Investment Funds 2020

Last Updated November 26, 2019

Italy

Law and Practice

Authors



McDermott Will & Emery Studio Legale Associato has an investment funds practice in Italy composed of four professionals with complementary expertise in legal, regulatory and tax matters. The firm’s network guarantees access to insights from the EU and US markets. The firm advises clients active in all sections of the funds market, including private equity, real estate, venture capital, debt, infrastructure funds and fund of funds. The team provides assistance on fund formation for sponsors/managers, fund review for investors, carried interest, incentive scheme and co-investment plan structuring, reorganisations and spin-outs, secondary transactions, mergers of private equity houses, fund governance, transaction structuring and fund level finance arrangements, including investor call, equity bridge, co-investment and warehousing facilities. The team has unrivalled experience in the Italian market, having assisted a number of GPs acting in different sectors on their most recent fund-raising and structuring initiatives, such as Ambienta (EUR650 million), Consilium (EUR250 million), Metrika (EUR120 million), Innogest (EUR120 million), Equita (EUR200 million) and Sagitta (EUR200 million).

The Italian funds market is relatively small compared to other European jurisdictions with similar economic structures and dimensions. However, the trend of growth is largely positive, with the number of firms raising capital on the market increasing by 50% between 2017 and 2018. 2018 was also a peak year in terms of the total amounts raised in the private market with a relevant portion of commitments made by international investors (source: AIFI). 

Over the last decade, there has been an increase in the amounts invested by pension funds and family offices, whilst banks and fund of funds have generally decreased their commitments. The fund-raising process for retail funds has been influenced substantially by certain tax advantages introduced by the Italian legislator, aimed at boosting the channelling of alternative financial resources to the mid cap market through the retail sector (see 2.6 Tax Regime: Tax Incentives). 

From a legal standpoint, alternative investment funds (AIFs) may be established according to two different forms:

  • a contractual form (fondo chiuso) to be established by an alternative asset fund manager (AIFM), whose constitutional document is represented exclusively by the management rules of the AIF. Afondo chiuso is a contractual arrangement with no legal personality, set up by way of simple resolution of the AIFM’s Board of Directors approving the relevant management rules; no further formalities or authorisation process is required; or
  • a corporate form (società di investimento a capitale fisso – SICAF – ie, a joint stock company with fixed capital), to be established in front of a public notary and whose constitutional documents are represented by the company by-laws and the investment agreement between the company, the manager (where external) and the investors. SICAFs, in turn, may differ between an internally managed SICAF, whereby the functions of the AIFM are carried out by the SICAF itself (so it needs to be authorised as an AIFM and an AIF at the same time), and an externally managed SICAF, whereby the management of the AIF is delegated to an external AIFM (in this case, the SICAF must be authorised as an AIF only).

Recently enacted legislation has introduced a sub-species of SICAF, represented by the so-called “società di investimento semplice” (SIS), aimed at facilitating investments in SMEs: it is a vehicle to be established in the form of a SICAF that will internally manage the funds raised among its investors (in the same way as the internally managed SICAF). From a regulatory point of view, a SIS is defined as an alternative investment fund and represents a lighter form of the traditional SICAF; in this sense, it is expected that a lighter authorisation process and a lighter ongoing regulatory burden will be applied to SIS (the legislative framework has not yet been completed). In order to avail itself of such a lighter regime, a SIS is subject to certain limitations (which do not apply to traditional SICAF), as follows:

  • assets under management shall not exceed EUR25 million;
  • company by-laws shall specifically state that the corporate object of a SIS is the direct investment of its assets in small-medium enterprises that are not listed on regulated markets and that are in the phase of testing (seed financing), establishing (start up financing) or starting activity (early-stage financing); and
  • no financial leverage is admitted.

Finally, it should be highlighted that, in order to avoid an evasion of the law, individuals who are directly or indirectly promoting a SIS are subject to the EUR25 million limit mentioned above, which means that an individual has the right to establish – as a promoter – more than one SIS (each addressed to a specific market sector), provided that the assets of each SIS are cumulatively calculated in order to verify the limit.

A fondo chiuso represents the lightest form of those mentioned above, with the fewest constraints. The relevant establishment occurs through a mere resolution of the Board of Directors of the AIFM; except for the various outsourcers of the fondo chiuso (ie, depository, fund administrator and audit firm), no administrative bodies other than those of the AIFM are required. No authorisation from the competent supervisory authorities is required for its establishment, and no checks on the requirements of the relevant investors are carried out.

A SICAF, on the other hand, requires the typical administrative bodies of a joint stock company (società per azioni), such as statutory auditors and a board of directors, in addition to the various outsourcers of the AIF. Being an AIF, a SICAF is seen as a single legal vehicle, so any subsequent SICAF must obtain authorisation from the competent supervisory authorities. Investors holding a stake equal to at least 10% of the share capital must comply with honourability and professional competence requirements. A SICAF is subject to the provisions of the Italian civil code governing joint stock companies, unless expressly provided otherwise (for example, a prohibition on issuing bonds).

