Italy’s Supreme Court affirms the look-through approach for WHT exemptions, clarifying that beneficial ownership—not form—drives eligibility for EU-based investors.
Supreme Court Decision Overview
On 20 February 2025, the Italian Supreme Court (Corte di Cassazione) issued Decision No. 4427 concerning the withholding tax (WHT) exemption on outbound interest payments from Italian companies to EU-based institutional investors. The court clarified that the “look-through” approach may be used to determine whether the actual beneficial owner (not necessarily the direct recipient) meets the conditions required for exemption under Article 26(5-bis) of Presidential Decree No. 600/1973.
This landmark ruling supports a more substance-over-form interpretation, aiming to uphold the intention behind the WHT exemption regime.
Legal Background
Article 26(5-bis) of Presidential Decree No. 600/1973 provides for an exemption from the standard 26% WHT rate on interest paid to EU resident institutional investors, subject to meeting both objective and subjective conditions:
Objective conditions:
The payer must be a resident Italian entity.
The term of the loan must exceed 18 months.
Subjective conditions:
The interest must be paid to a qualified EU lender, such as:
A financial institution under Directive 2013/36/EU
An EU-authorized insurance company
A regulatory-supervised institutional investor established in a white-listed jurisdiction
Case Summary
The case concerns an Italian company that had paid interest to a Luxembourg holding entity (Lux Holding Company), which was exempt from WHT under the EU Interest and Royalties Directive. However, the Italian Tax Authorities (ITA) challenged the exemption, arguing that the Lux Holding Company was not the true beneficial owner of the interest.
According to the ITA, the holding entity merely passed through the payments to its parent company, a Luxembourg investment fund (Lux Investment Fund), under a back-to-back loan arrangement. The Italian company, after initially applying a reduced WHT under the Italy-Luxembourg double tax treaty, sought a full refund based on the domestic exemption for EU qualified lenders. The tax authorities denied the refund, prompting litigation.
The lower courts ruled in favor of the taxpayer, and the matter ultimately reached the Supreme Court.
Supreme Court Ruling
The Supreme Court upheld the decisions of the lower courts and confirmed that the WHT exemption under Italian domestic law applies in this case. Crucially, the court emphasized:
Substance over form: The fact that the beneficial owner (the Lux Investment Fund) was not the direct recipient of the interest did not disqualify the transaction from exemption.
Purpose-driven interpretation: The absence of explicit wording on "beneficial ownership" in the legislation was not determinative. The court focused instead on the legislative intent, to eliminate double taxation and facilitate access to cross-border financing.
By endorsing the look-through approach, the court determined that the Lux Investment Fund, as the actual beneficial owner, qualified as an eligible institutional investor under Article 26(5-bis).
Importance of the Case
The Italian Supreme Court’s decision has far-reaching implications for cross-border financing structures involving EU-based investment funds. By affirming the application of the look-through approach, the Court effectively facilitates greater legal certainty and efficiency in the repatriation of interest income to foreign institutional investors.
This ruling establishes that Italian domestic WHT exemption applies even in cases of indirect financing, where the interest is paid to an intermediary entity but the true beneficial owner, such as a regulated foreign investment fund, qualifies under the exemption rules. This significantly reduces barriers for international capital flows and enhances Italy’s competitiveness in attracting foreign investment.
In practical terms, the decision:
Clarifies eligibility for WHT exemptions in layered or back-to-back financing structures;
Eases the compliance burden for foreign investment vehicles investing in Italy;
Supports consistency with broader EU legal principles;
Could influence future interpretations of other cross-border withholding tax provisions, especially around dividend payments.
Conclusion
The Italian Supreme Court’s endorsement of the look-through approach marks a pivotal step toward aligning domestic tax practices with the realities of modern cross-border financing. By focusing on the beneficial ownership and economic substance of transactions rather than formal structures, the Court has offered much-needed clarity for institutional investors and multinational groups operating in Italy.
This ruling not only resolves a long-standing interpretive uncertainty but also reinforces Italy’s commitment to supporting inbound investment while adhering to EU tax principles.
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