Press Room

1 Apr 2021

Andersen LLP – Tax News March 2021



Andersen LLP

March 2021

This month’s newsletter is unashamedly lengthy but packed full of Easter treats.

Zoe Wyatt starts the egg-rolling with news of HMRC’s new Cryptoassets Manual which was published yesterday. As Zoe explains, this is very welcome indeed and provides much needed clarity (to the extent ‘guidance’ can be relied upon) to a sector that is, what many people believe, the future for us all.

Andrew Parkes, who is a lover of all things chocolate (but not too fancy mind!), continues with musings on the Hybrid Mismatch Rules between the US and UK.  That something as simple and well-intended as the US LLC / check the box election could create such complexity is the tax world in a nutshell!

James Paull follows on with a 10-year anniversary review of the Disguised Remuneration rules and where we stand now in the UK.  The unintended consequences of what we might refer to as ‘overthought’ legislation echoes Andrew’s piece.

If you’re still awake, interested or need a break generally from the Easter festivities, I wrap up proceedings by getting carried away with the Parent Subsidiary Directive and various decisions of the Italian Supreme Court. Apologies in advance for the lack of brevity…

Happy reading and happy Easter!

Miles Dean
Head of International Tax, Andersen LLP



    1. HMRC: Cryptoassets Manual Published – Zoe Wyatt

    2. Hybrid Mismatch Rules: Heads I lose, tails you win – Andrew Parkes and Miles Dean

    3. Disguised Remuneration: A 10 Year Review – James Paull

    4. The Parent Subsidiary Directive & Recent Italian Supreme Court Cases – Miles Dean 

The UK

HMRC : Cryptoassets Manual Published

Yesterday (30 March) HMRC published its new Cryptoassets Manual. This essentially retires HMRC’s two policy papers covering tax for individuals and businesses on cryptoassets. We can confirm the new cryptoassets manual does not depart from HMRC’s position in the policy papers.

An HMRC spokesperson said in a statement shared with Andersen:

“The guidance manual demonstrates our commitment to providing clarity to our customers and will help individuals and businesses understand the tax consequences of different types of transactions in cryptoassets. This builds on the previously published policy papers and will provide a more flexible approach to updating customers in this fast-moving sector.”

The move by HMRC to create a specific cryptoassets manual is both timely and very welcome and acknowledges the direction of travel in this relatively nascent field. We expect the manual to be built on as both technology and practice develop.

Additions in the manual

The manual does contain new guidance on taxation of staking rewards and derivatives over cryptoassets.


Put very simplistically, participants to a blockchain network have traditionally undertaken to solve complex computation problems in order to prove transactions as authentic and add them to the blockchain (known as the ‘proof of work’ concept). The reward for those participants is a cryptoasset or token. This is known as ‘mining’ and the HMRC policy papers established how receipt of these tokens should be taxed. A newer method for validating transactions on the blockchain, known as ‘staking’, is now deployed whereby the validator stakes their own tokens in confirming the authenticity of a transaction as opposed to solving a complex computational problem (known as the ‘proof of stake’ concept). The rationale being that a validator wouldn’t risk its own tokens simply to cause mischief by stating a transaction as authentic when it is not. The validator then receives additional tokens.

The HMRC policy papers were silent on taxation of staking rewards and we have assumed that they would be taxed in the same way as mining. The new guidance now specifically addresses staking and confirms our earlier assumption to be correct.

Derivatives over cryptoassets

A derivative is a financial instrument where the performance is based on the movement of the price of the underlying asset.  Under a derivative the holder does not hold the underlying asset. Some businesses offer the ability for individuals and companies to gain exposure to the movements in the cryptoasset market by using a derivative.

The nature of a derivative is typically very different to directly holding a cryptoasset. In particular, a derivative will give rise to contractual rights and obligations between the two parties. As a result, the manual provides that where a cryptoasset derivative has been entered into the cryptoasset guidance will not generally apply.

Our blockchain and crypto specialist

Zoe Wyatt advises blockchain businesses on the relocation of critical technology and crypto activity to support with regulatory compliance and creation of decentralised autonomous organisations.  If you or your client is considering an initial coin offering or would like to understand more about relocation of such assets and functions, please get in touch:

Zoe Wyatt
M: +44 (0)7909 786 144 or


Hybrid Mismatch Rules: Heads I lose, tails you win

When considering the title for this article (often the hardest part of the entire process) we thought this must be how some US groups think the UK’s hybrid mismatch rules work.

