Italian Withholding Tax on Dividends: Beneficial Ownership and the 1.2% Rate

Introduction

Two recent Italian decisions — one from the Supreme Court (Corte di Cassazione) and one from the second instance tax court of Abruzzo— address respectively the withholding tax treatment of dividends paid by Italian subsidiaries to EU intermediate holding companies ultimately owned by US groups and the potential entitlement of US corporates to the reduced 1.2% rate.

The mentioned decisions give the opportunity to consider the most recent approach of the Italian Supreme Court in terms of eligibility to withholding tax exemptions and their practical implications for US corporate groups with Italian subsidiaries.

Regulatory Framework

Under Italian law, dividends paid to Italian resident companies benefit from a 95% exemption, resulting in an effective tax rate of 1.2% (unless a surcharge is applicable). The same 1.2% withholding rate applies, under certain conditions, to dividends paid to EU/EEA corporate recipients. 

For extra-EU recipients (e.g. US or UK companies), the applicable rate is generally set by the relevant double tax treaty. Under the Italy–US Treaty , the rate is 5% where the beneficial owner holds at least 25% of voting shares for 12 months.

The conditions to benefit from the treaty rate and the differential between 5% and 1.2% is at the heart of the decisions discussed below.

Case 1 — Supreme Court, Decision No. 32467/2025: EU Sub-Holding Denied Beneficial Owner Status

Facts

An Italian subsidiary distributed dividends in 2011 to its Danish parent (Alfa Denmark ApS), which was in turn owned by a US group parent (Alfa Corporation). The Italian company applied a zero-rate withholding under the Italy–Denmark Treaty, treating the Danish entity as beneficial owner. The Italian tax authorities (the ITA) challenged this treatment, alleging treaty shopping.

Outcome

The Supreme Court denied beneficial owner status to the Danish sub-holding, applying the three-part test consistently applied by the Italian Supreme Court. The Court held that the Danish sub-holding failed on all three limbs:

(i) Substantive business activity test (failed): The Danish entity had no genuine operational structure, no management role over its participations, and external advisers had themselves flagged the lack of documentation on staff, premises, and independence from the US parent;

(ii) Dominion test (failed): Dividends flowed into a group cash-pooling arrangement formally managed by a Dutch entity but effectively controlled by the US parent through a Swiss branch. The Danish company did not retain or independently use the funds.

(iii) Business purpose test (failed): Multi-year email correspondence showed that all key decisions on dividend distributions (amounts, dates, payment methods, minutes of shareholders' resolutions) were directed by the US parent. The Danish entity was regarded as a "mere screen," instrumental to tax avoidance.

The court also held that a tax residence certificate from the Danish authorities was not sufficient to establish beneficial ownership — substance, not form, is decisive.

As a consequence, the court applied the Italy–US Treaty on a look-through basis, upholding the 5% withholding rate with reference to the US ultimate beneficial owner.

Case 2 — Abruzzo Tax Court of Appeal, Decision No. 93/2026: US Corporate Entitled to Refund Down to 1.2%

Facts

Alfa LLC, a Delaware-incorporated US company, held a 35% stake in Gamma S.p.A. (Italian). In 2018, Gamma distributed dividends of approximately €28.3 million, withholding tax at 5% (~€1.42 million) under the Italy–US Treaty. Alfa LLC sought a refund of €1 million, being the difference between 5% and 1.2%.

Outcome

The court confirmed the refund, reasoning as follows:

(i) article 63 TFEU extends to third countries: the free movement of capital applies not only within the EU but also between Member States and third countries, including the US. A withholding tax differential based solely on residence is a restriction capable of discouraging cross-border investment;

(ii) the situations are objectively comparable. The comparison must focus on the specific tax measure (dividend taxation) and its purpose (eliminating double economic taxation). In both domestic and cross-border situations, the dividend carries the same risk of being taxed twice;

(iii) no valid justification was demonstrated. the court rejected the defence arguments raised by the ITA. In particular, the court rejected both: (a) the fiscal coherence argument because the participation exemption is unconditional and not offset by any other charge; and (b) the evasion risk argument because Alfa LLC belonged to a NYSE-listed group, the US is a white-list jurisdiction with a bilateral treaty including exchange-of-information provisions, and no concrete abuse was shown.

(iv) beneficial ownership was met:  Alfa LLC passed the three-part test:

(a) Substantive business activity: list of US-resident directors, group organisational chart, diversified portfolio of participations, profit-and-loss statement showing employee costs and operating profits;

(b) Dominion: dividends remained under the effective control of a US-resident entity subject to US taxation, with no evidence of an obligation to transfer proceeds to third parties;

(c) Business purpose: Alfa LLC had a genuine economic function within the group and was not a conduit interposed solely for tax savings.

The tax court confirmed the right of the US company to a refund of the withholding tax exceeding 1.2% on dividends received from its Italian subsidiary, holding that the application of the 5% treaty rate — in lieu of the 1.2% rate available to EU/EEA recipients — constituted an unjustified restriction on the free movement of capital under Article 63 TFEU. 

Key Takeaways 

1. Beneficial ownership is the gateway to withholding tax exemptions and reductions

For an intermediate EU holding company to benefit from reduced or zero withholding on dividends received from an Italian subsidiary, the presence of local substance (e.g. in terms of directors, employees, offices) is not sufficient. The EU holding company   must also qualify as the beneficial owner of the dividend. This is assessed on a substance-over-form basis through the three-part test consistently applied by the Italian Supreme Court:

These tests are autonomous and separate: failure on any one may be sufficient to deny beneficial owner status.

2. Look-through approach if the EU intermediate is disregarded

If the intermediate EU company fails the beneficial ownership test, Italian withholding taxes should be applied on a look-through basis, with reference to the status of the ultimate beneficial owner. In the Supreme Court case (No. 32467/2025), this meant applying the 5% rate under the Italy–US Treaty rather than the zero rate under the Italy–Denmark Treaty.

3. In principle, US corporates can claim a rate no higher than 1.2%

The Abruzzo decision (No. 93/2026) confirms that, under the non-discrimination principle of Article 63 TFEU, US corporate recipients of Italian-source dividends may argue  that the applicable withholding tax rate should not exceed the 1.2% available to comparable EU/EEA recipients.

Although not expressly dealt with in the Abruzzo decision, the mentioned principle should also apply when withholding taxes are applied on a look through basis.  

4. In practice, litigation is likely necessary for the 1.2% rate

Based on our experience:

(i) in the context of settlement procedures (accertamento con adesione) where the ITA denies withholding tax exemptions to EU intermediate entities ultimately owned by non-EU investors, the ITA is generally available to apply the treaty rate on a look-through basis (e.g., 5% under the Italy–US Treaty), provided that sufficient evidence is provided regarding the tax status of the ultimate beneficial owner;

(ii) however, we are not aware of cases where the ITA has granted the 1.2% rate in the context of a settlement. Absent a change in the ITA's interpretation, obtaining the 1.2% rate would likely require starting a tax litigation.

5. The principle extends beyond US groups

While the cases discussed here involve US entities, the underlying legal principle — that Article 63 TFEU prohibits unjustified restrictions on capital movements with all third countries, not only the US — is of general application. Companies resident in any third country included in Italy's white list and linked by a bilateral tax treaty with adequate exchange-of-information provisions may potentially benefit from the same reasoning.