The Italian tax authorities issued Ruling No. 86/E on 12 June 2006 concerning the notion of beneficial ownership in Italian tax treaties.

(a) The taxpayer's request. A US company (Alfa) requested a ruling from the Italian tax authorities regarding the tax treatment of royalties, received from Italian sub-licensees, under the Italy-United States tax treaty and other relevant tax treaties.

(b) Facts.Alfa entered into a contract with a group of licensors not resident in US or Italy, which owned certain patents. Among other things, the contract provided that Alfa has the right to sub-license the patent to third parties. As a sub-licensor, it was obliged to use a standard contract, in which both the terms and conditions are established by the licensors, and it must remit the royalties received to the licensors. As remuneration, Alfa received a fee for the service provided. Alfa is not taxed in the US on the royalty payments, which are taxed directly in the hands of the licensors.

(c) The ruling. The treaty provides that royalties may be taxed in the state in which they arise, but if the beneficial owner of the royalties is a resident of the other state the tax shall not exceed a certain amount. Because Alfa acts as an intermediary and it is not taxed in the US on the royalties received, the Italian tax authorities stated that the treaty benefits are not available, since Alfa is not the beneficial owner of those payments.

The Italian tax authorities stated that, since the licensors are economically entitled to the royalties and taxed on that income, the treaties between Italy and their residence countries could be applicable. In this respect, they stated that the royalties are in principle subject to the Italian domestic withholding tax and that the withholding agent has the possibility to apply directly the reduced rate under the relevant treaty with the state of residence of the beneficial owner, provided all the conditions are met.