Mezzanove Capital s.r.l. paid interest to a Luxembourg Finance Company and claimed an exemption from withholding tax on these payments.
However, the tax authorities argued that the Luxembourg Finance Company was merely a conduit. It noted, that the subjective requirements for the exemption to apply had to be verified in relation to the “beneficial owner” of the interest, which was not the Luxembourg Finance Company, but rather its sole shareholder Mezzanove Capital Sicar, a Luxembourg mutual investment fund which did not meet the subjective requirements for the requested exemption. Based on this, the tax authorities denied the exemption.
However, on appeal, the tax authorities’ assessment was set aside. The tax authorities then filed an appeal with the Supreme Court.
Judgment
The Supreme Court dismissed the tax authorities’ appeal.
In the decision it applied a three-step approach for assessing beneficial ownership:
- Only a binding contractual or legal obligation to pass on income disqualifies the recipient from being considered the actual owner.
- A functional and economic analysis must examine decision-making autonomy, exposure to credit risk and operational substance, such as staff and processes. It must also determine whether margins align with OECD benchmarks.
- Proportionality applies with no fixed margin; rather, a contextual assessment is based on functions, risks, duration and regulation.
On the basis of this approach, the court found that the Luxembourg Finance Company had sufficient substance, meaning that the exemption from withholding taxes applied to the interest payments.
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