By way of swift recap, the hybrid mismatch rules are designed to stop multi-nationals from playing one tax system off against another to obtain either:

  1. a double deduction; or
  2. a deduction but with no corresponding taxable income.

These mismatches were felt to be so widespread and leading to such a significant loss of tax that stopping them was made the second action of the OECD’s project relating to base erosion and profit shifting.

The following example illustrates the problem in its simplest form:

  • a US Inc owns a US LLC (transparent for US tax, opaque for UK);
  • US LLC in turn owns a UK Ltd;
  • UK Ltd has checked the box for US tax, such that it is transparent for US tax purposes (for UK purposes it remains, of course, opaque);
  • US LLC now lends money to UK Ltd, on which it pays interest;
  • the US doesn’t ‘see’ a loan as the LLC and UK Ltd are both disregarded entities and the US Inc can’t lend to itself; and
  • there is a tax deduction in the UK for the interest payment but no income pick-up in the US to match it.

Hybrid mismatch rules either disallow the interest or impute income depending on which side of the transaction the country is sitting. In the above example, the UK would disallow the interest deduction until the mismatch was removed – in other words all of it.

The intent of the rules is to provide certainty which results in them being very mechanical, and because they are trying to cover many different, often complex, scenarios they can be unbelievably complicated. To make matters worse, the UK’s rules operate in such a way that we adopt the role of world’s policeman in that they seek to make an adjustment even if the UK is not the disadvantaged party!  This occurs if the UK believes that the other jurisdiction in the transaction is not taking action and can even make an adjustment if the UK is not a party to the actual transaction causing the issue – just being somewhere in the chain can be enough.

Furthermore, and quite remarkably, the UK has decided, of its own volition, to go further than the OECD or EU asked for (when the UK was part of the EU that is).

Relief at last

As the rules apply mechanically, they can lead to some sort of adjustment, even if there was no tax avoidance or, incredibly, if the “hybrid” leads to more tax being paid overall, just not in the hybrid “link” (which we have seen happen in practice).

HMRC is finally taking action to remove a number of these skewed scenarios and, in a welcome use of retrospection, is in some cases making the changes with effect from when the rules were introduced on 1 January 2017.

The particular relief this article covers is the one that is probably of most use to US groups.

In our example above, if UK Ltd lent the money on to a UK subsidiary (UK Sub) as part of a linked chain of loans, UK Sub would pay interest to UK Ltd, which would be ‘flat’ in the UK (i.e. a matching deduction and income), but would also show in US Inc’s US return as being a taxable receipt. This is called ‘dual inclusion income’ as it is taxed twice (in the UK and the US). It matches the deduction of the interest paid by UK Ltd to US LLC and cancels it out. There is no overall mismatch and the UK takes no action.

Now, consider possibly the second most common US/UK scenario:

  • The structure is the same as above, but instead of receiving a loan, UK Ltd provides services to the US LLC for a cost-plus fee. Any third-party costs (wages, rent, etc.) of the UK Ltd are allowed both in the UK and the US (in the accounts of the Inc). The income of the UK Ltd is only taxed in the UK as the US ignores the payments as the Inc can’t pay itself.

This structure leads to a mismatch as the third-party deductions are allowed twice but the relevant income is only taxed once and the UK will disallow deductions until the mismatch is removed. The ‘dual inclusion income’ relief mentioned above is not available as the income received in the UK is only taxed once, but it is “special”. As mentioned above, the US ignores the income received by UK Ltd but, crucially, it also ignores the deduction in the LLC, so there is income that is being taxed (in the UK) where there is no matching deduction.

Up to now, the UK’s answer to this issue has been “tough noogies” and the UK Exchequer has quietly pocketed the tax windfall. However, the UK is finally addressing this issue and will treat this ‘inclusion/non-deduction income’ (to give it its technical name) as dual inclusion income and allow it to cover relevant mismatches. This then matches the third-party costs and the UK takes no action.

