For civil aspects, the Italian Civil Code is the main source of real estate law. Commercial leases are governed by Law No 392/1878 (the Tenancy Law), while residential leases are governed by Law No 431/1998. Zoning and planning aspects are mainly regulated by several national, regional and municipal laws and regulations.
Commercial transactions in the Italian real estate market (ie, not including residential transactions) reached approximately EUR12 billion in 2019. The main investment sectors were hotels, office and logistics. In 2019, Italy also experienced some transactions concerning micro-living and student/senior housing.
In 2019, the Italian real estate crowdfunding market saw a significant increase, from both an equity and a lending perspective, reaching an overall amount of EUR34.9 million.
Real estate crowdfunding can be an alternative instrument for developers and investors compared to the standard financial institution market.
In 2019, Italy saw the first real estate transaction completed through the STO system (ie, Security Token Offering), involving a non-performing loan held by Unicredit S.p.A.
It is clearly a growing market still to be discovered and implemented but it has all the necessary features to become the right alternative market for small/medium projects accessible to retail and institutional investors.
Over recent years, Italy has seen an increase in the short-term rent market. Short-term rent is not properly regulated in Italy, so the Italian legislator is working on it. An initial proposal of a regulation was filed at the end of 2019, but has not been approved. In a nutshell, the proposal provided for a stricter regulation for operators dealing with short-term rent, including the obtainment of a specific licence from the relevant Municipality, which has to assign such licence on an annual basis to the various operators. Licences should have been issued in a limited number. In addition, the proposal provided that the Municipality should adopt a municipal regulation dealing with short-term rent.
In relation to urban zoning, Milano – the booming Italian real estate market – has approved its new Town Planning Scheme (the so-called PGT entered into force on 5 February 2020), easing the change of use from industrial activity to office and residential, as well as fostering both regeneration and densification projects.
The categories of property rights that can be acquired are as follows:
Standard Italian transactions refer to sale and purchase or absolute freehold/full ownership.
The Italian Civil Code governs the transfer of title of ownership along with tax, zoning/planning and cadastral regulations.
A deed transferring a real estate asset shall be in writing and executed before an Italian Notary that has the duty to authenticate it. Preliminary sale and purchase agreements shall take the same form as the final deed and, therefore, must be done in writing.
Parties can freely negotiate the content of the notarial deed, save for the following requirements imposed by law:
Once executed, the Notary takes care to file the deed with the Real Estate Register (Conservatoria dei Registri Immobiliari); this is not a requirement for the validity of the notarial deed but it is necessary to avoid conflicts with third parties and future buyers.
Italian Notaries carry out a search on title in the Real Estate Register.
The Notary's report is usually part of the legal due diligence and includes an investigation into the existence of any third-party rights as well as the seller's title to the property. Because the Italian legal system gives the buyer a certain level of assurance in terms of title to the property, title insurance might not be necessary; however, the execution of title insurance at the time of acquiring a real estate asset is increasing because a great number of foreign investors are coming to Italy.
A potential purchaser shall build up a team composed of legal, tax, commercial and technical advisers.
Areas of investigation are as follows:
A notarial report confirms the goodness of title and lists the transfers of title over the past 20 years (the term relevant for adverse possession) and any registered prejudicial liens (eg, mortgages, lawsuits affecting the property, easements, and obligations stemming from zoning instruments).
According to statutory law, the seller has to guarantee the following:
According to the Italian Civil Code, the purchaser has to notify the seller of any breach of the warranties within eight days of the relevant discovery. A one-year statute of limitations applies from the date the purchaser takes possession of the property. These provisions may lead to the termination of the purchase agreement, and to a full refund of the purchase price.
According to current market practice, the parties negotiate and include additional representations and warranties, and agree to depart expressly from the set of rules included in the Italian Civil Code in relation to warranty defects thus derogating to the above-mentioned time limitations.
Parties usually include contractual remedies (eg, restoration of damages based on concept of a de minimis/basket and cap) or special indemnities to cure the breach of the representations and warranties. This indemnification structure prevents the termination of a sale and purchase agreement once the transfer of title has been consummated.
Depending on the structure of the transaction, the investor should carefully evaluate all tax aspects of the investment. Other areas to be taken into account would vary based on the type of investment to be carried out. In relation to core investment, a detailed evaluation of leases in place would be required, while for core plus investment – where the goal is to increase/create value – planning and zoning aspects should be evaluated in detail, with the same approach to be applied as for the acquisition of a development project.
