Italian Supreme Court adopts look-through approach for cross-border interest payments

A recent decision of the Italian Supreme Court (No. 4427 of February 20 2025) marks a significant step forward in the alignment of Italian tax law with international tax principles regarding cross-border interest payments being exempt from withholding tax.

The decision – which concerned an Italian resident limited liability company (ItaCo), its Luxembourg resident shareholder (LuxCo), and an undertaking for collective venture capital investments (société d’investissement en capital à risque, or SICAR), in its turn controlling LuxCo – clarified the interpretation of Article 26, paragraph 5-bis of Presidential Decree No. 600/1973. The ruling recognised the legitimacy of the so-called look-through approach, which had already been affirmed in conventional and EU contexts but had previously been denied by the practice of the Italian tax authorities.

The case concerned a structured intragroup loan in which ItaCo received funds from LuxCo, which was wholly owned and financed by SICAR, a regulated entity under Luxembourg law.

ItaCo applied and paid the withholding tax at the reduced rate provided under Article 11 of the double taxation treaty between Italy and Luxembourg on the interest paid to its sole shareholder, LuxCo. LuxCo, in turn, transferred the interest to its shareholder, SICAR.

ItaCo challenged the Italian tax authorities’ ‘silence-denial’ regarding the request for a refund of the withholding tax applied on payments to LuxCo, pursuant to Article 26, paragraph 5-bis, of Presidential Decree No. 600/1973. This provision exempts from withholding tax the interest on medium- to long-term loans granted to companies by, among others, foreign institutional investors — even if they are not subject to taxation — provided they are subject to supervisory regulation in their country of establishment.

The case turned on whether the exemption under Article 26, paragraph 5-bis, applies when the interest is paid to an intermediary vehicle (LuxCo, in this case), while the true beneficial owner and source of the funds (SICAR) fulfils the statutory requirements to benefit from the exemption.

Thus, the key point of interpretation lies in the nature of the subject to be taken into account for the purposes of the entitlement to the exemption: the ‘direct recipient’ of the interest (formally, LuxCo) or the ‘beneficial owner’ (SICAR). The Italian tax authority, in line with its statements of practice (among others, Resolution No. 76/E/2019 and Resolution No. 125/E/2021), has always ruled out the possibility of applying a look-through approach, since no explicit reference is made to the concept of beneficial owner in Article 26, paragraph 5-bis.

The Supreme Court first noted that the use of the term “received" in Article 26, paragraph 5-bis, while literal, is not determinative. The OECD Model Tax Convention on Income and on Capital (Article 11) and corresponding Italian treaties – including that with Luxembourg – qualify treaty benefits on the basis of beneficial ownership of the interest, not merely receipt. According to settled EU and Italian case law, this includes the party that has the actual economic right to the income, regardless of formal receipt.

Citing the Court of Justice of the European Union (CJEU) in its 2019 ‘Danish cases’ (joined cases C-115/16, C-118/16, C119/16, and C-299/16), the Italian Supreme Court emphasised that beneficial ownership must be interpreted broadly in light of the purpose of avoiding double taxation and preventing abuse. The test requires an examination of who actually controls and benefits from the income – precisely the function of the look-through approach.

The Supreme Court also relied on the purpose of Article 26, paragraph 5-bis. Introduced at a time of limited credit availability for Italian companies, the provision was intended to promote access to foreign capital markets by eliminating the legal double taxation of interest flows.

According to its legislative history, the exemption aims to reduce the financing costs of Italian companies by eliminating tax frictions on cross-border loans provided by regulated foreign institutional investors. Disregarding the economic substance of intragroup financing structures would undermine this intention.

The Supreme Court pointed out that in complex multinational groups, the formal receipt of funds often lies with intermediaries. However, these intermediaries may not have economic autonomy and may be contractually or operationally obliged to pass the funds to a superior entity. In such cases, identifying the beneficial owner as the true lender – in this case, SICAR – is consistent with domestic law principles and international tax standards.

This decision is a landmark confirmation of the look-through principle in Italian tax law, at least for the purposes of withholding tax on interest payments under Article 26, paragraph 5-bis. It aligns Italian case law with international tax practice and the evolving jurisprudence of the CJEU and the OECD framework.

The key takeaways of the Supreme Court’s judgment include:

• The term “recipient” under Italian law may include the beneficial owner, not just the immediate payee;

• The application of withholding tax exemptions should reflect the economic substance of transactions (particularly within multinational groups); and

• The decision weakens the formalistic approach of the Italian tax authorities and increases certainty for foreign investors in the Italian credit markets.

By upholding the look-through approach for the purposes of the withholding tax exemption under Article 26, paragraph 5-bis of Presidential Decree No. 600/1973, the Italian Supreme Court has provided taxpayers with an important clarification. The decision strengthens legal certainty and promotes consistency with international rules, ensuring that tax treatment is in line with the economic realities of cross-border financing.

As such, it represents a significant development in Italy’s ongoing adaptation to the global tax environment and reaffirms its commitment to a transparent, fair, and internationally consistent tax policy.