This change is one that will helpfully be available in respect of inclusion/non-deduction income from 1 January 2017 and, although companies will have to wait until the Finance Bill takes effect to make a claim for relief, help is finally on its way.

We should also point out that the hybrid mismatch rules are due to be amended in other ways via the new Finance Bill, but given that there are 18 different amendments, we will cover other interesting changes in later editions.

If you have any questions regarding hybrids and the UK, please contact:

Andrew Parkes
National Technical Director
M: +44 (0)7522 229 589 or

Miles Dean
Head of International Tax
M: +44 (0)7785 770 431 or

The UK 

Disguised Remuneration: A 10 Year Review

April 6th 2021 will see the tenth anniversary of the employment income provided through third parties rules, better known as disguised remuneration. At the time the rules were introduced, they were controversial in the broad way in which they were structured.  However, they were implemented in a very different tax landscape to the one that now exists. Many of the concerns that HMRC had at the time are no longer so pressing, and the other powers that HMRC has at its disposal have greatly expanded.

As the ten-year milestone approaches, we think it is appropriate to question whether the disguised remuneration legislation remains fit for purpose or should be given a radical overhaul.

The Original Target

At the end of the noughties, it is fair to say that the appetite for complex tax planning was much greater than it is today. HMRC found itself firefighting against ever more complex structures which purported to deliver remuneration in forms that did not attract the full rate of income tax. Often these arrangements sought to utilise exemptions from taxation for purposes that they had not been intended.

One of the key targets that HMRC had long had in its sights was the use of employee benefit trusts (EBTs) as a mechanism for delivering the value of bonuses to employees and/or their families without suffering the same tax rate as would have been paid had the bonus been paid directly to the employee.

In essence, the employee would waive their right to a bonus and instead the employer would make an equivalent contribution to an EBT. The trustee of the EBT would hold the contribution for the benefit of the employee and his or her family and could use the contributions to provide benefits. Commonly, the bonus would be loaned to the employee, who could then use the whole amount of the loan to spend as they chose. The loan would act as a charge on their estate for inheritance tax purposes and the proceeds of repayment of the loan could then be distributed tax free to beneficiaries after the death of the employee. The fund could also be used for other purposes, such as the payment of school fees or the purchase of assets for the use of the employee.

It’s not difficult to see why HMRC did not like this planning. Originally used in certain parts of the financial services sector, EBT schemes proliferated as the benefits became more widely known, leading to increased losses to the Exchequer. The problem was that each time HMRC tried to challenge these arrangements through the courts, it lost. In spite of HMRC continuing to state its view that these arrangements did not work, this did nothing to stop their use – hardly surprising when the courts kept ruling that they did.
The result of this frustration was the introduction of the disguised remuneration rules in December 2010, taking full effect on 6 April 2011.

The Way the Rules Operate

So far, so predictable. However, where things started to go wrong was the way in which the rules were structured. They stopped the target in its tracks, but they caught more. Much more.

The basic premise was to make the legislation as widely applicable as possible and then to provide exemptions to protect the innocent arrangements that would otherwise be caught. It is fair to say that there was a degree of paranoia on the part of HMRC that if the exemptions were too widely drawn, they would be used for purposes for which they were not intended; better that 99 innocents are caught than one guilty party escapes. Unfortunately, this meant that the exemptions were in many cases far too narrowly drawn.

In essence, an employee reward arrangement involving a third person (anyone other than the employer or a group company) taking a “relevant step” would potentially find itself in the sights of the rules and would then need to find an exemption or find itself subject to sometimes punitive tax consequences.

What it catches

Relevant steps include:

  1. earmarking: a nebulous concept where cash or an asset was, however informally, set aside for use for the benefit of an employee;
  2. use of assets: making an asset available for use by the employee; and
  3. payments of money: this specifically included the making of a loan.

Where a relevant step occurred, an immediate liability to income tax, withholding through PAYE and NIC, arose. The liability would be on the “value” of the relevant step (generally the amount of money or value of the asset). This could happen at a time when the employee had not actually received any value at all. In the case of loans, it did not matter if the loan was ultimately repaid; there would be no relief from the earlier tax liability.