Italy applies the "polluter pays" principle, which means that an owner who is not responsible is not obliged to carry out the necessary remediation works. However, if the owner does not carry out remediation works, they would not be entitled to carry out construction works and, in the worst case scenario, the public authorities might compulsorily purchase the area and carry out the remediation works; upon the sale of the area, the public authorities should return to the owner the excess price obtained through the sale compared to the costs borne by the public authorities to carry out the remediation works. This has happened in relation to sites of national interest that have needed to be cleaned up.
The permitted use of an asset is set forth in the general town planning scheme of the city but, in case of existing buildings, the construction history of each asset should also be taken into account, since it could affect the establishment of a specific use.
A buyer may ascertain the permitted use under the town planning regulations in force by requesting a zoning certificate (certificato di destinazione urbanistica – CDU).
The implementation of a project of development may require the developer to enter into a town planning agreement with the Municipality in order to regulate specific features of the project and the carrying out of public works.
If there is a supervening public interest, Italian authorities might start an expropriation procedure, in which case an indemnification shall be paid to the owner of the property/land. It should be noted that the indemnification is at market price of the property/land subject to expropriation.
The sale of a non-residential real property by one VAT entity to another VAT entity is generally VAT-exempt, other than in the following circumstances:
In either of these cases, one of the following two mechanisms will respectively apply:
The applicable VAT rate is either 22% or the reduced rate of 10%, if the real property sold had been subject to material renovation works.
The following taxes will be payable in any sale and purchase of real assets (regardless of its VAT status):
Mortgage tax and cadastral taxes can be reduced to an aggregate 2% rate if one of the parties to the transaction is an Italian real estate investment fund (REIF) or if the real property is acquired by an Italian listed real estate investment company (SIIQ). Generally speaking, VAT can be offset with output VAT, offset with other taxes up to the limit of EUR700,000 per year, or recovered over a period of up to two years after the sale and purchase.
The sale of residential real property by a VAT entity to another VAT entity is generally VAT-exempt, except where:
The following taxes apply in sales of residential real properties that are VAT-exempt:
Otherwise, the registration tax, mortgage tax and cadastral tax will each be due as EUR200.
Typically, the purchaser will pay the transfer tax, the fees for the Notary and any legal fees or expenses in connection with the sale and purchase agreement, except for legal costs (if any) incurred to release any encumbrances over the real property, which are the responsibility of the seller. Brokerage fees typically range from 1% to 3% of the sale price.
If the transfer of the real asset is the result of the acquisition of the entity that owns the real asset, then the transfer transaction is VAT-exempt and a registration tax of EUR200 will be due, regardless of which percentage of ownership in the entity is purchased, and no stamp duty will be due in connection with the transaction. However, a financial transaction tax (also called a Tobin Tax) will be due in a purchase of any number of shares representing the corporate capital of a joint stock company (but not in case of quotas in a limited liability company) that is an Italian resident company for tax purposes, regardless of whether the purchaser or the seller is an Italian resident. This financial transaction tax is 0.2% of the sale price.
In principle, there are no restrictions on foreign investors acquiring real estate. However, if investors come from countries where rights are limited or restricted, it is advisable to check the applicability of the so-called reciprocity principle (ie, whether the country of the investor gives similar right to Italy).
Commercial real estate purchases are generally financed through bank loans.
To foster overseas investments in the real estate market, Italy approved Law Decree 133/2014, which regulates real estate investment trusts (ie, SIIQs) and sets forth provisions to remove barriers for foreign funds and insurance companies that obtain financing in Italy for real estate acquisitions.
Typically, Italian real estate finance transactions are assisted by an extensive security package that includes a mortgage over the real property; the assignment of rental receivables; a pledge over the corporate capital of the borrower; a pledge over the borrower's bank accounts; the assignment of receivables under other contracts or of insurance proceeds; and a loss payee clause in connection with any insurance policy (other than covering third party risks).
Pursuant to the Italian Banking Act and Decree No. 53/2015, the providing of loans on a professional basis to the public (both clients and non-clients) is reserved for certain qualifying entities, which include financial intermediaries, insurance firms, alternative investment funds and securitisation vehicle companies. Lending provided by other entities is prohibited, and may give raise to a criminal offence.
