As a rule, if a nonresident lender grants a loan to an Italian resident borrower, the interest paid on the loan is subject to a 26 percent withholding tax in Italy unless the lender is eligible for the exemption under the Italian laws that implemented the EU Interest and Royalties Directive. The withholding tax may be reduced (usually to 10 percent) or, in very few cases, zeroed under the double tax treaties entered into by Italy, where applicable.
Law Decree No. 91 of June 24, 2014, converted into law by the Italian Parliament on August 7, 2014, repealed the interest withholding tax in cases of cross-border loans that meet certain requirements. As a result, no withholding tax is now levied on the interest if (i) the loan is a medium- or long-term loan; (ii) the borrower is an enterprise (e.g., an Italian commercial partnership, a resident company, or the Italian permanent establishment of a nonresident enterprise); and (iii) the lender is any of the following:
- A bank established under the laws of an EU Member State;
- An insurance company established and licensed under the laws of an EU Member State; or
- An unleveraged undertaking for collective investment (e.g., an investment fund) that is set up in an EU Member State or in an EEA country allowing for an adequate exchange of information with Italy (i.e., Iceland and Norway).
Because the new rules state that the borrower must be an enterprise, the withholding tax exemption should not apply when the borrower is an Italian undertaking for collective investment (e.g., an Italian investment fund). Moreover, it will have to be clarified in due course whether the withholding tax exemption is available if the borrower is an Italian static holding company.