It is easy to see how these relevant steps were evolved simply by considering the way in which the EBT schemes operated (see above). Earmarking was when the trustee of the EBT allocated the funds to a particular employee. Payment of money was primarily aimed at the advance of a loan (as paying cash would be fully taxable, this wasn’t generally done). Providing assets also addressed a common use to which EBT funds were put.

What innocent things it catches

The legislation was an overnight success in stopping EBT schemes. Sadly, however, things didn’t stop there. The wide scope of the rules, coupled with narrow framing of exemptions, meant that wholly innocent arrangements found themselves in the crosshairs.

Perhaps the worst outcome was in the case of loans being provided by individual shareholders of companies (usually owner managed businesses). These loans could be for perfectly innocent purposes. For example, helping the employee through a short-term cash flow issue, or helping them to subscribe for shares in the company. The loan would be a genuine loan, which was expected to be repaid. However, the disguised remuneration rules treat the loan as a payment of employment income with no relief on repayment. Although there is an exemption in the rules for certain loans, this is very narrowly framed and would not typically apply to shareholders.

Likewise, a shareholder who decides to use some of his or her shares to incentivise employees and grants the employee an option to acquire some shares, or otherwise promises to deliver some shares, would be within the scope of the legislation. There are several exemptions applying to employee share schemes but not all will qualify. For example, a vested option or an option with a life of greater than 10 years would not fall within the exemption so would give a worse tax treatment than if an equivalent option had been granted by a group company.

In spite of their chequered history, EBTs still have a valuable role to play in the context of employee share arrangements. They can operate to warehouse shares pending their use under share plans. There is no tax avoidance purpose here; just an administrative benefit. However, if trustees grant options they will be earmarking so, unless the exemption applies, there will be an immediate income tax charge.

A ‘relevant third person’ is the employer or a group company. This is relatively straightforward where the group contains only corporate entities, but what about a group that contains one or more partnerships? Bizarrely, if the partnership is a subsidiary of a corporate parent, it will be treated as a third person, but in the opposite case, where a limited liability partnership is the parent, it will not be. There seems no rationale for this inconsistency.

All of these pitfalls can be avoided with proper advice and planning. The problem is that in many cases, the arrangements being entered into are so innocent that the parties may not even consider the necessity to get tax advice. Many advisers will have met with incredulous responses when they suggest that disguised remuneration is an issue with transactions like those described above.

New weapons

If these perverse results were not reason enough to recast the legislation, the developments in the tax avoidance landscape since disguised remuneration was introduced, make the case compelling still.

Firstly, HMRC finally won a tax case in relation to EBTs. Known as the Rangers case (after the Glasgow football club) the Supreme Court held that allocations by EBT trustees to individual family trusts should be treated as employment income of the beneficiary. Following this, HMRC gave taxpayers operating EBT schemes the chance to settle their outstanding liabilities. Many employers signed up to this settlement opportunity. In April 2019 there was a deemed income tax charge on the amounts of any pre-disguised remuneration loans that remained outstanding.

Secondly, the disclosure of tax avoidance schemes (also known as DOTAS) rules were expanded to introduce a hallmark that applied to require the disclosure of arrangements with a purpose of avoiding the application of the disguised remuneration rules. The introduction of accelerated payment notices also makes arrangements like the EBT scheme less attractive.

Thirdly, the general anti-abuse rule (GAAR) was introduced. This rule gives power to override a purported tax outcome where it is predicated on an interpretation of the legislation which stretches the bounds of reasonableness. Any complex structure designed to circumvent the rules prohibiting the use of EBTs for bonus planning would in all probability stumble when confronted by the GAAR.

Fourthly, in the case of banks and building societies, the code of practice on taxation for banks was introduced in 2009 and subsequently expanded. This dictates the way that relevant institutions are expected to behave in relation to their tax affairs and includes a prohibition on engaging in tax planning that is contrary to the intentions of Parliament. Again, it’s difficult to see how an EBT scheme would not be in breach of this code.

Finally, the reputational considerations of entering into artificial tax planning structures are significantly different from ten years ago. We would expect that many large or high-profile businesses would shy away from planning of this type, even if there were no legislative prohibition.

In the light of these developments it’s legitimate to question whether EBT schemes would continue to be used even if there were no disguised remuneration rules at all.

What would we recommend?