According to Italian law, lending activity falls within the scope of the reserve described above when it is carried out on a professional basis. This requirement is not triggered when the lending activity is a one-off transaction; however, this circumstance should be verified on a case-by-case basis as the interpretation of the provisions of law is very strict.
The following are payable when a mortgage is created over a real property:
If the transaction is eligible for substitute tax (ie, an all-inclusive tax at a rate of 0.25% (for business entities) of the principal amount of the loan), then no registration tax, mortgage tax, cadastral tax, stamp duties, governmental duties or other taxes and duties will be charged, and "substitute tax" will be paid instead.
Substitute tax can be applied when:
The granting of security on own assets in favour of third parties is always subject to the existence of a corporate benefit, and to certain restrictions in financial assistance situations.
Corporate benefit should exist, and be verified, on a case-by-case basis. Transactions within a group of companies are evaluated by taking into account the group’s benefit (but there should nonetheless be a direct benefit for the entity concerned).
In the case of joint stock companies, financial assistance is generally prohibited, but it is possible to provide security over own assets subject to the compliance with certain steps, formalities and restrictions. Limited liability companies are subject to stricter rules.
In the case of borrower default, the acceleration of the loan and the enforceability of the relevant security are regulated by the provisions of the Italian Civil Code, as supplemented by the facility agreement and the security documents. The Italian Civil Procedure Code sets forth the steps and formalities to be used to enforce security.
In principle, secured debt ranks prior to subsequent debt because priority follows a timing order, subject in any case to the fulfilment of the relevant formalities.
Non-secured debt ranks junior to secured debt. However, in certain circumstances the law provides for priorities ranking prior to secured debt including (by way of example, certain taxes or indebtedness vis-à-vis workforce and social security) in the absence of a formal security.
In any case, priority applies in an enforcement scenario.
In a bankruptcy scenario, the secured debt retains its priority but the security can no longer be enforced, because the process to sell the borrower's assets is managed by the bankruptcy receiver, in compliance with the provisions of the Italian Insolvency Law.
Italy applies the “polluter pays principle”. Where the current owner of a real property is not responsible for the pollution, it can still perform the remediation activities on a voluntary basis. Lenders are not juridically liable in relation to environmental issues affecting borrowers.
In principle, security constituted in compliance with the requirements set forth by law is opposable if the borrower goes bankrupt. If such requirements are not met (by way of example, security given after the drawdown of the loan, or for an amount exceeding the loan amount outside the current practice), certain security could be deemed void in cases of bankruptcy, upon a motion by the receiver and a finding by the Court that the security is void.
In certain circumstances, any security created in breach of the Italian Law on Insolvency may also give rise to criminal liability in the context of a bankruptcy procedure.
At this stage of the transition period for the LIBOR index, the market is following the LMA (Loan Market Association) suggestions. A change of the reference rate also affects the exercise of the lender's voting rights. In the Italian real estate financing market, the variable rate used is the EURIBOR – LIBOR is neglected.
Town planning rules are set forth by each Municipality at a local level by means of the general town planning scheme.
The local discipline must be in compliance with national and regional legislation (indeed, zoning is a shared competence between the State and the Region), as well as with higher ranking plans (such as the regional and provincial plans).
As a general rule, the region must also check and approve each local town planning scheme.
The regulation of the design, appearance and method of construction of new buildings, and the refurbishment of existing buildings, is set forth principally at a national level. However, certain aspects of design and appearance may be further detailed locally.
The Municipalities are in charge of controlling compliance with the regulation.
The Municipality is the authority responsible for authorising and controlling the development of individual parcels of real estate.
If the asset is affected by specific restrictions, the authority competent over the constraint must issue its prior approval. For instance, if the asset is affected by a cultural lien, the Superintendence of Cultural Heritage must also approve the project.
In any case, projects of development must comply with town planning, building, hygiene, health and safety, static and fire prevention regulations, as well as with any specific constraint (hydrogeological, cultural, landscape, etc) affecting the asset.
The entitlement procedure and specific building title depend on the type of building works to be carried out, and are mainly regulated by national legislation.
For most building works, the developer must submit a prior certified notice to the Municipality (“Start Works Notice” – SCIA/Segnalazione Certificata di Inizio Attività), which is checked by the relevant municipal offices. Particularly significant building works are subject to the issuance of a building title on the part of the Municipality.
