Look-through approach upheld in indirect lending by the Italian Supreme Court

The Supreme Court of Cassation, with decision no. 4427/2025, overturned the position of the Italian Revenue Agency by establishing that, in the case of cross-border indirect lending, where the material recipient of interest does not coincide with its beneficial owner, the subjective requirements for the withholding tax exemption under art. 26, para. 5-bis, of Presidential Decree no. 600/1973 must be assessed with reference to the latter, in application of the look-through approach.

The Case

The case originates from an indirect lending transaction in favour of an Italian company, which paid the related interest to its sole shareholder, a Luxembourg-based company, without applying the withholding tax provided for under art. 26, para. 5, of Presidential Decree no. 600/1973, in compliance with the exemption under art. 26-quater of the same Decree (which implements the Interest & Royalty Directive in Italian law). The latter entity subsequently transferred the same interest to its own sole shareholder (a Luxembourg-based investment fund), which was the beneficial owner of the income flow.

In that “triangular” operation, the Agency contested the non-application of withholding tax on interest paid for several fiscal years, arguing that the Fund, as the beneficial owner of the interest, did not fulfil the subjective requirements to benefit from the exemption provided for in art. 26-quater. The Italian company therefore settled its tax position by paying the assessed additional taxes, although to a reduced amount under art. 11 of the Double Taxation Convention between Italy and Luxembourg.

Following the introduction of the new exemption pursuant to art. 26, para. 5-bis, of Presidential Decree no. 600/1973, applied to loans granted by foreign institutional investors subject to regulatory supervision in their country of establishment, the Italian-resident company applied for a refund of the withholding tax paid on the interest, limited to the two fiscal years involved in the amended legislation.

After the Financial Administration’s tacit rejection, the company appealed against the silence. However, the Agency maintained its position throughout the various stages of litigation, asserting that the exemption under the provision in discussion could not apply to indirect lending, as the provision does not explicitly refer to the concept of “beneficial owner.”

The decision

The decision of the Supreme Court which confirmed the conclusions reached in the two lower instances, based on two main grounds.

The first is based on the interpretation of art. 11 of the OECD Model Convention, which, despite addressing interest “paid to a resident of the other State,” conditions the granting of treaty benefits on the requirement that “the person who receives the interest is the beneficial owner,” meaning the entity to which the income is fiscally attributable due to its availability and, further, an entity that benefits from the interest received under the look-through approach.

Moreover, this interpretative approach, which prioritizes the beneficial owner over the mere recipient of the income flow, fully aligns with the purpose of the legislation to facilitate access to credit for resident companies by removing any economic burden on the taxpayer exposed to potential double taxation risks.