Italy clarifies exemption from withholding tax on loan interest

The Italian tax administration published resolution n ° 125 / E / 2021 (resolution 125) on February 12, 2021, confirming a previous interpretation in 2019 (resolution n ° 76 / E / 2019) and providing additional details on the withholding at the Italian source (WHT) exemption from interest paid by an Italian borrower in respect of a medium / long term loan granted by its control mutual fund.

In particular, Resolution 125 confirms that the tax exemption also applies to direct loans granted by an unregulated private equity fund to its Italian subsidiary to the extent that the asset manager of the fund is a regulated entity in accordance with local regulatory legislation.

Ordinary tax treatment of loans granted to Italian borrowers

As a general rule, any interest or income from a loan granted by a foreign entity to an Italian company is subject to the WHT at the tax rate of 26%.

The Italian borrower, as the beneficiary of the loan, is obliged to apply the WHT on the interest paid to the foreign lender, in accordance with Article 26, paragraph 5-bis of the Presidential Decree of September 29, 1973, No. 600 ( WHT Exemption Provision). The national WHT rate may be reduced in accordance with the relevant provisions of the tax treaty, if applicable.

Eligible loan facilities may benefit from WHT interest relief. This exemption applies to interest paid by an Italian company for loans:

• granted by credit institutions established in an EU Member State, entities identified in Article 2 (5) of Directive 2013/36 / EU, insurance companies authorized in accordance with regulations issued by Member States of the EU or by “white lists” foreign institutional investors within the meaning of Article 6 (1) b) of Legislative Decree No. 239 of April 1, 1996, subject to the supervision of the foreign countries in which they are established ; and
• a medium / long term maturity (i.e. a final maturity greater than 18 months) granted to Italian “commercial companies” including holding companies and real estate companies but excluding investment funds Italian collective.

In practice, since the introduction of the law, the main entities authorized to carry out this financing activity in favor of Italian companies (except in limited cases) were credit institutions based in the EU; From the point of view of Italian banking regulation, all the other entities mentioned above were not authorized, except those authorized, to grant loans to Italian borrowers. The WHT interest exemption applies only on condition that the lender is authorized to carry out financial and banking activity towards the public in accordance with the Italian Banking Law (TUB) approved by Legislative Decree No. 385 of September 1 1993.

Resolution 125 — Overview

The practical case submitted to the Italian tax administration was similar to that dealt with by resolution n ° 76 / E / 2019 of 12 August 2019, where a regulated asset manager of several British funds was tax resident in Guernsey (United Kingdom ) and overseen by the local authority, the Guernsey Financial Services Commission (GFSC).

The regulated asset manager has filed a tax ruling requesting clarification on the WHT treatment applicable to interest paid by an Italian borrower to its indirect control collective investment fund (lender) in relation to a medium / long term loan (higher at 18 months) granted to the Italian Borrower.

The tax administration responded by confirming that the tax exemption was applicable because all the conditions were met, and in particular that the lender was an “institutional investor” regulated by the GFSC.

With Resolution 125, the Italian tax authorities analyzed the tax treatment of interest on a medium / long term loan granted under a similar scheme, as described below:

• a regulated asset manager residing for tax purposes in the United Kingdom and subject to the supervision of the local regulator, the Financial Conduct Authority (FCA), manages (on the basis of a management agreement with the general partner) several British funds. The general partner (UK) and the funds are not regulated entities and the funds control a standard two-tier UK holding structure ie UK1 which controls UK2;
• UK2 then controls 100% of an Italian holding company (ITAHoldCo) which is the Special Purpose Vehicle (SPV) investing in Italian target companies.

On this basis, the asset manager asked the Italian tax authorities whether the fund could be considered as a foreign institutional investor and, therefore, whether the interest received by ITAHoldCo, under a medium / long term loan intended to finance the ‘acquisition of an Italian corporation, could be tax exempt under WHT’s exemption provision.

Although the fund has not been authorized to engage in regulated activities under the UK Financial Services and Markets Act, and public financial and banking activities in accordance with the TUB, the Italian tax authorities have nonetheless considered the funds as a qualified lender in accordance with article 26, paragraph 5-bis of Presidential Decree No. 600/1973.

In particular, Resolution 125 confirmed the tax exemption of interest paid by ITAHoldCo, referring to Ministerial Decree No. 53 of April 2, 2015 which states that “the activity of granting loans is deemed to be exercised vis-à-vis public. if it is carried out vis-à-vis third parties in a professional and professional capacity and that all the activities carried out exclusively in favor of the group to which it belongs are not considered as transactions vis-à-vis the public.

On this basis, as the loans are granted by the fund in favor of an indirectly controlled Italian company (ITAHoldCo), the fund itself does not carry out any financing activity vis-à-vis the public.

Therefore, the Italian tax authorities have confirmed that all of the following conditions under the WHT exemption provision are met:

• the loan has a maturity of more than 18 months;
• the fund is registered in a country (United Kingdom) which exchanges tax information with the Italian tax authorities (the white list);
• the beneficiary of the loan is an Italian company (ITAHoldCo);
• the fund’s asset manager is subject to the supervision of the local regulatory authority (FCA); and
• the fund is qualified as a foreign institutional investor not carrying out any activity vis-à-vis the public.

All the conditions for tax exemption having been met, the Italian tax authorities concluded that the interest paid by ITAHoldCo to the fund could benefit from the exemption.

Planning points

• Resolution 125 confirms new structuring opportunities for whitelisted collective investment funds to finance private equity investments in Italy, which may in part disintermediate the banking system in financing the acquisition of shares or assets (or active companies) of Italian target companies.
• The innovative part of resolution 125 is that, even if the fund and its general partner are not both “regulated entities”, nevertheless since the asset manager (in charge of the management of the funds) is an entity subject to under the supervision of the local regulator (FCA), the funds are deemed to benefit from the tax exemption as a foreign institutional investor since the loan is granted in favor of its indirectly controlled Italian company.
• This principle applies to any fund and asset manager subject to the supervision of a local authority insofar as they are incorporated in a country appearing on the white list of countries which exchange tax information with the Italian tax authorities ( i.e. in addition to EU and OECD countries, Switzerland, Jersey, Guernsey, British Virgin Islands, Cayman Islands, Hong Kong, Singapore, etc.).

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Francesco Bonichi is Tax Partner and Antonio Festa is Tax Associate at Caiazzo Donnini Pappalardo & Associati.

The authors can be contacted at: francesco.bonichi@cdplex.it; antonio.festa@cdplex.it