That being said, the general town scheme may – at a local level – provide for the necessity to approve a prior implementation plan or to enter into a town planning agreement.
The operator who requested and was denied a building permit may challenge the denial before the Administrative Regional Court.
Third parties may request to take part in the administrative procedure for the issuance of the building title and/or challenge an existing title (before the Administrative Courts) as long as they have legal standing to sue (ie, those who can prove to have a direct interest in the project of development and to be affected by it).
Entering into a town planning agreement is necessary for implementation plans. Through such agreements, the Municipality and the developer discipline various aspects of the development, such as the realisation of urbanisation works – roads, squares, parks and so on – and the transfer of areas to the Municipality for public use.
Town planning agreement are also sometimes necessary in case of a mere building title, when certain specific features of the project must be regulated (eg, planovolumetric aspects, public works, the transfer of development rights, or the establishment of private services of general interest).
Any building works carried out in violation of building and town planning regulations may be subject to a suspension order, a demolition order and/or an order to re-establish the legitimate status of the building. The developer may also incur administrative and criminal liability.
Real estate investments in Italy are mainly carried out via one of the following types of investment vehicles, or a combination thereof.
Real estate companies are special purpose vehicles carrying out the purchase/sale, management, leasing and building of real estate assets. Real estate companies are generally formed as limited liability companies (società a responsabilità limitata – S.r.l.) or joint stock companies (società per azioni – S.p.A.), and are usually not listed on an exchange (with a few exceptions).
Real Estate Investment Funds (REIFs)
REIFs are undertakings for collective investments, and are generally utilised to invest in a plurality of real estate assets.
REIFs must be managed by licensed Italian managers, or alternatively by non-domestic EU managers under the freedom to provide services regime (management passport), or by establishing an Italian Branch.
REIFs must invest at least two thirds of their assets into real estate assets (including rights in rem on such assets, equity interests in real estate companies, and units of other REIFs). The remaining third may be invested in listed or non-listed financial instruments.
REIFs may not directly carry out building activity and, more importantly, may not directly own business activities, which are deferred to affiliates indirectly owned by the REIF.
Listed Real Estate Investment Trusts (SIIQs)
Listed real estate investment trusts are Italian investment vehicles that have the following features:
Real Estate SICAFs
A RE SICAF is an Italian joint stock company with fixed corporate capital and that has its registered office and headquarters in Italy. A RE SICAF raises capital by offering its shares or other equity instruments, and invests the capital raised into real estate assets.
The considerations that apply to REIF investments also apply, mutatis mutandis, to RE SICAF investments.
Limited liability companies have a corporate capital divided into quotas with no face value.
Joint stock companies have a corporate capital divided into shares with the same face value.
The minimum capital required is EUR10,000 for limited liability companies, and EUR50,000 for joint stock companies.
A limited liability company is characterised by greater flexibility, and quota-holders have wider autonomy in shaping the company according to their needs through the provision of different rules within the by-laws, while a joint stock company is governed by a major number of mandatory provisions.
Unless provided otherwise under the by-laws, the management of the company is granted to the board or to a sole director, or to more directors with a joint/single signature. Resolutions can be adopted through “written consents” or “written consultation” procedures. These companies can appoint a control body, composed – unless provided otherwise under the by-laws – of a sole statutory auditor and, as an alternative or in addition, an auditor or an auditing firm. If certain financial and patrimonial thresholds are exceeded, such appointment becomes compulsory.
As per joint stock companies, the standard model provides that the general meeting appoints the board of directors or a sole director for the management of the company, as well as a board of statutory auditors for the control of the compliance of the company's activity with the law and the by-laws, and on the fairness of the company’s management. This model applies unless a different model is explicitly chosen within the by-laws. An auditor or auditing firm controls the accounts of the company. In certain specific circumstances, the audit of the accounts can be vested with the statutory auditors (instead of the auditor/auditing firm).
The annual entity maintenance and accounting compliance cost would really depend on the amount of activities to be carried out. On an average basis, for both types of companies, costs range from a minimum of EUR10,000 up to EUR20,000. Auditors’ costs shall be added.
Italian law recognises two type of leases: property leases and business leases.
A property lease concerns non-residential properties (eg, office, retail and hotel) and residential properties.
Property leases are mainly regulated by the Italian Civil Code, Law No 392/78 (in relation to non-residential properties) and Law No 431/98 (in relation to residential properties).
