375%) or (ii) the difference between the withholding paid and the amount provided for by the Italy-Luxembourg Convention (i.e. 15%).

The Luxembourg company was denied the right of refund the withholding tax both by the first and second Tax Court of merit, on the assumption that it had failed to prove the actual taxation of the dividends in Luxembourg (as regards the main claim and the first subordinate claim) and that it had failed to prove that it was the beneficial owner of the dividends (as regards the second subordinate claim).

The company appealed before the Supreme Court against the decision of the second instance Tax Court arguing the illegitimacy to refund the dividends at the condition that the Luxembourg company would provide evidence (i) that the dividends were actually taxed in Luxembourg and that (ii) the Luxembourg parent company was the beneficial owner of the dividends.  

The ruling of the Supreme Court 

In the ruling the Supreme Court focused its “investigation” on the beneficial owner requirements (absorbing all the other claims raised in the appeal), notwithstanding the second instance Tax Courts denied it existed.

The Court rejected the taxpayer’s appeal and ruled the following principle of law: «With regards to the dividends and the Parent-Subsidiary Directive, pursuant to the provisions of Presidential Decree no. 600 of 29 September 1973, art. 27-bis, paragraph 5 … the circumstance that the person claiming the benefits provided for therein is not the “actual beneficial owner” represents a clue of an elusive practice, put in place in a formal and artificial manner to take undue advantage of the benefits granted to companies based in the European Union».

According to the reasoning of the Supreme Court, the beneficial owner clause is a general clause of the international tax system, aimed at preventing the abuse of tax treaties through treaty shopping practices.

Secondly, the Court recognized for the first time that such clause is contemplated only in the Interest and Royalties Directive (i.e., Directive 2003/49/EC) and not also in the Parent-Subsidiary Directive. According to the Supreme Court, «the explanation to this is that the purpose of the Parent-Subsidiary Directive is that the profits of the subsidiary should be taxed only one time in its country of residence, consequently, the dividends distributed should be exempt either from the withholding tax at the time of the distribution in the source country – i.e., in the country of residence of the distributing company – and from the taxation in the country in which the parent company receiving the dividends is resident. In this perspective, the doctrine has observed that it is irrelevant, from a technical point of view, that the recipient is the beneficial owner of the income (especially in its meaning of person to whom the income is attributed from a legal-formal standpoint)».

Notwithstanding the above-mentioned clause is not found in the Parent-Subsidiary Directive, the Supreme Court pointed out that the clause cannot «be used for abusive purposes, as would be the case if it were used by companies not established in the European Union or, more generally, not meeting the conditions provided by the Directive itself», since the tax avoidance of abusive practices is a general principle.

According to the Court, the latter principle is consistent both with the general anti-abuse clause introduced in the Parent-Subsidiary Directive by Directive 2104/86/EU of 8 July 2014 in the PSD, and with the EU case law, in particular with the so-called Danish cases (joined cases C-116/16 and C-117/16) in which it was emphasized that even in the absence of anti-abuse provisions of national or conventional law, «national authorities and Courts cannot be prevented from denying the benefits of a directive in the event of fraud or abuse because the prohibition of abusive practices is a general principle of the Union law, which applies irrespective of whether the benefits and advantages being abused have their legal basis either in the Treaties, or in a regulation or in a directive, which have identified a set of clues from which it could be inferred the existence of an abuse».

Therefore, the Supreme Court dismissed the Luxembourg company’s appeal and upheld the decision of the lower Tax Courts that had identified a whole series of elements demonstrating that the Luxembourg company lacked of economic substance and that it had been set up for the sole purpose of receive profits of a non-EU company (hence the impossibility of being able to apply for the exemption from taxation provided for by the EU Parent-Subsidiary Directive).


With this judgement the Supreme Court ruled that the beneficial owner clause is completely out of the scope of the Parent-Subsidiary Directive and that the only way to deny the exemption regime provided for by the said Directive in the EU, provided that the requirements set forth in Article 27-bis of Presidential Decree 600/73 are met, is when an abuse of law, aimed at allowing a non-EU company an advantage that only EU companies shall benefit of, occurs.

Therefore, this ruling may have significant implications not only on the pending proceedings referred to refund claims, but also on the assessment activities of the Tax Administration dealing with the Parent-Subsidiary dividends. In fact, the Tax Administrations might be hindered in challenging the lack of the status of beneficial owner for non-resident parent companies and shall consider the entire discipline of the abuse of law under Article 10-bis of Law no. 212/2000 and in particular the procedural guarantees (paragraphs 6, 7 and 8) and the exclusion of the tax criminal liability (paragraph 13).

Let’s Talk

For a deeper discussion, please contact:

Carlo Romano

PwC TLS Avvocati e Commercialisti


Maurizio Foti

PwC TLS Avvocati e Commercialisti

Senior Manager