Participants’ interests in a fondo chiuso are represented by units. Certificates representing the units are usually registered (“nominativi”), and are issued for whole numbers. The certificates can be split, provided that each certificate represents at least one unit. The AIFM is responsible for drafting such certificates, and such certificates indicate the relevant class of units subscribed. As requested by the AIFM, the certificates shall be confirmed by the AIF’s depositary.

Participants’ interests in a SICAF are represented by shares and are subject to the provisions of the Italian Civil Code that apply to joint stock companies.

Investments by investment managers and/or investment advisers of an AIF can be carried out (i) directly by the relevant person by subscribing the unit/share or (ii) indirectly through a special purpose vehicle, which is usually structured either in the form of a limited liability company (società a responsabilità limitata) or through a simple partnership (società semplice).

Fondo Chiuso

No pre-approval or authorisation is required to establish a fondo chiuso (except for the authorisation provided by the applicable EU regulations related to certain specific sub-categories of AIFs, such as ELTIF). Once established, the fondo chiuso shall be registered with the competent register held by the Bank of Italy, and given an ISIN code. The requisite documentation is represented by the relevant management rules, containing the terms and conditions regulating the AIF and the participation of the investor in the AIF. As mentioned above, the set-up of a fondo chiuso requires a resolution of the board of directors of the relevant AIFM, approving the management rules of the AIF; in this sense, the establishment process does not involve any particular costs, except for the costs related to the drafting of the management rules.

SICAF

When the SICAF is internally or externally managed, it shall be authorised by the Bank of Italy (upon the positive opinion of Consob), registered with the competent register held by the Bank of Italy and given an ISIN code. In addition to the constitutional documents of the AIF itself (company by-laws and investment agreement), a series of documents must be filed with the Bank of Italy to obtain authorisation as a SICAF, such as documentation proving the honourability and financial stability of the founding shareholders of the SICAF, documentation regarding the honourability and professional requirements of the members of the board of directors and statutory auditors of the SICAF, in relation to the organisational structure, and a programme of activities. The authorisation process is supposed to last between five and seven months, and is more expensive than the process for the establishment of a fondo chiuso.

Pursuant to the applicable laws, the liability of each investor of an AIF is limited to the total amount of the units/shares subscribed by said investor (provided that certain amounts distributed to the subscribers can be re-called by the AIFM pursuant to the management rules/investment agreement of the AIF). The investors are not deemed to participate in the management of the business of the AIF, nor to become liable as a manager or otherwise for the debts and liability of the AIF solely by reason of the exercise of the rights and powers granted to them under the constitutional documents of the AIF, or, eventually, by acting (or appointing a representative to act) as a member of the relevant advisory board.

The AIFM shall maintain the following records and books of account of the AIF/SICAF:

  • the daily transaction book (libro giornale) of the AIF, in which the day-to-day activities related to the management, operation, and issue and redemption of the units/shares are recorded;
  • the AIF’s yearly report (relazione annuale), along with a directors’ report, to be audited by the audit firm (and, with respect to a SICAF, the annual financial statements);
  • the semi-annual report (relazione semestrale) relating to the AIF’s management during the first six months of any accounting period; and
  • a prospectus with an indication of the value of the units/shares and the total value of the AIF in each case of reimbursement.

Specific reporting requirements are due on each AIF on a semi-annual basis, such as the financial data of the AIF, the composition of the portfolio, the units/shares recap, and the value of the units/shares.

Investors in AIFs range from financial institutional investors (such as banks, insurance companies and funds of funds) to pension funds, family offices, big corporations willing to diversify their invested assets and, in a smaller percentage, (ultra)high net worth individuals.

According to the applicable regulations, the only legal structure that can be authorised as an AIFM is the joint stock company (società per azioni). In cases where particular types of investors require the establishment of corporate vehicles, already existing AIFMs establish externally managed SICAFs, while internally managed SICAFs are typically used by promoters/sponsors that are foreign or not linked to AIFMs.

According to the applicable legislation, certain restrictions apply to reserved alternative investment funds, which may be subscribed by (i) professional clients by default or upon request (as classified by the AIFM according to the MiFID 2 legislation), (ii) retail clients investing at least EUR500,000, and (iii) directors and employees of the AIFM (regardless of the invested amounts).

An AIF’s units/shares that qualify as a European Venture Capital Fund (EuVECA) AIF may be subscribed by retail clients investing at least EUR100,000 (instead of the minimum limit of EUR500,000 indicated above).

Before establishing a new AIF, the AIFM shall identify the specific target market applicable to such AIF – ie, identify the categories of individuals who can subscribe the relevant units/shares (positive target market) and the categories of individuals who cannot subscribe the relevant units/shares (negative target market), according to the MiFID 2 provisions regulating the product governance, as adopted by the Italian legislator.

Reserved closed-ended alternative investment funds are not subject to any investment limitations, except for the following limits applicable to those funds that are allowed to provide finance to third parties using the fund’s assets (so-called credit funds):

  • maximum amount of employable financial leverage (as calculated according to EU Delegated Regulation 231/2013) up to 1.5;
  • no more than 10% of the bigger amount of (x) total asset value of the AIF and (y) total commitments of the investors to the AIF shall be invested in a single counterparty.