The Italian tenancy law on non-residential properties (ie, Law No 392/78) was amended on 11 November 2014, allowing the parties to freely negotiate the terms and conditions of a lease if the lease provides for an annual rent higher than EUR250,000 and the building does not have historical value – the so-called “big leases”. This new law granted more flexibility to the parties and, in particular, to landlords because the Italian tenancy law included provisions that were a bit more favourable to landlords.
A business lease is a lease that concerns a “going concern” or a business (ramo d’azienda or azienda) that might include a property. In this case, the lease is only regulated by certain provisions of the Italian Civil Code so the parties are granted wider freedom to negotiate the terms and conditions of the lease.
The Italian tenancy law on non-residential properties regulates leases concerning offices, retail properties and hotels.
The parties are free to determine rent amounts.
Italian laws set a minimum term for leases (as reported below), and the parties can freely fix the term in big leases.
The Italian tenancy law provides for fixed minimum terms for non-residential leases of six years for office/retail properties and nine years for hotel properties. Temporary leases can be entered into based on certain objective reasons. In big leases, the parties can agree on a different term.
Upon the expiry of the first period, the lease automatically renews unless either party gives notice not to renew at least 12 months prior to the expiry term, or 18 months for hotels.
A residential lease has a fixed/minimum term of four years. Upon the expiry of the initial term, the lease automatically renews for a further period of four years, unless the parties agree otherwise.
The Italian Civil Code distinguishes between ordinary and extraordinary maintenance works, and tenants are generally responsible only for ordinary maintenance; however, parties can deviate from this principle.
The frequency of rent payments can be freely agreed between parties. Current market practice provides for payments on a quarterly basis.
The parties are free to determine the rent, but once fixed it is subject only to an annual review based on 75% (or 100%) ISTAT consumer price index. Following November 2014, in big leases parties can freely negotiate and determine a mechanism to review and update the rent; however, current market practice still provides for the update of the rent based on ISTAT consumer price index.
Turnover rents, stepped rents and free rent periods are also permitted.
See 6.5 Rent Variation.
Non-residential leases are VAT-exempt, unless a landlord opts for the VAT (at a 22% rate) regime to be applied. The VAT option shall be clearly stated in the agreement.
No other costs should be paid by the tenant, unless there are fit-out works to be carried out within the property. If this is the case, parties shall define which works are for the benefit of the tenant and those that are for the benefit of the landlord.
Each party pays its own maintenance costs. Maintenance costs for common portions of the property are sustained by the landlord and reimbursed by tenants on a pro rata basis.
Tenants pay utilities and telecommunications costs.
The tenant is required to take out policies covering any damage caused to third parties or to the property as a result of the activities carried out by the tenant within the premises.
Use of the real estate shall comply with the zoning and planning provisions. The lease states the use of the property and the tenant is not allowed to change it, subject to termination of the lease.
The tenant is usually allowed to alter/improve the property, subject to the landlord’s consent. Upon the expiry of the lease, the landlord may require the tenant to remove all alterations and improvements, or may decide to acquire all alterations and improvements for free.
Law No 392/78 regulates commercial leases (eg, office, retail and hotel), and Law No 431/98 regulates residential leases. The Italian Civil Code applies to all leases.
A landlord is not allowed to terminate the lease in the event of the tenant's insolvency; a specific procedure set up by the Court-appointed receiver will take place.
A cash deposit of up to three months’ rent is usually provided to a landlord to protect against a failure by the tenant to meet its obligation. Bank guarantees/insurance policies can cover higher amounts. Corporate guarantees are even delivered by the tenant.
At the expiry date, the tenant shall vacate the property. Should this not be the case, the lease provides for the payment of certain holdover indemnities up to a certain period. Upon the expiry of this grace period (if agreed), the landlord may seek a court injunctions and the restoration of damages.
As per current market practice, a tenant might be allowed to assign the lease, subject to the landlord’s consent, although exceptions might apply for intra-group assignments. A sub-lease might be allowed subject to the landlord’s consent and on conditions that the sub-lease term is no longer than the term of the lease.
These provisions can be freely determined by the parties and are subject to negotiations, with particular reference to big leases.
Italian tenancy law provides that, if a tenant transfers the business along with the lease, the landlord can only oppose such transfer upon justified reasons. Big leases can deviate from this provision.
