Executive summary

A decision that the Italian Supreme Court rendered in February 2025, affecting foreign institutional investors involved in indirect financing, has come to the forefront now that year-end busy season has wrapped up and businesses are focusing more directly on the year ahead. Specifically, in judgment No. 4427¹ the Italian Supreme Court of Cassation (the Court) examined the subjective requirement for applying Article 26, para 5-bis, of local Presidential Decree No. 600/1973, which establishes a withholding tax (WHT) exemption regime for interest and other capital income arising from medium- to long-term loans provided by banks, European Union (EU) insurance companies and foreign institutional investors (Exemption).²

Rejecting the position of the Italian Tax Authorities (ITA),³ the Court stated that in cases of indirect financing in which a recipient (Recipient) materially receives the interest income but is obliged to transfer it to a third party, the subjective requirements of beneficial ownership must be investigated in respect to the third-party beneficial ownership by using the so-called "look-through" approach.

The Court acknowledged the possibility that a nonresident Recipient could act as pass-through vehicle receiving interest income without WHT — thus benefiting from the Exemption — under the assumption that the Recipient has a contractual obligation to transfer the interest income to the effective beneficial owner.

Detailed discussion

Facts of the case

An Italian Company (IC) applied the WHT Exemption to interest payouts stemming from a loan issued by its Holding Company settled in Luxembourg (LHC).

The ITA challenged this approach, arguing that IC lacked the subjective requirements to be considered a beneficial owner and, as such, should not have benefited from Exemption on interest received. According to the ITA, only the Luxembourg investment fund (LIF) that effectively provided the loan should have benefited from the Exemption and LHC, which as a mere intermediary between IC and LIF, may have been entitled to the lower WHT provided for by Article 11 of the Italy-Luxembourg Double Tax Treaty (DTT).

Subsequently, IC filed a refund claim for the DTT WHT paid on interest payouts, invoking the WHT exemption regime provided by Article 26, para 5-bis, of local Presidential Decree No. 600/1973.

The ITA challenged the refund claim when IC brought a tax litigation proceeding, which ultimately had a taxpayer-positive outcome before both the First and the Second-Degree Tax Courts.

The Court's judgment

In line with the decision of the second-degree judges, the Court observed, in summary, that:

• The wording of Article 26, para 5-bis, of local Presidential Decree No. 600/1973 is consistent with the Double Taxation Conventions based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, which aim to mitigate the risk of double taxation through the exemption regime and the beneficial-ownership principle.
• The Exemption aims to facilitate access to foreign credit for Italian businesses by eliminating the risk of double taxation. For this reason, in cases of indirect financing, verification of the subjective requirements for the Exemption should be investigated at the level of the income's final beneficial owner.

Implications

Judgment No. 4427 applied the beneficial ownership clause in a substantial sense by adopting the "look-through" approach to identify the final beneficiary of the interest, bypassing the interposed entities.

This approach may in principle also be valid for other cases and could also be applied in relation to the reduced WHT of 11% for dividends earned by EU pension funds through intermediaries.

Judgment No. 4427 is the first decision by the Court in favor of the "look-through" approach to allow the Exemption in the hands of the beneficial owner by bypassing the interposed entities. The judgment may come into play in:

• Making refund claims where a higher internal WHT has been applied
• Managing pending WHT refund claims by following up with the ITA to request the refund
• Considering grounds for possible appeals against either the silent or explicit denial of the refund