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Italy implements EU Interest and Royalties Directive — Orbitax Tax News & Alerts

Italy has enacted Legislative Decree No. 143 of 30 May 2005, which implements the EU Council Directive 2003/49/EC (EU Interest and Royalty Directive). The Decree, published in the Italian Official Gazette No. 172 of 26 July 2005, entered into force on the same date. The Decree applies retroactively to interests and royalties accruing as of 1 January 2004.


Under the Decree, which amends the Italian Tax Assessment Act, interest and royalty payments arising in Italy shall be exempt from any taxes imposed on those payments therein, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another EU Member State or a permanent establishment (PE) situated in another EU Member State of a company of an EU Member State.

The tax exemption applies if the person making the payments and the beneficial owner of the payments are companies (or PE of companies) that fulfil the requirements set out in Annexes A and B of the Decree, which correspond to the requirements of the Directive.

In particular, the legal form of the company making and benefiting from the payments must be listed in Annex A of the Decree.

In addition, such companies (or PEs) must be subject in their residence states to the income taxes that are indicated in Annex B of the Decree.

A further condition requires that the company that makes the payment, and the company that benefits from the payment, must be "associated" as per the wording of the Directive, i.e.:
-   the first company directly holds a participation equal to at least 25% of the voting rights in the second company; or
the second company directly holds a participation equal to at least 25% of the voting rights in the first company; or
-   a third company, fulfilling the requirements under Annexes A and B of the Decree, directly holds a participation equal to at least 25% of the voting rights in both the first and the second companies.

The afore-mentioned participations must be held for an uninterrupted period of at least 1 year.

The request for the application of the exemption regime shall be substantiated by an attestation of the beneficial owner's residence issued by the tax authorities of the relevant Member State, and by a declaration of the beneficial owner regarding the fulfilment of the requirements laid down in Annexes A and B of the Decree.


As regards the definition of "interest" and "royalties", the Decree follows the Directive.

The term "interest" includes income from debt claims of every kind, whether or not secured by mortgage, and in particular, income from securities and income from bonds or debentures, including premiums and prizes attached to such securities, bonds or debentures.

The term "royalties" includes:

-   payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and software, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
payments for the use of, or the right to use, industrial, commercial or scientific equipment


The Decree indicates some situations in which the benefits of the exemption regime are partly or fully excluded, e.g.:

-   where the amount of the interest or royalties exceeds the amount that would have been agreed by the payer and the beneficial owner in the absence of a special relationship between the two parties. Such a special relationship exists when one party directly or indirectly controls the other, or when both parties are directly or indirectly controlled by the same third party;
where "thin capitalization" rules apply; and
-   where interest and royalty are paid to persons within the European Union that are directly or indirectly controlled by one or more persons that are not resident of an EU Member State.

Withholding tax exemption on dividends to EU parent companies clarified

Dividends paid to qualifying EU parent companies are not subject to withholding tax. To qualify for the exemption from withholding tax, one of the requirements is that the EU parent company must hold the required percentage of the capital in the Italian subsidiary for at least 1 uninterrupted year.

The tax authorities released Ministerial Circular 109/E on 1 August 2005 to clarify that the exemption is only available if, at the moment of distribution, the holding period has been met.