Non-reserved open-ended alternative investment funds are subject to the investment limitations provided with respect to UCITS funds.

Non-reserved closed-ended alternative investment funds are subject to certain investment limitations, such as the prohibition to sell short financial instruments, invest in financial instruments issued by the AIFM managing the fund, and invest in assets directly or indirectly transferred or conferred by a shareholder holding qualified shareholdings, as well as by a director, general manager or statutory auditor of the AIFM. In addition, investment in unlisted financial instruments of the same issuer and in parts of the same UCI shall not exceed 20% of the total assets of the fund, investment in a single real estate asset shall not exceed 20% of the total assets of the fund, and investment in credits viz a single counterparty shall not exceed 10% of the total assets of the fund.

Non-local service providers are not subject to regulation/registration requirements to the extent that they do not carry out an activity that is subject to the authorisation of the competent supervisory authorities. In this sense, by way of example and with no limitation, a service provider willing to provide services related to the compliance function or anti-money laundering is not subject to any specific requirement, while a custodian (in order to be appointed as custodian to an Italian AIF) or a risk manager (in order to be appointed as risk manager to an Italian AIFM) is subject to the applicable regulation and shall be regulated and subject to supervisory activity in its home country.

A distinction shall be drawn between a non-local manager managing AIFs in Italy through the establishment of a branch (sede secondaria) and a non-local manager managing AIFs in Italy with the freedom to provide services regime.

In the first option, the branch shall comply with the regulatory provisions applicable to Italian AIFMs when dealing with investors and aimed at safeguarding investors’ interest, and shall comply with a series of reporting/disclosure duties with the Italian supervisory authorities, such as an annual report on how the activity has been carried out, the annual report of the compliance officer and the data on any complaints received.

Under the freedom to provide services regime, the activity of a non-local AIFM will continue to be supervised by the home country authority in accordance with the “home country control principle”.

Retail funds – other than reserved funds (which, as mentioned above, are not subject to any approval process) – are subject to the regulatory approval of the Bank of Italy, which shall approve the relevant management rules. The request for authorisation is presented to the Bank of Italy by the AIFM and shall include the text of the management rules, the confirmation by the depositary of being fully licensed, and the resolution of the board of directors. The fund is approved 60 days after the filing has been completed, provided that all the requested documentation has been submitted.

If the management rules of retail are drafted according to the standard format provided by the Regulations on collective asset management adopted by the Bank of Italy on 19 January 2015, then the approval of the Bank of Italy is not requested, provided that the board of directors of the AIFM acknowledges the presence of the conditions enabling it to avoid the approval of the Bank of Italy (in this case, a communication shall be sent by the AIFM to the Bank of Italy within ten days of the approval of the management rules, attaching the management rules and the resolution of the board of directors), and that the Bank of Italy has the faculty to forbid the establishment of the fund if there are issues connected with the financial and economic situation of the AIFM.

Prudential rules deriving from MiFID 2 legislation related to the marketing of funds in Italy apply to all firms authorised to do so, irrespective of whether the fund is an alternative fund or a retail fund.

The marketing of AIFs (either Italian or EU) is regulated by the Unified Financial Act (UFA) and Consob’s relevant implementing regulations, and also by the AIFMD and EU Regulation 231/2013. More specifically, Italian AIFMs willing to market a reserved AIF (either Italian or EU) must submit advance notification to Consob, and can start marketing once the relevant no-objection communication has been issued by the competent authority. Their notification must include the rules governing the AIF, the offering document and the other documentation listed under Annex III or IV of the AIFMD, as applicable. The process takes around 60 days to be completed. This regime is not applicable to sub-threshold Italian AIFM.

The marketing of an AIF by an EU AIFM is subject to the provisions of the relevant Member State, and the marketing of the relevant units/shares shall be anticipated by a communication from the Member State’s supervisory authority to Consob.

Italian AIFMs willing to market a retail AIF (either Italian or EU) must submit advance notification to Consob, and can start marketing once the relevant no-objection communication has been issued by Consob. Their notification must include the rules governing the AIF, the prospectus and the other offering documentation required under the UFA and Consob regulations. The process takes around 20 days to be completed.

Please see 2.2.3 Restrictions on Investors.

Except for the marketing restrictions indicated above, no further restrictions apply to investors, depending on the type of AIF. Certain internal regulatory requirements might apply to certain investors whose activity is, in turn, regulated and subject to supervision by the competent authorities (such as banks, insurance companies and pension funds).

In the last few years, the attitude of the Italian regulators (Bank of Italy and Consob) has been moving towards a bespoke approach, whereby AIFMs are encouraged to reasonably direct any questions to the relevant authority in order to clear any issue or doubts while interpreting a specific regulation. It is very common for each AIFM to have a dedicated individual within the authority for ordinary matters; recurrent face-to-face meetings (usually on a yearly basis) are encouraged by the Bank of Italy, to update on current activity and present any further initiatives.

Applicable regulations impose on each AIFM the obligation to appoint a single custodian for the assets of each managed AIF. The role of custodian may be carried out by regulated entities only, such as Italian banks, Italian branches of foreign banks, Italian investment firms and Italian branches of foreign investment firms.

