In their decision No. 4600 of 26 February 2009, the Italian Supreme Court (Corte di Cassazione) considered the tax treaty entitlement of a Japanese fund in relation to dividends distributed by Italian companies via a US limited liability partnership.
The rationale behind the Supreme Court’s decision is quite questionable and unveils an interpretation of the relevant tax treaties which may be criticized from a OECD Model Convention (OECD MC) perspective.
The case was submitted by a Japanese fund (the Fund) controlling a US limited liability partnership (US LLP), which in turn held participations in Italian companies. Dividends distributed by the Italian companies were subject to the domestic (at that time 32.4%)1 withholding tax and the Fund claimed for refund of the difference between such withholding tax and the reduced 15% withholding tax granted by Article 10 of the Italy-Japan Tax Treaty.
In particular, the line of reasoning adopted by the Fund was the following:
- dividends distributed by the Italian companies to US LLP did not benefit from the reduced withholding tax granted by the Italy-US Tax Treaty since US LLP, as a limited liability partnership, is not entitled to the application of the US tax treaty; however,
- the Fund qualified as the “beneficial owner” of the dividends according to Article 10 of the Italy-Japan Tax Treaty, thus allowing it to benefit from the application of the reduced 15% withholding tax2 .
The Tax Office rejected the refund request and, after conflicting rulings of the Tax Courts3, the Fund appealed to the Supreme Court.
The decision issued by the Supreme Court
The Supreme Court has rejected the Fund’s request based on a literal interpretation of the Italy-Japan Tax Treaty.
In particular, Article 10, paragraph 2, of the convention, when looking at the taxation of dividends in the State of source (i.e. Italy), does not contain the normal “beneficial ownership” clause i.e. the provision contained in Article 10 of the OECD MC according to which the reduced taxation of dividends in the State of source is granted only to the “beneficial owner” of the dividend payments.
Based on the above, the Supreme Court argued that the reduced withholding tax provided under the Italy-Japan Tax Treaty only applies when the actual recipient is resident of the Contracting State (in our case Japan), irrespective who the “beneficial owner” of the relevant payments is.
Here, dividends were actually distributed by the Italian companies to US LLP, a US partnership: consequently, the Italy-Japan Tax Treaty does not apply and the Fund, even if the “beneficial owner” of the distributions, was not entitled to benefit from the reduced Italian withholding tax provided under the Treaty.
The decision would be surprising to most tax practitioners, and clearly will give rise to difficulties when dividends are paid to transparent entities.