Italy: Withholding tax exemption on cross-border interest payments applied on look-through basis (court decision)

A court decision concerning withholding tax exemption on cross-border interest payments applied on look-through basis

A court decision ithholding tax exemption on cross-border interest payments

The regional tax court of Lombardy on 3 February 2022 held that beneficial ownership requirements must be determined on a look-through basis for purposes of the Italian withholding tax exemption on cross-border interest payments.

Summary

In the case at issue, an Italian company paid interest to its Luxembourg parent company, and based on the withholding tax exemption under the Interest and Royalties Directive 2003/49/EU, did not withhold any tax on the interest payments. The Luxembourg parent company was wholly owned by another Luxembourg company, which in turn was wholly owned by another Luxembourg company, which in turn was wholly owned by a Dutch investment fund, managed by a U.K. partnership.

The Italian tax authority argued that the Luxembourg parent company was not the beneficial owner of the interest payments, and thus was ineligible for the withholding tax exemption. The lower court agreed with the tax authority, but the regional tax court reversed the decision of the lower court.

The regional tax court held that the fact that the direct recipient of the interest is not the beneficial owner does not jeopardize the application of the withholding tax exemption so long as the beneficial owner (the indirect recipient) is eligible for it and satisfies the necessary requirements. The court confirmed that such a look-through approach also applies to the withholding tax exemption under article 26(5-bis) of Presidential Decree no. 600/1973.

KPMG observation

The regional tax court’s decision is contrary to the position taken by the Italian tax authority in several other tax audits and in Resolution no. 76 of 12 August 2019. However, the decision is consistent with a prior decision of the provincial tax court of Milan on a similar case decided 11 November 2019. It remains to be seen what position the Supreme Court will take in the appeal that tax professionals believe is likely to be filed against the regional tax court’s decision.

Read a May 2022 report [PDF 270 KB] prepared by the KPMG member firm in Italy

 

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