The depositary performs the custodian duties of financial instruments in its custody, and verifies the property and the registration of other assets. The depositary also holds the liquid assets of the AIF. In the performance of its duties, the depositary:

  • verifies the legitimacy of the disposal, issuance, repurchase, reimbursement and annulment of the units/shares of the fund, as well as the distribution of the proceeds to investors;
  • verifies the accuracy of the calculation of the value of the units/shares;
  • verifies, in operations relative to the fund, that the counter-obligation is fulfilled within the established terms;
  • carries out the instructions of the AIFM, unless they conflict with Italian law, the management rules of the AIF or the prescriptions of the Supervisory Authorities; and
  • monitors the liquidity flows of the fund, in the event the liquidity is not deposited with the depositary.

The depositary is responsible to the AIFM and the AIF’s investors for any prejudice they may suffer as a consequence of the breach of its obligations. In a loss of financial instruments in custody, unless the depositary can prove that the default was caused by accident or by force majeure, it shall be held to return, without undue delay, financial instruments of the same kind or a sum for a corresponding amount, and shall be held liable for any other loss suffered by the AIF or the investors consequent to failure to respect its obligations, whether intentional or due to negligence. In such cases, the provisions of articles 100 and 101 of the EU Regulation 231/2013 shall apply.

Activities related to the valuation of the AIF’s assets may be carried out internally (in the case of a fully licensed AIFM, by an independent person – ie, someone not involved in any management activity of the AIF’s assets) or externally by a service provider, pursuant to the principles established by EU Regulation 231/2013 and the Regulations on collective asset management adopted by the Bank of Italy on 19 January 2015.

The valuation policies and procedures adopted by the AIFM are subject to review at least annually. Within the valuation process, it is provided that specific controls and checks are carried out by the internal control functions, with respect to the area of competence of each of them. The net asset value of the AIF is equal to the current value at the reference date of the valuation of the assets of which they consist, net of any liabilities. Investors have the right to obtain a copy of the document setting out the valuation criteria from the AIFM, free of charge.

Borrowing for AIFs is accessible on market-standard conditions, even though the number of financial institutions that have developed a dedicated desk to fund finance is not very large. Restrictions on borrowing are usually regulated in the relevant constitutional document of the AIF, such as the term of duration and the maximum amount compared to total assets of the AIF, and reflected in the relevant financing agreement, provided that the AIFMD leverage regulation applies in any case. A revolving credit facility for a maximum single duration of six or 12 months is the most common instrument used by AIFs, specifically to manage short-term liquidity needs or to rationalise the timing of capital calls. Lenders usually take forms of security, the magnitude of which depends on the amount of the financing and the relevant complexity: the most common form of security is a pledge on the cash available on the AIF’s bank accounts. Financing agreements regulating fund finance usually provide for specific remedies upon the occurrence of an event of default, such as the ability of the lender, subject to certain conditions, to issue, on behalf of the AIFM, drawdown notices to investors in order to ask investors to pay – out of their undrawn commitments – the balance of the outstanding financing.

Direct Taxes

Under Italian tax law, alternative funds established in Italy are deemed to be resident therein for income tax purposes, regardless of their legal form, and are liable to Italian corporate income tax (IRES), generally applied at a rate of 24%.

Italian tax law establishes that proceeds realised by Italian alternative funds are exempt from Italian income taxes – ie, IRES and local operating profit tax (IRAP), ordinarily applied at a rate of 3.9%.

As a consequence, proceeds realised by alternative funds arising from their investments shall be received gross of any Italian withholding tax or substitutive tax (with some exceptions – eg, under certain conditions, interest from certain unlisted bonds), and shall not be subject to Italian income taxes.

On the basis of the wording of Italian tax law, and according to the interpretation of the Italian Tax Authorities, Italian alternative funds are entitled to the application of the Double Taxation Treaties entered into by Italy, and may request the Italian Tax Authorities to issue a tax residence certificate supporting their status for such purposes. However, the actual application of the Double Taxation Treaties depends on the interpretation of the sourcing state.

Indirect Taxes

Management fees invoiced by the management company to the funds are exempt for Italian value added tax (VAT) purposes (no Italian VAT shall be charged on such management fees), but the fees due to the depository may trigger some VAT leakage. Indeed, the Italian Tax Authorities took the view that certain services rendered by the depository (eg, custody services and mandatory supervision services) shall trigger VAT at a rate of 22%, and some others (eg, net asset value calculation) shall be treated as VAT exempt. As a consequence, Italian VAT applied by the depository in the first case shall not generally be recoverable in the hands of the funds.

Operations carried out by real estate funds (purchase/sale/lease of real estate properties) may be subject to VAT, depending on the nature of the transaction. The management company of the real estate investment fund is deemed to be the taxable person for VAT purposes for the activities carried out by such fund. The fund’s VAT liability is determined separately from that of the management company and that of the other funds managed by the same management company.

The tax treatment of proceeds arising in the hands of alternative fund investors depends on both the type of proceeds and the type of investors.

Tax Regime of Investors into Alternative Investment Funds (other than Real Estate Funds)

Any amount received that can be regarded as capital reimbursement is not subject to taxation. To this regard, the actual qualification of the sums distributed shall be verified on the basis of the information provided by the management company itself upon the payments.