In our view, a wholesale repeal of the disguised remuneration rules would be a step too far. However, there are two relatively straightforward ways in which these unfair outcomes could be addressed. In our view, neither of these would be likely to lead to a re-starting of the use of EBT schemes for bonus planning purposes.

Firstly, provide some broader exemptions that cover the whole range of innocent arrangements. Many of the unfair outcomes are now well known and can easily be covered by a recasting of the rules.

Secondly, and perhaps preferably, a tax avoidance purpose gateway could be introduced. This would automatically exempt any innocent arrangements. Of course, it is not always possible to assess purpose, but the concept of a tax avoidance motive is found in numerous other areas of the tax legislation and seems to operate non-contentiously. If necessary, a clearance process could be established for HMRC to approve commercial motives.  This would seem, with one fell swoop, to save all of the inadvertent transgressions we highlight above.


The disguised remuneration rules in the form as originally introduced have long outlived their necessity and the case for revision of the rules is compelling. The rules were always a sledgehammer to crack a nut but when the nut is well and truly cracked, it’s time to stop hammering.

For more information and if you have any questions relating to disguised remuneration, please contact:

James Paull
Head of Incentives Group
M: +44 (0)7961 118 994 or

The EU

The Parent Subsidiary Directive & Recent Italian Supreme Court Cases

The use of Luxembourg as an intermediary holding company location is well known and whilst the rulings of yesteryear are no longer a feature of the regime, it nonetheless has many significant benefits that puts it alongside the UK in the premier league of go-to jurisdictions. In addition to the holding company regime (or Participation Exemption or PEx as it is better known as), there is a comprehensive funds regime, IP Box regime, extensive treaty network and a stable economy.

Given the above benefits Luxembourg is widely used as a platform for investment into Germany (in particular real estate) and Italy. Luxembourg companies are, of course, able to benefit from the EU Parent Subsidiary Directive (PSD) which, when coupled with the PEx, allows dividends to flow from one member state to another free from tax.

Well, that’s the theory. Over the past 3 years or so there has been a slew of cases before the Italian Supreme Court on the application of the PSD to dividends paid by Italian companies to their Luxembourg (and Dutch) parents. The Supreme Court has, unfortunately, flip-flopped all over the place such that their rulings are inconsistent, unhelpful and in some cases undeniably wrong. Before looking at a handful of the cases in question, it’s perhaps helpful to remind ourselves of the salient features of the Luxembourg PEx and also the PSD.

The Luxembourg PEx

Under the PEx, dividends received by a Luxembourg resident company are exempt if the following conditions are met:

  1. a minimum participation of at least 10% or with an acquisition price of at least €1.2mn is held;
  2. the participation is held in:
    1. capital company that is fully subject to Luxembourg corporate income tax or a comparable foreign tax (i.e. a tax rate of at least 9% and a comparable tax base; a ‘Comparable Tax’); or
    2. an EU entity that qualifies for the benefits of the EU Parent-Subsidiary Directive; and
  3. on the distribution date, the holding company must have held a qualifying participation continuously for at least 12 months (or must commit itself to hold such participation for at least 12 months).

Directive 2011/96/EU (The Parent Subsidiary Directive or PSD) 

The purpose of the PSD is to allow frictionless distribution of profits between companies established within the EU, thus eliminating double taxation.

Under the PSD:

  1. the member state in which a qualifying subsidiary is resident may not impose withholding tax (WHT) on distributions made to its EU parent company (with some exceptions); and
  2. the member state where the parent company is resident must give credit for the underlying corporate tax that relates to the distribution or it must exempt the dividends from tax.

Both parent and subsidiary must satisfy the following conditions in order for the PSD to apply:

  1. the company must be in one of the legal forms listed in the annex to the PSD;
  2. the company must be deemed to be a resident of an EU member state under its domestic law and is subject to one of the taxes listed in Annex 1, Part B, without the possibility of an option or of being exempt, or to any other tax which may be substituted for any of those taxes”; 
  3. the parent company must hold at least 10% of the capital (or voting rights) of the subsidiary; and
  4. the minimum holding period requirement, if any, must be met (member states have the option to require that a parent company hold the subsidiary shares for at least two interrupted years).

