The COVID-19 pandemic has obviously had a strong impact on the fundraising process, causing a slowing down of subscription processes and a slight decrease in the amounts allocated by institutional investors to the various projects that were in the fundraising process during Q1 2020. Nonetheless, the market reacted positively starting from the end of Q2, and a lot of new private equity/venture capital-driven projects are on the way, with a strong boost coming from the state-owned investment arm (Cassa Depositi e Prestiti – CDP) using the country’s saving to support the growth of many private equity/venture capital projects becoming limited partners in the various alternative asset fund managers (AIFMs).
Moreover, the introduction of a new favourable tax regime for individual investors (see 2.6 Alternative Funds Tax Regime) will certainly have a positive impact on the fundraising process for family offices and in the retail sector.
On the structuring side, a relevant prospective change in the regulatory framework (see 2.3.1 Regulatory Regime for Alternative Funds) will make Italian investment funds that are focused on direct lending a prospective alternative option to banks, which have maintained a substantial monopoly on lending activity.
From a legal standpoint, alternative investment funds (AIFs) may be established in two different forms.
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 either directly by the relevant person by subscribing the unit/share, or 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).
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 European Long-term Investment Funds, or ELTIF). Once established, the fondo chiuso shall be registered with the competent register held by the Bank of Italy, and given an International Securities Identification Number (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.
Whether 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, documentation in relation to the organisational structure, and a programme of activities. The authorisation process is supposed to last between five and seven months, and it 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:
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 AIFs, which may be subscribed by the following:
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.
It is worth highlighting that, during Q3 2020, the Italian Ministry for Economy and Finance launched a public consultation in relation to proposed amendments to the limits to participation in reserved AIFs. The proposed amendment is aimed at allowing access to reserved AIFs to a wider audience of retail customers, specifically the following:
The proposal for reduction in the minimum subscription amount for retail investors is now under consultation, but the reduction or elimination of minimum thresholds is not generalised: lower thresholds are foreseen where the investment in reserved AIFs is carried out as part of the provision of investment consultancy and portfolio management services and, therefore, with the intervention of qualified intermediaries and – due to the services provided – with the obligation to assess the suitability of the investment.
Reserved closed-ended AIFs 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):
Non-reserved open-ended AIFs are subject to the investment limitations provided with respect to UCITS funds.
Non-reserved closed-ended AIFs are subject to certain investment limitations, such as prohibitions on selling short financial instruments, investing in financial instruments issued by the AIFM managing the fund, and investing 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 undertaking for collective investment 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.
It is worth highlighting that, during Q3 2020, the Bank of Italy launched a public consultation aimed at simplifying the regulations applicable to Italian AIFs in order to remove some potential obstacles to their diffusion and facilitate their use as a channel of financing for the real economy: in this sense the proposed amendments provide for the removal in toto of the concentration limit of 10% indicated above and applicable to reserved AIFs, and the increase to 20% of the total assets of the fund of the investment in credits viz a single counterparty applicable to non-reserved AIFs.
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 submitting 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 Alternative Investment Fund Managers Directive (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; in addition, the potential target market (positive and negative) shall be identified in advance and disclosed to the competent authority. The process takes around 60 days to be completed. This regime is not applicable to sub-threshold Italian AIFM. Retail clients subscribing units/shares of a reserved AIF shall be provided the key investor document (KID), pursuant to the PRIIPs regulations, by the AIFM, before the relevant subscription.
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:
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 EU Regulation 231/2013 shall apply.
Activities related to the valuation of the AIF’s assets may be carried out internally (by an independent person in the case of a fully licensed AIFM – 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 not many financial institutions have developed a dedicated desk to fund finance. 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.
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.
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. In 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:
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 also to IRAP 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 does not have a permanent establishment for tax purposes in Italy and 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:
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 deposit the units with an Italian qualifying financial intermediary and submit proper documentation and self-declaration to the management company, stating the fulfilment of the requirements to benefit from 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 the redemption or liquidation value of the fund’s units and 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:
According to the interpretation of the Italian Tax Authorities, foreign investment funds are entitled to the exemption when the following requirements are fulfilled:
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:
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:
Moreover, in determining the 1% threshold, relevance shall also be attributed to:
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).
No stamp duty, registration duty 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 drawdown 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.
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/EU 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 shares issued by 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/EU 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 seven years; 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).
“Ordinary” long-term individual investment plan (PIR ordinari)
A PIR is defined as the pool of qualified financial instruments and cash that is entitled to a special tax regime if certain requirements are met. Such special tax regime is available to Italian tax resident individuals only, and entails the following:
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 from 2020 onwards, the amount invested into the PIR shall be allocated, during each year and for at least two-thirds of the year, as follows:
Mandatory Italian pension funds and other non-mandatory Italian pension funds may also set up a PIR benefitting from the exemption from taxation on proceeds.
Italian/EU 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).
“Alternative” long-term individual investment plan (PIR alternativi)
The “alternative” PIR was introduced in 2020 as a new type of PIR. The tax benefits are the same as apply to the “ordinary” PIR: exemption from taxation on proceeds and from inheritance tax. The main differences are as follows:
A taxpayer can benefit from the incentives of an “alternative” PIR in addition to an “ordinary” PIR.
The law introducing the “alternative” PIR repealed the tax incentive applicable to ELTIFs (European Long Term Investment Funds regulated by EU Regulation 2015/760) that was introduced in 2020 but never came into effect, pending the authorisation of the EU Commission.
Please see 2.1.1 Fund Structures (reference to SICAFs shall be interpreted, mutatis mutandis, as reference to société d'investissement à capital variable – 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-ended mutual funds.
Please see 2.3.4 Regulatory Approval Process.
Please see 2.1.3 Limited Liability of Investors.
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, banks and investment firms play an important role in the fundraising process of retail funds, marketing 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, the following is not permitted:
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 for Alternative Investment Funds.
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 Alternative Investment Funds: Fund Finance Market.
Please see 2.6 Alternative Funds Tax Regime.
As mentioned above, recently proposed amendments to the regulatory framework are aimed at allowing the subscription of units/shares of reserved AIFs to a wider audience of retail customers, and facilitating the use of AIFs as a channel of financing for the real economy (execution regulations are still pending).
The Fundraising Outlook – Market Trends and Structuring Options
Article 136 of Law Decree 19 May 2020 (No. 34) imposed a new exemption regime on investments into alternative investment funds, stating that the same regime “shall be considered a permanent measure aimed at incentivising equity and debt investments into the real economy … through channelling the private savings into the business world.”
In the course of the first wave of the COVID-19 pandemic (February to April 2020), the liquidity amounts of Italian private savings increased by more than EUR34 billion (source: Censis, July 2020). From 2017 to 2019, the overall increase of liquidity of private savings was equal to approximately EUR121 billion. While the aim of investors in the medium/long term is to maintain or increase their investments into alternative funds asset classes (source: Preqin Investor Survey, April 2020), there are no doubts that the pandemic has heavily affected – and will continue to materially affect – the fundraising process in the short term. This conclusion holds especially true with regard to first-time funds.
The large amount of "dry powder", alongside the low performance of liquid investments, will certainly grant strong fundraising opportunities for alternative assets. However, due to the uncertainty of the economic environment, investors’ preference will be focused on fund managers with strong and consolidated experience in the market and substantial assets under management. Italian fund managers are relatively small compared to the average in the European market, so Italian fundraising activity will probably face some difficulties in the short term. For this reason, private savings will represent a very important alternative source of funding for Italian managers, and the tax measures recently enacted by the Government will enhance such opportunity. Indeed, alongside the exemption regime noted above, the Bill of Law for 2021 (Article 1, para. 219 of Law 30 December 2020, No. 178) has also introduced a tax credit regime granted in case of capital loss incurred from the same investments into alternative investment funds made in 2021. Such tax credit shall be equal to the amount of losses actually incurred, up to 20% of the total amount invested.
As a consequence, Italian resident individuals will be able to invest into alternative investment funds and, under certain conditions (eg, when at least 70% of the capital is invested in Italian or European enterprises with permanent establishment in Italy, or a minimum holding period of five years is verified), they will benefit from a safeguard (ie, tax credit) on capital losses (if any) on the one side, and a substantial increase of the prospective net performance equal to the tax savings on the proceeds (26%) on the other side.
In such a context, many fund managers are exploring (and some have already implemented) new types of products, which may be able to bridge the request for long-term value for private savings and the increasing demand for credit and private capital from businesses and the economic system. These investment schemes may be summarised as having the following main characteristics:
Typically, this type of product would fit well with the European Long-Term Investment Fund (ELTIF) Regulation (Regulation (EU) 2015/760), which is now under review by the European Commission following the public consultation process. In this regard, it is worth noting that eight of the 11 Italian fund managers that are enrolled in the Bank of Italy's Register of ELTIF managers were authorised in 2020 (source: Bank of Italy website).
The Distressed Debt Market
The Italian insolvency framework makes a number of restructuring options available to firms and creditors in order to avoid liquidation and preserve business continuity. However, the effectiveness of these instruments is often limited. While the liquidity measures enacted by the Italian Government during 2020 have delayed some of the financial effects of the economic downturn, it is expected that, in the next few years, Italy will be one of the main markets in Europe for distressed debt transactions. This is due not only to the continued effects of the COVID-19 pandemic but also to structural features such as the consolidation of the Italian banking sector and the increased bank provisioning.
The Italian regulatory framework on direct lending capability has historically been very tight. Up until the implementation of the Alternative Investment Fund Directive (Directive 2011/61/UE), only banks and securitisation vehicles were permitted to carry out direct lending in the Italian territory. Since 2015, alternative investment funds have been formally included amongst those allowed to provide financing to third parties. However, due to the strict investment limitations and, in particular, the 10% concentration limit applicable to credit funds (to be met within six months of the date of establishment of the investment scheme), the structuring option to carry out direct lending services by firms other than banks was de facto limited to securitisation vehicles.
On 30 July 2020, the Bank of Italy released a consultation paper on some proposed amendments to the Regulation on Collective Asset Management, including the proposal to eliminate the above 10% concentration limit. The prospective amendments to the Regulation shall have a definite impact on the Italian financing market, welcoming alternative investment funds to carry out lending activities (including the acquisition of NPLs) in Italy with a greater level of structuring flexibility and a material reduction of operational expenses.
The New (Expected) Wave of Foreign Fund Managers Investing into Italy
In the last decade, international fund managers showed some reluctance in making investment into the Italian market, despite a high level of interesting opportunities and lower pricing compared to similar European mid-sized markets (eg, Nordic countries).
It was commonly shared that one of the greatest obstacles to investing in Italy was legal uncertainty, related mainly to the applicable tax framework. As a matter of practice, foreign investment funds previously invested into Italian companies through the interposition of foreign special purposes vehicles (SPVs) in order to obtain, inter alia, treaty protection on capital gains and, under certain conditions, exemption from withholding tax on outbound dividends under the EU Parent-Subsidiary Directive.
However, the interposition of such vehicles has been subject to extensive scrutiny by the Italian tax authorities under the “beneficial ownership” test and the anti-avoidance rules, mainly relying on the lack of sufficient “economic substance”.
The Italian Tax Bill for 2021 has introduced some new provisions that will have a very significant and positive impact on the asset management industry and in particular for EU investment firms investing into Italian companies.
The changes are aimed at repealing a discrimination under Italian tax law in respect of the Italian tax treatment applicable to financial proceeds realised by foreign investment funds from Italian companies (dividends and capital gains) compared to the more favourable tax treatment applicable to Italian investment funds on the same proceeds.
Indeed, investment funds established in Italy (regardless of whether they fall under the UCITS Directive provision or are managed by AIFMD-compliant managers) are deemed to be an Italian resident person for income tax purposes, although they are exempt from corporate and local operating profit taxes.
Consequently, proceeds realised by Italian investment funds arising from their investments shall be received gross of any Italian withholding tax or substitutive tax (with some minor exceptions – eg, under certain conditions, interest from certain unlisted bonds), and shall not be subject to Italian income taxes.
On the contrary, foreign investment funds were generally subject to Italian taxes on the proceeds realised from investments into Italian companies, levied at 26% on dividend income and on capital gains on “qualified participations” – ie, a participation representing more than 20% (2% in the case of a listed company) of the voting rights or 25% (5% in the case of a listed company) of the capital. An exemption regime was available only with respect to capital gains realised upon the sale of “non-qualified participations” and participations into Italian companies listed on regulated markets.
The discrimination against foreign investment funds, representing a violation of the fundamental freedoms provided by EU law, had been brought to the attention of the EU Commission, which had already launched an investigative initiative with the competent Italian authorities (EU PILOT 8105/15/TAXU, which refers to a potential discrimination against EU investment funds over Italian funds only, and not extra-EU funds).
According to the amendment enacted by the Tax Bill for 2021, EU investment funds investing in Italy shall be subject to the same tax treatment as Italian funds. More particular, the amended tax law establishes that dividend income paid by Italian companies, and capital gains upon the sale of the same companies, shall not be subject to tax in Italy if it is realised by foreign funds falling within the following categories:
Based on the wording of the enacting law and the accompanying explanatory note, the new provision shall enter into effect with respect to distributions of profits and capital gains realised as of the entry into force of the same law (1 January 2021).
The new tax regime shall represent a landmark change to the tax regime of EU investment funds, allowing them to invest directly into Italian companies and benefit from the exemption regime already granted to Italian investment funds. It will also provide for extensive increased flexibility on fund structuring for Italian fund managers. Indeed, under the provisions of the AIFMD, an Italian fund manager may set up alternative investment funds in any European jurisdiction, and thereby gain access to a wide range of structuring options beside the Italian Fondo Chiuso (in the form of a contractual arrangement) or the SICAF (società investimento a capitale fisso, in the corporate form). Accordingly, from 2021, Italian managers will be in the position to set up a Luxembourg limited partnership, whose legal structure is very familiar to international investors, and carry out their investment activities in Italy without any concern regarding the tax effect of such structure.
As far as the scope of application of the new provision is concerned, it is worth noting that the wording of the law refers to “dividends paid” and “capital gains realised” by EU investment funds. Based on a literal interpretation, the exemption should apply only if the first payee (in the case of dividends) or the direct recipient of the sums from the sale (in the case of capital gains) qualifies as an EU investment fund. Accordingly, only direct investments would fall within the scope of the new tax exemption. Such interpretation would be consistent with recent guidelines of the Italian tax authorities commenting on other Italian domestic relief rules providing similar wording (see Rulings No. 76 and No. 423 dated 2019). However, such a restrictive approach would prevent the application of the new tax exemption provision to foreign SPV structures used by EU investment funds, which can be set up for other non-tax non-marginal reasons (eg, ring-fencing, security package on financings), regardless of their “economic substance” for tax purposes.
As explained above, there have been several significant changes to the legal and tax framework in Italy, which are expected to have a material impact on the investment fund industry, by providing for the increased alignment of the Italian market with other European jurisdictions historically perceived as attractive environments for setting up fund manager operations (eg, Luxembourg) and carrying out investment activities (eg, France).