For funds other than real estate investment funds, a 26% (final or advanced) withholding tax is generally applied, by the investment fund’s management company, on proceeds arising from such investments. In particular, reference shall be made to proceeds from:

  • distributions of the fund (either in cash or in kind); and
  • liquidation of the funds or redemption/transfer of the funds’ units. In such a case, the taxable base of the proceeds is determined as the difference between the value of the units on the redemption/liquidation/transfer date and the weighted average subscription/purchase price.

In more detail, proceeds realised by Italian resident investors holding fund units as private assets are subject to a 26% final withholding tax, to be applied by the management company.

For proceeds arising from the transfer of fund units, the 26% final withholding tax shall be levied by the management company or by the Italian financial intermediary that has been engaged by the investor to manage the transfer of the fund units. Should the management company or any other Italian financial intermediary not act as the withholding tax agent with regard to such proceeds, the investor shall be required to include them in its yearly income tax return and autonomously pay the final substitute tax at a rate of 26%.

The above 26% withholding tax does not apply to proceeds paid to (or realised by) Italian individual investors holding the fund units through a portfolio subject to the “discretionary portfolio regime” (“regime del risparmio gestito”). Such proceeds are included in the increase of the portfolio’s net asset value, and are potentially subject to 26% taxation on an accrual basis.

Proceeds realised by Italian resident investors holding the fund units as business assets, entities engaged in entrepreneurial activity and permanent establishments of foreign investors qualify as business income and are fully subject to tax in the hands of the recipient (eg, 24% IRES for Italian resident companies or 27.5% IRES for banks), and to IRAP as well for some tax payers (eg, banks). A 26% advance withholding tax is levied upon the payment of such proceeds by the management company, but is not applicable to proceeds realised by insurance companies if the fund units qualify as assets allocated to cover the actuarial reserves according to the applicable life insurance regulations.

Italian non-mandatory pension funds (“forme di previdenza complementare”), Italian undertakings for collective investment and Italian real estate investment funds are not subject to tax with regard to proceeds arising from an investment into alternative funds, and no withholding tax or substitute tax is withheld and/or levied by the management company on such proceeds.

Proceeds realised by non-resident investors from a participation in an alternative fund are, in principle, subject to 26% withholding tax, to be levied by the management company. However, no withholding tax applies on proceeds paid out by alternative funds, provided that the foreign recipient (i) does not have a permanent establishment for tax purposes in Italy and (ii) is either the beneficial owner of the income and resident for tax purposes in a country that grants an adequate exchange of information with the Italian tax authorities (White List Countries) or an “institutional investor” established in a White List Country.

The definition of “institutional investor” for these purposes includes:

  • entities that are subject to regulatory supervision in the state in which they are incorporated or created (eg, foreign banks, insurance companies);
  • entities that have specific expertise in investment in financial instruments (eg, foreign investment funds), including tax transparent entities not subject to regulatory supervision;
  • entities that have been set up with the exclusive purpose of managing investments for institutional investors that are subject to regulatory supervision, including tax transparent entities that are not subject to regulatory supervision, provided that both such institutional investors and the management company of the entity are established in White List Countries.

The exemption also applies to entities or international bodies set up in compliance with international treaties that are in force in Italy, and to central banks or organisations, and also managing official state reserves.

In order to obtain the above-mentioned exemption from Italian taxation, non-Italian resident investors shall (i) deposit the units with an Italian qualifying financial intermediary and (ii) submit proper documentation and self-declaration to the management company, stating the fulfilment of the requirements for benefit of the exemption.

If there is a negative difference between the sale and the purchase price (increased by any cost or expense related to the acquisition of the fund units), the latter amount can be used to offset other income, with certain limitations, depending on the nature of the investor.

Tax Regime of Investors into Real Estate Funds

Distributions of proceeds from real estate investment funds to resident investors are subject to 26% (final or advanced) withholding tax, to be applied by the management company. Proceeds included in the positive difference between (i) the redemption or liquidation value of the fund’s units and (ii) their average subscription or acquisition price are subject to the same tax treatment. No withholding tax applies to Italian non-mandatory pension and investment funds.

In order to counteract tax abusive structures, Italian tax law provides for certain anti-abuse provisions where the above regime does not apply to Italian resident investors (the fund is treated as tax transparent – ie, the taxpayer is taxed on proceeds realised by the fund, regardless of their actual distribution). This is the case when the investor holds (directly or indirectly) more than 5% of the fund. However, such anti-abuse rules shall not be applicable if the investor qualifies as an “institutional investor” (eg, banks, insurance companies, investment funds).

Non-resident investors are subject to 26% final Italian withholding tax (or the lower tax rate on outbound interest payments according to the provisions of any applicable Double Taxation Treaties).

Foreign “institutional investors” without a permanent establishment for tax purposes in Italy are exempt from the 26% withholding tax, provided that they are established in a White List Country. The definition of “institutional investors” for the purposes of the exemption at hand (which differs from the one applicable in respect to non-real estate investment funds)  includes:

  • foreign pension funds and foreign investment funds;
  • international bodies established on the basis of international treaties that are valid in Italy; and
  • central banks or entities that manage the state’s official reserves.