The Subject to Tax Requirement 

The subject-to-tax requirement highlighted above has traditionally been interpreted as being ‘potentially liable’ to corporate tax, rather than requiring the recipient company to actually pay tax on the income in question (i.e. the dividend it receives under the PSD). The fact that the recipient may benefit from an exemption in respect of certain items of income under a domestic PEx (as is quite common throughout Europe) is not the same as being exempt from tax altogether, a point borne out in the CJEU case Wereldhave.

In Wereldhave, a Belgian entity distributed dividends in favour of two Dutch recipient companies that qualified as “fiscal investment institutions” benefitting from a 0% tax rate to the extent that all their profits would be distributed to their shareholders. As a brief aside, could the Dutch companies be considered the beneficial owners of the income if they were under an obligation from their shareholders to distribute?  Strictly speaking this doesn’t matter as the concept of beneficial ownership isn’t a condition of the PSD….or is it?

Back to Wereldhave. The court posed two questions as to the PSD:

  1. can the PSD apply to a parent company, that whilst liable to tax is exempt therefrom if all the profits are distributed to its shareholders; and
  2. does the free movement of capital and freedom of establishment preclude the taxation of the dividends at source?

As to the first question, the Court considered the wording of Article 2 of the PSD and found that there were two requirements, both of which must be met:

  1. a positive requirement that the company to which the Directive applies must be liable to one of the taxes listed in that provision; and
  2. a negative requirement that the company does not have the possibility of having an option to be subject to or of being exempt from that tax.

As a consequence, companies that are subject to tax at a rate of 0% are not entitled to the PSD nor are companies that benefit from exemptions in relation to all of their income.


Having clarified the scope and intent of the PSD in Wereldhave, we now turn our attention to the Italian cases. Per the PSD, as implemented under Italian law, the paying company can either:

  1. withhold tax at source on the dividend thus allowing the recipient to claim a refund; or
  2. pay the dividend gross having satisfied itself that the recipient meets the conditions set out above.

In most of the cases considered in this article, the paying company has withheld tax at source leaving it to the recipient to claim a refund. Unfortunately, this is where the Italian Supreme Court has decided to go off piste as we will now discover.

Decision No. 32255/2018 

In this first decision, the Italian paying company applied a 27% withholding tax upon distribution of a dividend to its Luxembourg parent. The Luxembourg company (which was liable to tax in Luxembourg but able to benefit from the PEx) filed a claim for a refund of the WHT and eventually found itself at the mercy of the Supreme Court.

The Supreme Court found, upholding the position of the Italian tax authorities, that the imposition of WHT was justified on the basis that double taxation was avoided by the fact that the dividend was exempt in Luxembourg. In other words, the purpose of the PSD is to prevent double taxation and not allow double non-taxation.

It is widely thought that the decision of the Supreme Court is incorrect for the following reasons:

  1. the aim of the PSD is to eliminate economic (and juridical) double taxation within the EU. To this end, the PSD provides an exemption from WHT on dividends in the member state of the distributing company and an exemption from taxation (or indirect credit) of the same dividends in the hands of the recipient company. Granting the WHT exemption only to the extent the dividend is effectively taxed in the state of the recipient company is inconsistent with the PSD, since economic double taxation is not eliminated; and
  2. the Supreme Court misinterpreted the subject to tax requirement for the recipient company under the PSD. In Wereldhave, the CJEU held that the PSD did not apply to companies that were subject to tax at a rate of 0% (i.e. substantially exempt from corporate income tax). By contrast, the case dealt with before the Supreme Court concerned a dividend exemption regime in line with the provisions and objectives of the PSD.

Decision No. 25490/2019

In the next case, also involving a dividend paid to a Luxembourg parent, WHT was levied at the reduced treaty rate of 15%. The Luxembourg parent claimed a refund under the PSD which was denied by the Italian Revenue which subsequently assessed the full domestic 27% WHT on the basis that the Italy/Luxembourg treaty didn’t actually apply!

The Supreme Court held that the “subject to tax” test contained in the PSD requires the item of income (i.e. the dividend itself) to be liable to tax in the recipient state. Furthermore, the objective of the PSD (the avoidance of double taxation) is achieved by the application of the PEx in the recipient state and the combination of the PSD and a PEx, such as the one available to regular companies in Luxembourg, gives rise to an unintended double (non-taxation) benefit.

