Italian tax exemption on interest from medium / long term loans paid to foreign investment funds

The Italian tax authorities have recently ruled that the domestic WHT exemption granted to certain foreign investment funds and other qualified investors on interest deriving from medium / long term loans is not applicable to interests paid through an intermediate entity, thus rejecting a “look through” approach (see ruling 569 of August 30,2021).

In the case at hand, a (2,5%) interest bearing long term loan (20 years) was granted by a regulated Luxembourg investment fund to a fully owned Luxembourg holding, and the amount received by the holding was in turn used to finance its fully owned Italian subsidiary at an increased rate (4,25%).

The Italian tax authorities reminded that foreign investment funds may benefit of such interest WHT exemption if, amongst the various conditions, (i) either the fund or its investment manager are subject to regulatory supervision in their State of establishment (the local regulator being the CSSF in Luxembourg), (ii) they are established in a (“white list”) State that allows a satisfactory exchange of information with Italy (such as Luxembourg) and (iii) the loan is not regarded as granted “to the public” and as such not subject to the Italian banking law (hence allowing loans granted to group entities).

Although the fund’s eligibility to the tax exemption was not disputed, nor it was argued that another person should be regarded as the beneficial owner of the interest income (e.g. the intermediate holding company, taking into account the significant difference in the interest rates, or possibly the fund’s sole Luxembourg participant), the exemption was denied on the ground that the fund was not the direct recipient of the interest income, thus refusing a “look through approach”.

Nevertheless, the ruling leaves some room for intermediate companies to take advantage of the WHT exemption, which was however denied in the present case because the Luxembourg holding was established to manage the investments of a limited number of investors and therefore could not be regarded as a qualified investor. Moreover, being the conclusion of the ruling based on the wording of the domestic law on medium / long term loans (article 26, par. 5-bis, CTA), the possibility that a more favorable “look through” approach will be taken under other domestic or international law provisions cannot be excluded.

Italian tax regime of interests on loan granted to Italian tax resident persons by non-resident banks

With the answer n. 500/2021 of 21.7.2021, the Revenue Agency discussed the tax liability of interests received on mortgages granted to Italian tax resident persons by foreign banks without a permanent establishment in Italy.

The issue has been risen by a Liechtenstein tax resident bank, without PE in Italy, granting loans (Lombard loans and mortgage) to Italian individuals for their foreign investments. As private investors do not act as withholding agents, the bank asked to the Italian tax authority to clarify the tax treatment applicable to the interests paid by the Italian individuals.

As general rule, non-resident companies with no permanent establishment in Italy are taxed on income sourced in Italy only if interest are paid by an Italian tax resident person. In the case at issue, the bank has invested the capital in Italy (i.e. income has been sourced in Italy, regardless the use of the capital then made by the borrower) and interests have been paid by Italian individuals. As a consequence, such income is taxed in Italy.

However, no WHT is applicable as interests are paid by individuals. Therefore, the foreign bank has to fulfill its tax duty filing the Italian annual corporate income tax return (RL sheet).

Anyway, in case of loans granted to Italian companies, we strongly advice foreign banks to verify the correct application of the WHT on Italian sourced income and, if necessary, file the annual Italian CIT return.

If you wish to discuss these topics, please contact: WTS R&A and Studio Biscozzi Nobili Piazza, Milano

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