According to the interpretation of the Italian Tax Authorities, foreign investment funds are entitled to the exemption when the following requirements are fulfilled:

  • the foreign investment funds can be compared, regardless of their legal form and their liability to tax, to Italian regulated alternative investment funds from a substantial standpoint having the same purposes; and
  • the foreign investment funds (or their management companies/advisers) are subject to regulatory supervision.

Capital gains realised upon the sale of real estate fund units by Italian resident investors holding fund units as private assets and by non-resident investors are subject to 26% substitutive tax. If the units are held in the context of a business activity, the relevant capital gain is included in the taxable base, and ordinarily subject to IRES/personal income tax.

The 26% substitutive tax on capital gains does not apply to the following non-resident investors:

  • investors who are the beneficial owners of the income and are resident for tax purposes in White List Countries;
  • “institutional investors” established in White List Countries (the same definition applies as for the exemption from withholding tax on proceeds from Italian non-real estate investment funds described underTax Regime of Investors into Alternative Investment Funds (other than Real Estate Funds) above);
  • entities or international bodies set up in compliance with international treaties that are in force in Italy; or
  • central banks or organisations that also manage official state reserves.

The exclusion of Italy's right to taxation in respect of capital gains realised by a non-resident taxpayer upon the sale of a participation in an Italian real estate fund can also be granted under any applicable Double Taxation Treaties.

Carried Interest Schemes

Italian tax law provides that, if certain requirements are met, proceeds realised by Italian tax resident individuals under carried interest schemes shall be treated as income from capital and therefore subject to substitutive taxation, to be applied at a rate of 26%.

The applicable law provision does not introduce a special regime but rather clarifies the circumstances under which the carried interest proceeds have a financial nature, regardless of the existence of an employment relationship between the unitholder and the fund (or its manager/adviser).

The tax regime applies to directors and/or employees of entities who have a direct or indirect control, management or advisory relationship with the fund (or its manager/adviser). The conditions required to “secure” the qualification as income from capital are as follows:

  • carry holders shall commit themselves to actually invest an amount at least equal to 1% of the total investment of the fund;
  • proceeds from the units shall be payable only if all investors have received (i) full repayment of the invested capital and (ii) a certain return (“hurdle”) provided under the relevant by-laws/rules of the fund; and
  • a five-year minimum holding period is observed, or, in a change of control scenario, the units are held until that date.

Moreover, in determining the 1% threshold, relevance shall also be attributed to:

  • ordinary units into the funds, held by the carry holders (ie, co-investments); and
  • the value of the (ordinary or carry) units attributed to the carry holders as a benefit in kind and taxed as employment income.

If the above requirements are not met, analysis will be carried out on a case-by-case basis to assess whether there is any risk that the carry proceeds may be qualified as employment income, subject to personal income tax at progressive tax rates (eg, equal to 43% on taxable income exceeding EUR75,000) and related surcharges (if applicable).

Other Taxes

No stamp, registration or other duties, taxes or fees are required to be paid upon the subscription of the fund units. No capital duty is levied on the subscription of the fund units or the draw down payments to be made by the investors into the funds.

As a general rule, the execution of the documentation connected with the investment into the fund units is not subject to Italian registration tax. If the execution of the documentation is carried out through either a notarial deed or a notarised agreement, registration tax shall be due, at a fixed amount equal to EUR200. Non-notarised agreements are subject to registration tax, at a fixed amount equal to EUR200, only in case of use.

Both Italian resident investors and non-Italian resident investors who fall within the definition of “clients” for regulatory purposes are subject to Italian stamp duty on periodical communications related to fund units. The stamp duty at hand is applied on a yearly basis by the management company at a rate of 0.2%, on a taxable base equal to the fair market value of the fund units and, in the absence thereof, to their nominal or reimbursement value as periodically communicated by the management company. The stamp duty due from “clients” other than individuals is capped at EUR14,000.

The transfer of fund units is not subject to the Italian financial transaction tax.

Tax Incentives

Under Italian tax law, there are several special tax regimes providing incentives for investing into Italian investment funds. In general, such incentives are granted as exemptions from tax on proceeds arising from the investment and differ according to the nature of the investor and/or the investment fund.

Italian pension funds

Mandatory Italian pension funds (such as “enti di previdenza obbligatoria” and “casse di previdenza”) and other non-mandatory Italian pension funds making long-term investments (with a holding period of at least five years) into, inter alia, Italian alternative funds may benefit from an exemption from tax on the proceeds arising therefrom.

The investment funds qualifying for the above exemption shall invest most (>51%) of their capital into companies that are tax resident in Italy or that are based in EU/EEA countries but have a permanent establishment for tax purposes in Italy.

Assets whose proceeds benefit from the exemption are capped at 10% of the total assets of the pension funds.

Venture capital investment funds

Proceeds from the investment into certain Italian venture capital investment funds are not subject to tax. Such exemption applies to individuals, as well as corporate entities, regardless of their tax residency status.