Decision No. 14527/2019

This case centres around the refusal to refund WHT on dividends paid by an Italian company to its Dutch parent on the basis it was a fictitious entity, had been incorporated in the Netherlands only to benefit from the PEx there and that the company wasn’t resident in the Netherlands since its directors resided in Italy and the UK.

It seems whimsical, if not bizarre, given the other cases considered in this article, that that the Supreme Court went on to find in favour of the taxpayer – but that’s exactly what they did. The Supreme Court held as follows:

  1. a pure holding company is not per se a fictitious entity;
  2. to carry out a mere investment management activity is consistent with the nature of the holding even though it limits its activity to managing the shareholdings, board meetings and the payment of dividends and the fees to consultants and directors without carrying any commercial activity;
  3. a holding company cannot be fictitious if there is an administrative and finance structure able to prove the main management decisions are autonomously taken and properly documented; and
  4. the fact that the holding company is resident in a jurisdiction that provides a tax advantage is irrelevant.

Decision  No. 2313/2020

In this case the Supreme Court had to consider the refund of the dividend tax credit (imputation credit) under Article 10 of the Italy/UK tax treaty. In a well-received decision, the Supreme Court helpfully made a distinction between juridical and economic double taxation:

  • Juridical double taxation occurs when a person is subject to tax on the same income or capital in more than one jurisdiction.
  • Economic double taxation occurs if more than one person is subject to tax on the same item of income or capital.

In this regard the refund of the imputation credit is meant to eliminate economic double taxation, whereas the exemption from withholding tax is meant to eliminate juridical double taxation.  The two reliefs are therefore not incompatible.

Decision No. 2617/2020 and No. 2618/2020

These decisions are slightly off topic, but bear with me a moment. They concerned the application of the 1988 Italy/UK tax treaty (DTA) to an English trust. The claimant was the trustee of a trust governed by English law and tax resident of the UK that received dividends from Italian companies.

The Italian tax authorities denied DTA benefits on the grounds that the trust was not a “person” for treaty purposes. The trustee challenged this, producing a certificate of residence (CoR) issued by HMRC confirming that the trust was tax resident and subject to taxation in the UK.

The Tax Court and the Tax Court of Appeals upheld the conclusion of the Italian tax authorities arguing that:

  1. the trust did not fall within the definition of “person” provided by Article 3(1)(d) of the DTA;
  2. the trustee did not prove that the Trust was the beneficial owner of the dividends; nor
  3. that the dividends were effectively taxed in the UK.

The Supreme Court confirmed that trusts can qualify as “persons” for tax treaty purposes and that the definition of “person” per Article 3(1)(d) of the DTA should be interpreted broadly (taking into account whether the relevant entities/arrangements are recognised as legal persons under the laws of the contracting states).

The decision confirms that trusts are, in principle, entitled to treaty benefits provided:

  1. they qualify as tax residents of one or both Contracting States; and
  2. they are the beneficial owner of the item of income in question and not subject to an obligation to pass on that item.

Now, the reason for including this case in this article is because it’s interesting and hopefully relevant to you. The main reason though is because the Supreme Court found that the granting of the treaty benefits was also subject to the proof that the dividends had been effectively subject to tax in the UK. Interestingly, the Court supported its conclusion by referring to case No.25490/19 (see above) which dealt with the application of the PSD, where the Judges (wrongly) denied the withholding tax exemption based on the argument that double taxation had been already eliminated by the dividend exemption granted by the State of the Parent company.

It is worth highlighting that the PSD and most Italian tax treaties do not contain a subject to tax requirement. I guess the Court just couldn’t help itself!


This is something of a dog’s breakfast and it follows that the Italian Tax Authorities will continue to challenge structures with low levels of substance and, in particular, those where they consider the recipient entity is not the actual beneficial owner of the dividend or interest flows. The fact that the Supreme Court cases are not binding means that investments into Italy, and the application of the PSD and treaty reliefs, will remain a lottery for taxpayers for the foreseeable future.

For further information on this, please contact:

Miles Dean
Head of International Tax
M: +44 (0)7785 770 431 or


Andersen LLP, 80 Coleman Street, London, EC2R 5BJ

Tel: +44 (0)20 7242 5000
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The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.

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