Italian Supreme Court Judgment no. 3380 of February 3, 2022
In back-to-back financing structures, the application of the withholding tax exemption under the Interest and Royalties Directive on interest paid to an EU group company does not require the presence of a mark-up margin for the EU recipient.
This is the conclusion drawn by the Supreme Court in the above captioned judgment which follows a precedent (Supreme Court judgment no. 14756 of July 10, 2020), based on the case law of the ECJ (judgment of February 26, 2019 relating to joined cases C-115/16, C-118/16, C-119/16 and C-299/16).
In the 2020 decision, the Supreme Court stated that the withholding tax exemption under the Interest and Royalties Directive (implemented by art. 26-quater of Presidential Decree 600/73) was applicable to the interest on the financing between an Italian company and its EU parent company which, in the context of an MLBO transaction, mirrored the financing between the parent company itself and its higher-level parent company, which had in turn obtained an upstream financing.
In 2020, the Court stated that for the purpose of determining the status of beneficial owner of the EU parent company’s interest income , the right to enjoy the income must not be limited by legal or contractual obligations to transfer the sums to third parties. On the other hand, not much importance was given to the exiguity of the mark-up (0.125%) earned by the EU parent company.
In the 2022 decision, the Court again confirmed this principle in a case where the EU parent company earned no mark-up at all; the case concerned a loan between an Italian company operating in the publishing sector and its 99% Luxembourg parent company, financed under the same conditions by its US parent company.
The Supreme Court recognized that the Luxembourg parent company did not act as a mere conduit, on the basis of the following parameters:
In substance, under this new interpretation by the Italian Supreme Court, the status of beneficial owner cannot be denied where: