The facts
Mezzanove Capital s.r.l. (Mezzanove) is an Italian operating company that received loans from its sole Luxembourg shareholder, Mezzanove Finance s.a.r.l. (Finance), across the tax periods 2012–2015 and 2017. Interest payments on those loans were subject to Italian withholding tax under Article 26(5) DPR 600/1973, which imposes withholding at source on capital income paid by Italian residents to non-resident recipients without a permanent establishment in Italy.
Mezzanove took the position that the interest was exempt under Article 26-quater DPR 600/1973, the Italian implementation of the EU Interest and Royalties Directive (Directive 2003/49/CE, the IRD). The IRD exempts interest paid between qualifying EU-resident associated companies from withholding tax at source, provided the recipient meets specific subjective requirements as to its corporate form and residence. Finance, as a Luxembourg company, appeared on its face to qualify.
The three-entity structure
The tax authority conducted an audit and identified that Finance was not the economic owner of the interest. Finance had itself obtained the lending funds from its own sole shareholder, Mezzanove Capital Sicar (Sicar), a Luxembourg common investment fund. Sicar provided capital to Finance, Finance on-lent to Mezzanove, and the interest received by Finance was contractually retroceded upstream to Sicar. The structure ran through three entities:
- Mezzanove Capital s.r.l. — the Italian borrower and payer of interest; an Italy-resident operating company subject to Italian withholding tax rules.
- Mezzanove Finance s.a.r.l. — the direct lender and material recipient of interest; a Luxembourg company and sole shareholder of Mezzanove Capital, which does not retain the interest (it retrocedes to Sicar) and is not the beneficial owner.
- Mezzanove Capital Sicar — the beneficial owner and ultimate capital provider; a Luxembourg investment fund subject to regulatory supervision. It does not meet the IRD subjective requirements but does meet the Article 26(5-bis) institutional investor test.
Sicar, as a fund rather than a company, did not meet the subjective requirements for the IRD exemption under Article 26-quater. The authority therefore applied a look-through approach, treating Sicar as the substantive lender and beneficial owner, and applied the reduced withholding rate under Article 11 of the Italy–Luxembourg double tax convention. Mezzanove paid the resulting withholding at the treaty rate. In 2018, after a new Italian domestic exemption came into force, Mezzanove filed a refund claim.
The new exemption and the refund claim
Article 26(5-bis) DPR 600/1973 was introduced in 2014 and amended in 2015, during a period of severe credit tightening in Italy. Its purpose was to encourage Italian companies to access foreign credit markets by eliminating the withholding tax cost that would otherwise be borne by Italian borrowers through gross-up clauses. The provision exempts interest paid by Italian resident companies to foreign lenders that are ‘institutional investors’ subject to regulatory supervision in their home jurisdiction — a category that expressly includes investment funds.
Sicar, as a Luxembourg-regulated investment fund, clearly met the Article 26(5-bis) institutional investor test. Mezzanove filed a refund claim for withholding tax paid on interest for 2015 and 2017 (the years within the applicable limitation period). The authority refused, taking the position that Article 26(5-bis) required the qualifying institutional investor to be the ‘direct recipient’ of the interest — i.e. Finance, not Sicar — and that no look-through should be applied.
The litigation
Lower courts — taxpayer wins at both levels
The Commissione Tributaria Provinciale di Milano granted the refund, finding the authority’s direct-recipient argument inconsistent with its own prior look-through analysis and with the purpose of the exemption. The authority appealed. The Commissione Tributaria Regionale della Lombardia dismissed the appeal, holding that the authority had already treated the structure as a look-through arrangement throughout the audit and could not adopt a different characterisation selectively in the refund context; that the purpose of Article 26(5-bis) required look-through; and that the amending provision was itself titled ‘Indirect loan for foreign institutional investors’, indicating legislative intent to extend the benefit to indirect financing.
Corte di Cassazione — binding principle established
The Corte di Cassazione dismissed the authority’s further appeal and established a principle of law binding on all lower courts: where ‘indirect’ financing is characterised by the interposition of an entity that materially receives the interest but is then required to retrocede it to a third party — the substantive lender — it is by reference to that third party, understood as the beneficial owner of the taxable income, that the subjective requirements of Article 26(5-bis) must be assessed.
The Court’s reasoning rested on four connected pillars:
- The literal argument fails. The authority argued Article 26(5-bis) refers to income ‘perceived’ by the lender, requiring direct receipt. The Court dismissed this: the OECD Model Convention (Art. 11) uses the same ‘paid to a resident’ language yet universally applies the beneficial owner test. Identical language cannot bear a different interpretation where the legislative purpose is the same.
- The purposive argument confirms look-through. Article 26(5-bis) eliminates double taxation to reduce the cost of foreign credit. Double taxation does not arise in the hands of an interposed entity contractually obliged to retrocede the interest — it arises in the hands of the beneficial owner. Restricting the exemption to the direct recipient fails the legislative purpose entirely.
- The abuse argument cuts against the authority. The direct-recipient interpretation would allow a non-qualifying beneficial owner to obtain exemption by inserting a qualifying pass-through entity, while denying exemption to a qualifying beneficial owner operating through a non-qualifying pass-through. That is an incentive to artificial structuring, not a safeguard against it.
- OECD and CJEU alignment. The OECD Commentary to Art. 11 expressly provides that treaty benefits flow to the beneficial owner even where interest is received indirectly through an intermediary or agent. The CJEU (26 February 2019, joined cases C-115/16 etc.) confirmed that ‘beneficial owner’ is a functional concept directed at whoever genuinely benefits from the income and has real disposal of it.
ajiho commentary
A Supreme Court ruling with immediate market impact
This is not a lower-tribunal decision that can be distinguished or ignored. The Corte di Cassazione is Italy’s apex civil court, and a sentenza establishing a principio di diritto binds all subordinate courts. The Agenzia delle Entrate can no longer successfully argue, in any Italian court, that Article 26(5-bis) requires direct receipt of interest by the qualifying institutional investor. That argument is now foreclosed. The significance goes beyond Mezzanove: fund-financed structures, bank-backed lending chains, and treasury centre arrangements are widespread in the Italian market, and in all of them there is typically an entity between the Italian borrower and the ultimate capital provider.
Look-through is symmetrical — it cuts both ways
The most important practical implication is one the Court explicitly flags: look-through is neither taxpayer-friendly nor authority-friendly. It is a neutral analytical tool that applies symmetrically. Where the beneficial owner qualifies for Article 26(5-bis) exemption (as Sicar did), look-through delivers the exemption despite a non-qualifying intermediary. But the same logic means that where a qualifying intermediary stands between the Italian borrower and a non-qualifying beneficial owner, look-through denies the exemption — even if the direct lender appears to meet all the formal requirements. The analysis cannot stop at ‘does the direct lender qualify?’ It must extend to ‘is the direct lender the genuine beneficial owner, or is there an upstream entity to which interest will be retroceded?’
The IRD and Article 26(5-bis) — two different regimes, now aligned
Article 26-quater (the IRD implementation) requires the lender to be an EU-resident company meeting specific corporate form requirements — it does not apply to funds, partnerships, or entities outside the EU. Article 26(5-bis) is broader in one direction and narrower in another: it applies to institutional investors (including funds, insurance entities and credit institutions) from any jurisdiction exercising regulatory supervision, but only to medium and long-term financing. Before Mezzanove, the Agenzia delle Entrate had issued administrative guidance (Risoluzione n. 76/E of 2019, and a response to query n. 25 of February 2021) stating that Article 26(5-bis) did not allow look-through. The Corte di Cassazione has now overruled that guidance.
The consistency principle as a procedural protection
One further element deserves attention. The Court noted that the authority had applied a look-through approach throughout the audit — treating Sicar as the effective lender and applying the Italy–Luxembourg treaty rate. Having committed to that characterisation, it could not then argue the opposite in the refund context. This consistency requirement is a useful protection for taxpayers who have accepted an adverse look-through characterisation in one context: if the authority treats an intermediate entity as a pass-through for withholding purposes, it is bound to that characterisation when the same structure is assessed under a provision that benefits the taxpayer.
What this means for your business
For any group with an Italian borrower paying interest to a non-resident lender, the starting question is no longer simply ‘does the lender qualify for an exemption?’ It is ‘who is the beneficial owner of the interest, and does that entity qualify?’ The following situations now warrant direct review:
- Fund-financed structures. Where a private equity, infrastructure, credit or real estate fund is the economic capital provider but lends through an intermediate holding vehicle, the fund’s regulatory supervision status in its home jurisdiction is the relevant test under Article 26(5-bis). If the fund is regulated and the intermediate vehicle is obliged to pass interest through, the exemption should apply.
- Group treasury centre arrangements. Where a treasury company on-lends to Italian subsidiaries but is itself funded by back-to-back borrowings, the analysis requires identifying who ultimately bears the interest income. If the treasury centre has no genuine economic margin and is contractually obliged to pass interest through, look-through is triggered.
- Restructured or refinanced facilities. Where an existing arrangement has been audited under the look-through approach and the authority has already characterised an upstream entity as the beneficial owner, the consistency principle means the same characterisation should be available to support an exemption claim.
- New Italian borrowings from 2025 onwards. The Mezzanove principle should now be the baseline in structuring inbound lending to Italy. Documentation should record the beneficial ownership chain, the pass-through obligation on any intermediate lenders, and the regulatory supervision status of the ultimate capital provider.
The withholding tax cost on intercompany interest paid into Italy has historically been a structuring constraint for groups accessing Italian debt markets, particularly where the capital provider is a fund that does not meet the IRD corporate form requirements. Mezzanove removes a significant element of that constraint: a properly documented structure with a regulated institutional investor as the beneficial owner, lending through an intermediate vehicle, should now obtain the Article 26(5-bis) exemption as a matter of Italian domestic law, confirmed at the apex court level.
Case reference
Agenzia delle Entrate v Mezzanove Capital s.r.l. in liquidazione · Corte di Cassazione, Sezione Tributaria (Sez. 5) · Sentenza Civile Sez. 5 n. 4427 Anno 2025 · 20 February 2025
Judgment in Italian. Access via the Corte di Cassazione official database.