Leases include a specific termination clause listing all events pursuant to which a landlord can ask for termination. In any case, a tenant’s non-fulfilment of its obligations might allow the landlord to terminate the lease.
All leases have to be registered with the Tax Authority, and an annual registration fee equal to 1% of the passing rent shall be paid. The registration fee is usually paid equally by the landlord and the tenant.
Certain leases having a first term longer than nine years should be executed before a Notary and registered also with the Land Register so that they can be opposed to all third parties.
If the lease has to be terminated because the tenant does not comply with the obligations arising from the lease, the landlord can terminate the lease and seek eviction. This is a court process, the duration of which changes on a court-by-court basis.
A lease can be terminated by a third party only in cases of compulsory procedure, and an indemnity is payable.
The most common structures are as follows:
A landlord might decide to enter into separate agreements for design and construction, and relevant liabilities will remain with the appointed contractor.
It is market practice to insert penalties to be paid by the contractor in case of delay. Regarding the feasibility of the project, the construction agreement usually includes proper representations and warranties. Contractors are even required to deliver performance bonds and evidence of insurance policies.
Construction contracts usually provide for penalties to be paid in case of delay.
Contractors are required to deliver a performance bond and, upon completion of the works, they are required to give a ten-year insurance policy covering defects of the building.
In the worst-case scenario (ie, default of the landlord), there might be a possibility for contractors/designers to encumber the property and enforce the sale in order to recover their outstanding debts. This would imply a judicial proceeding in court.
The law requires that buildings are fit for use before being inhabited.
According to the regulations currently in force, the fitness for use is self-declared through a certified technical assessment by the developer through a specific form.
A building is declared fit for use when it is in compliance with the regulations on hygiene, health and safety, plants and systems, and fire prevention.
See 2.10 Taxes Applicable to a Transaction.
Where non-residential real assets are purchased by a REIF or a SIIQ, the cadastral tax and mortgage tax applicable are halved to 0.5% and 1.5%, respectively.
The contribution to a REIF or SIIQ of a more than one real asset mainly leased is out of the scope of VAT and subject to fixed cadastral, mortgage and stamp duty.
An owner of real property is generally liable to the local property tax (imposta municipale unica – IMU). The taxable basis is equal to the cadastral income (including a 5% increase), multiplied by a figure depending on the kind of property.
Each year the local Municipality approves the rates (from 0% to 1.14%).
The user of a property is also subject to the waste removal tax (tassa sui rifiuti – TARI) in order to finance waste management by the Municipality.
An investor may derive lease income from owned real properties, either directly or by means of dividends or distributions made by a corporate vehicle or fund. Tax on rental income may vary substantially, depending on the structure of the investment.
Where the property is held by an Italian corporate vehicle, if the real estate is leased to tenants, any rental income generated is subject to corporate tax (IRES) at a rate of 24% and regional tax (IRAP) at the ordinary rate of 3.9% (or more, depending on the relevant region).
The taxable income of a real estate company for IRES purposes is the net revenue after the deduction of costs, as shown in the annual profit and loss account. Roughly all costs relating to the activities of a company can be deducted, including depreciation (excluding lands) and interest (as long as this exceeds interest receivable), up to an amount equal to 30% of EBITDA. Interest due on loans aimed at purchasing real estate properties for "letting" that are secured by mortgages over the same properties is not subject to the 30% threshold and is therefore fully deductible.
The taxable income of a real estate company in relation to the leasing of residential real properties for IRES purposes is represented by the rents minus maintenance expenses and interest up to the above limits. No other costs are deductible.
Interest is not deductible from an IRAP standpoint.
The taxation of dividends distributed to shareholders depends on the nature of the shareholder.
Dividends in favour of a foreign individual are generally subject to a withholding tax of 26%. Withholding tax rates can be reduced by the Double Tax Treaty signed by Italy with the country of residence of the foreign investor.
On the other hand, dividends distributed to a foreign company are generally subject to a withholding tax of 26%. Such a withholding tax rate could be reduced by the Double Tax Treaty. Dividends distributed to a company located in the EU or EEA are liable to a 1.2% withholding tax. Exemption from Italian withholding tax under the Parent Subsidiary Directive may apply.
