Exemption from withholding taxes on interest on medium-long term loans granted to enterprises – UCITS and non-commercial entities are excluded from this benefit

The Italian Revenue Agency has recently clarified the regulations for an application of withholding taxes on interest paid to foreign entities and, more specifically, the scope of the facilitated provisions referred to in paragraph 5-bis of the Art. 26 of the Presidential Decree no. 600/1973. Based on said paragraph 5-bis, an exemption provision from withholding taxes is allowed for interest that is: (i) in connection with medium-long term loans granted in compliance with the Italian Bank Code and (ii) paid by enterprises to lender entities listed in the Directive 2013/36/UE, or insurance companies established and licensed under the law of an EU Member State, or institutional investors subject to regulatory supervision in its home country.

The aforementioned provision was added to the Italian tax system in 2014 by the so-called Decreto Competitività with the aim of helping enterprises to gain access to credit. The Italian Revenue Agency has recently focused on what qualifies an “enterprise” in such a case.

With a recent response, Tax Ruling no. 98 of 5th April 2019, the Italian Revenue Agency has clarified that the term “enterprise” should be interpreted in a “strict” sense and not as a generic reference to economic activities organised for the purpose of production and exchange of goods and services. Seeing as UCITS and non-commercial entities do not carry out such economic activities, they cannot qualify as an “enterprise” for the purposes of the mentioned paragraph 5-bis. Therefore, if UCITS and non-commercial entities have received medium-long term loans from a foreign entity, even if in compliance with the other conditions mentioned above, they are obliged to withhold taxes on the paid interest as they may not benefit from the exemption pursuant to paragraph 5-bis of the aforementioned Art. 26.