For the purposes of applying such exemption, the fund shall invest at least 85% of its capital into unlisted small and medium enterprises that are in a seed, start-up, early-stage or expansion phase and have certain specific features (ie, a legal seat in Italy, subject to corporate income tax; annual turnover lower than EUR50 million; have been carrying out business for no more than 36 months, recently increased to seven years, subject to the authorisation of the EU Commission; and are participated in, directly or indirectly, mostly (51%) by individuals), and the remaining 15% in listed small medium enterprises.

The size of the investment into each “start-up” shall be lower than EUR2.5 million, on a 12-month basis.

The tax incentive at hand will be available up until 2022 (included).

Long-term individual investment plan (PIR)

A PIR is defined as the pool of qualified financial instruments and cash which, where certain requirements are met, is entitled to a special tax regime. In particular, such special tax regime is available to Italian tax resident individuals only, and entails the following:

  • an exemption from personal income tax (or substitutive taxation) on the proceeds arising from the financial assets underlying the PIR; and
  • an exemption from inheritance taxation on the financial instruments included in the PIR, in the case of the death of the holder of the PIR.

The financial instruments included in the PIR shall be held for at least five years, and the annual investment incentivised is limited to EUR30,000. The overall investment into the PIR shall not exceed EUR150,000.

For PIRs set up in 2020, the amount invested into the PIR shall be allocated, during each year and for at least two-thirds of the year, as follows:

  • 70% into financial instruments (eg, equity, bonds, non-speculative derivatives), even if not listed on a stock exchange, issued by Italian tax resident enterprises or enterprises that are tax resident in the EU or EEA and have a permanent establishment for tax purposes in Italy, with the following qualifications:
    1. 25% out of the 70% (ie, 17.5% of the overall amount invested into the PIR) into financial instruments issued by Italian tax resident companies that are not listed on the FTSE MIB index of the Italian Stock Exchange or other major foreign indexes;
    2. 5% out of the 70% (ie, 3.5% of the overall amount invested into the PIR) into financial instruments issued by Italian tax resident companies that are not listed on the FTSE MIB and FTSE Mid Cap index of the Italian Stock Exchange or equivalent;
  • the remaining part (the “free quota”) is not subject to such limitations and may be invested into other financial instruments or cash equivalents (ie, time deposits, bank accounts), if compliant with the other requirements (eg, concentration).

Italian investment funds may serve as qualified underlying investments of a PIR, if their investment policy is compliant with the requirements above (so-called “PIR-compliant” funds). Moreover, a PIR may also be set up by subscribing for units of an Italian investment fund.

Being the target of the PIR incentive mostly made of non-professional investors, retail funds units are usually preferred to alternative investment ones (which are more often used as indirect investments of a PIR scheme).

ELTIF

Italian tax law provides for a special tax regime in order to encourage investments into ELTIFs (European Long Term Investment Funds) regulated by EU Regulation 2015/760.

Similar to the PIR regime, Italian tax resident individuals may benefit from a tax exemption on proceeds arising from the investment into ELTIFs (direct or indirect – ie, investment into alternative investment funds fully investing into ELTIFs) that meet certain requirements, and from inheritance tax in the case of transfer mortis causa.

The special tax regime applies to investments into ELTIFs that meet the following requirements:

  • the funds raised by a fund management company must not exceed EUR200 million for each year, up to a total amount of EUR600 million for each fund management company; and
  • at least 70% of the capital is invested in the so-called “eligible investment assets” of “qualifying portfolio undertakings” (as defined by Regulation (EU) 2015/760) that are tax resident in Italy or are based in the EU/EEA countries but have a permanent establishment for tax purposes in Italy.

The investment into the ELTIFs shall be held for at least five years, and the annual investment incentivised is limited to EUR150,000. The overall investment shall not exceed EUR1,500,000.

The special tax regime provided for investments into ELTIFs, entering into force on 1 January 2020, is still subject to the authorisation of the EU Commission (until then it is ineffective).

Please see 2.1.1 Fund Structures (reference to SICAFs shall be interpreted, mutatis mutandis, as reference to SICAVs).

Instead of the SICAF, legislation provides for the possibility to use the SICAV structure (ie, a joint stock company with variable capital). The peculiarity of SICAVs, which also represents the difference compared to mutual funds, is that the investor becomes a shareholder of the company and, therefore, acquires a series of patrimonial rights (right to profits and capital redemption following the redemption request) and administrative rights. Like mutual funds, the capital of a SICAV is not fixed, but varies according to new subscriptions and redemption requests. SICAVs are open-ended entities: an investor can always subscribe new shares and request their redemption. This also shows the main difference compared to SICAFs (the legal structure that might be used by an AIFM to establish an AIF): the share capital is not fixed, but is equal to the net assets, which vary according to new subscriptions and redemptions. The shares representing the capital must be fully paid up when they are issued, and contributions can only be made in cash.

A SICAV may directly manage its assets or delegate their management to an asset management company; it may also carry out the related and instrumental activities established by the Bank of Italy, after consulting Consob, provided that the proper performance of the main business activity is guaranteed. As regards management limits, the legislator has laid down rules for SICAVs similar to those laid down for open-end mutual funds.

