Interest deduction and withholding tax on shareholder loans: Italy's Supreme Court closes a dangerous loophole

It is a common, almost ordinary, scenario in the life of many companies: a shareholder finances the company, interest accrues, is recorded in the accounts and deducted – but payment is postponed. A deferral which, on the surface, appears innocuous. At least until the Italian Revenue Agency steps in.

By order no. 15227 of 20 May 2026, the Supreme Court of Cassation overturned the decisions of both lower courts and laid down a principle that changes the way shareholder loans need to be structured.

The case in brief

A company had received a loan from its sole shareholder of up to €11 million, under a written agreement dated March 2011. In 2013 it recorded interest expense of €219,973.68, deducted it pursuant to Article 96 of the Italian Income Tax Code – but did not pay it. Not in that year, nor in the following ones. The Italian Revenue Agency challenged the failure to apply the 12.5% withholding tax. 

The company argued in response: the interest had not been paid, therefore it had not been received by the shareholder, and so no withholding was due. Both the Provincial and Regional Tax Commissions agreed. The Supreme Court did not.

The Court’s reasoning

Three provisions, to be read together: Article 46 of the Italian Income Tax Code, which characterises payments made by shareholders as loans where the financial statements do not show a different legal basis; Article 45(2) of the Italian Consolidated Income Tax Act, which presumes, unless there is evidence to the contrary, that interest on loan capital is received on the due dates and in the amounts agreed in writing; and Article 26(5) of Presidential Decree no. 600/73, which obliges the company to withhold tax on investment income “paid”. The answer lies in the systematic coordination of these rules that the answer lies: the presumption of receipt operates with respect to both the lender and the borrowing company acting as withholding agent.

The term “paid” cannot be construed as meaning “physically disbursed” – otherwise the parties would effectively have a tool to manipulate the taxable event at will.

Why this decision really matters

The court spells it out clearly: proof of the lack of actual, physical payment of the interest – which was undisputed in the case – does not exclude the operation of the “legal” payment, which serves a specific function, namely to rebalance an asymmetry in the tax mechanism. Put differently: it is not rational to introduce a presumption that shareholder loans are interest-bearing and then neutralise it by providing for the withholding obligation only where interest is actually paid (which in practice is difficult to ascertain, both as to whether and when payment occurs). The internal consistency of the system requires that the presumption operate on both sides of the relationship.

The Supreme Court’s ruling therefore requires careful alignment between the clauses of the loan agreement, the interest schedules and the corresponding accounting treatment: mere postponement of payment does not automatically allow the deferral of withholding tax.