Please see 2.3.4 Regulatory Approval Process.

Please see 2.1.3 Limited Liability.

Please see 2.1.4 Disclosure Requirements. The management rules of the retail funds (other than AIFs) provide for the obligation of the AIFM to calculate the net asset value and to publish the relevant value on a bi-monthly basis.

In addition to the categories of investors indicated under 2.2.1 Types of Investors in Alternative Funds, it is worth noting that retail funds, by definition, can be subscribed by every category of investors without distinctions and minimum amounts. In addition, an important role in the fund-raising process of retail funds is played by banks and investment firms, which market the relevant units to their retail clients.

Please see 2.2.2 Legal Structures Used by Fund Managers.

There are no specific restrictions applicable in respect of the types of investors that can invest in a retail fund, provided that, before establishing a new retail fund, the relevant fund manager identifies the specific target market applicable to such fund – ie, the categories of individuals that can subscribe the relevant units/shares (positive target market) and the categories of individuals that cannot subscribe the relevant units/shares (negative target market), according to the MiFID 2 provisions regulating the product governance, as adopted by the Italian legislator.

Retail funds are subject to the relevant provisions included in the UCITS Directive, as adopted by the Regulations on collective asset management adopted by Bank of Italy on 19 January 2015. On a general note, retail funds invest their assets (i) consistently with their investment policy, (ii) in assets whose risks are adequately controlled within the risk management system, (iii) in assets that are liquid, so as not to jeopardise the obligation of the fund to redeem the units at any time in accordance with the management rules, and (iv) in respect of which the maximum potential loss that the fund may incur is limited – with the exception of certain financial derivatives – to the consideration paid for the relevant purchase/subscription.

While managing the relevant retail fund, it is not permitted to (i) grant loans other than those provided for in respect of forward transactions in financial instruments, (ii) sell short financial instruments (without prejudice to certain specific provisions with regard to limits on taking short positions in financial derivative instruments), (iii) invest in financial instruments issued by the same fund manager managing the fund, (iv) purchase precious metals and stones or certificates representing them, or (v) invest in assets directly or indirectly transferred or conferred by a shareholder holding qualified shareholdings, nor by a director, general manager or statutory auditor of the fund manager, nor by a company of the relevant group, nor to sell or otherwise dispose of such assets directly or indirectly to directors, statutory auditors or the general manager of the fund manager.

Please see 2.3.2 Requirements for Non-local Service Providers.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers.

Please see 2.3.4 Regulatory Approval Process.

Prudential rules deriving from MiFID 2 legislation regarding the marketing of funds in Italy apply to all firms authorised to do so, irrespective of whether the fund is an alternative fund or a retail fund.

The fund manager shall communicate its intention to market a retail fund in advance to Consob, by filing the relevant prospectus and key investor information document (KIID).

The marketing of a retail fund by an EU fund manager is subject to the provisions of the relevant State Member, and the marketing of the relevant units/shares is anticipated by a communication from the Member State’s supervisory authority to Consob.

Please see 3.2.3 Restrictions on Investors.

Please see 2.3.7 Investor Protection Rules.

Please see 2.3.8 Approach of the Regulator.

Please see 2.4 Operational Requirements.

In the exercise of its management activity, the retail fund may – up to a maximum of 10% of the total net value of the fund – take out loans to cover temporary mismatches in treasury management, in relation to the investment or disinvestment needs of the fund’s assets.

The duration of the loans taken out must be related to the purpose of the debt and in any case may not exceed six months. In the case of short-term borrowing, its use must be characterised by a high degree of elasticity. Within the above limits, loans in a foreign currency with a deposit with the lender of a corresponding amount of domestic currency (so-called back-to-back loans) are not counted.

Please see 2.5 Fund Finance.

Please see 2.6 Tax Regime.

As mentioned at the beginning of this document, recently enacted legislation relating to SIS has the aim of facilitating investment in Italian SMEs by creating a lighter regulatory environment (execution regulations are still pending).

McDermott Will & Emery Studio Legale Associato

Via Dante 15
20123 Milan
Italy

+39 02 3657 5701

+39 02 3657 5757

info-italy@mwe.com www.mwe.com
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Law and Practice

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McDermott Will & Emery Studio Legale Associato has an investment funds practice in Italy composed of four professionals with complementary expertise in legal, regulatory and tax matters. The firm’s network guarantees access to insights from the EU and US markets. The firm advises clients active in all sections of the funds market, including private equity, real estate, venture capital, debt, infrastructure funds and fund of funds. The team provides assistance on fund formation for sponsors/managers, fund review for investors, carried interest, incentive scheme and co-investment plan structuring, reorganisations and spin-outs, secondary transactions, mergers of private equity houses, fund governance, transaction structuring and fund level finance arrangements, including investor call, equity bridge, co-investment and warehousing facilities. The team has unrivalled experience in the Italian market, having assisted a number of GPs acting in different sectors on their most recent fund-raising and structuring initiatives, such as Ambienta (EUR650 million), Consilium (EUR250 million), Metrika (EUR120 million), Innogest (EUR120 million), Equita (EUR200 million) and Sagitta (EUR200 million).

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