In the case of direct investment performed by a foreign company (without a permanent establishment in Italy – please consider that ownership of Italian real estate does not automatically give rise to a permanent establishment in Italy), the income derived from letting property is subject to IRES, payable at a rate of 24%. 95% of the gross income derived from letting is taxable and no depreciation or other costs can be deducted.
Italian REIFs are not subject to IRES or IRAP.
SIIQs are not subject to IRES and IRAP on income from letting property, nor on the dividends paid by another SIIQ, if those dividends relate to letting property, or profits distributed by an Italian REIF performing letting activity.
Tax on capital gains deriving from the sale of real estate properties may vary according to the structure of the investments.
Profits on the sale of a property realised by an Italian corporate vehicle are subject to IRES and IRAP at the aggregate rate of 27.9%, regardless of how much time has lapsed since acquisition. The profit is represented by the difference between the agreed purchase price and the net tax value of the property at the time of the sale. In some cases, it is possible to spread the liability for tax on capital gains over a period of five years.
In a sale of the participation into the Italian vehicle, the capital gain is subject to Italian taxes at a rate of 26%. However, the sale of a participation representing no more than 20% of the Italian vehicle in a 12-month period performed by an investor resident in a white-list country is exempt. The double tax treaty between Italy and the country of residence of a foreign investor may provide for exclusive taxation in the country of residence of the foreign investor.
Capital gains derived from the sale of real estate directly owned by a foreign investor without a permanent establishment in Italy are not subject to IRES if the property is sold more than five years after its acquisition. If the sale occurs within five years, IRES applies at a rate of 24%. The taxable income is represented by the difference between the price agreed for the sale of the property and its acquisition cost.
Capital gains from the sale of property owned by an Italian REIF are included in the fund's net income and taxed at the level of the investors when the income is distributed.
In a sale of the participation into the Italian REIF, the capital gain would be, in principle, exempt from taxation if the foreign investor is resident in a white-listed country.
Capital gains from the sale of real estate by a SIIQ, whose rental income is exempt, are not liable to either IRES or IRAP. The sale of the participation into an Italian SIIQ is the same as that expected for the sale of an Italian vehicle, with the only difference represented by the threshold for the exemption, which decreases from 20% to 2%.
An investor may derive income from letting property, either directly or by means of dividends or distributions made by a corporate vehicle or fund. Tax on rental income may vary substantially, depending on the structure of the investment.
Where the property is held by an Italian corporate vehicle, if the real estate is leased to tenants, any rental income generated is subject to corporate tax (IRES) at a rate of 24% and regional tax (IRAP) at the ordinary rate of 3.9% (this can be increased depending on the relevant region).
Taxable income of a real estate company for IRES purposes is the net revenue after the deduction of costs, as shown in the annual profit and loss account. Roughly all costs relating to the activities of a company can be deducted, including interest (as long as this exceeds interest receivable), up to an amount equal to 30% of EBITDA. Interest due on loans aimed at purchasing real estate properties for "letting" that are secured by mortgages over the same properties is not subject to the 30% threshold and is therefore fully deductible.
The taxation of dividends distributed to shareholders depends on the nature of the shareholder. The dividends effectively distributed by a company in favour of a foreign individual are generally subject to a withholding tax of 26%, with the right to request a tax refund equal to 11/26 (42.307%) if a definitive tax has been applied on the same income abroad.
On the other hand, the dividends distributed by a company to another company are generally subject to a withholding tax of 1.2%. Exemption from Italian withholding tax under the Parent Subsidiary Directive may apply.
In the case of investment without a permanent establishment in Italy (owning Italian real estate does not automatically give rise to a permanent establishment in Italy), the income derived from letting property is subject to IRES, payable at a rate of 24%. 95% of the gross income derived from letting is taxable, and no depreciation or other costs can be deducted.
Italian REIFs are not subject to IRES or IRAP.
SIIQs are not subject to IRES or IRAP on income from letting property, nor on the dividends paid by another SIIQ, if those dividends relate to letting property.
Tax on capital gains deriving from the sale of real estate properties may vary according to the structure of the investments.
Profits on the sale of property realised by an Italian corporate vehicle are subject to IRES at the ordinary rate of 24%, regardless of how much time has lapsed since acquisition. The profit is the difference between the book value of a property at the time of the sale (as reduced by depreciation) and the agreed purchase price. In some cases, it is possible to spread the liability for tax on capital gains over a period of five years.
Capital gains realised from the sale of property are also generally subject to IRAP at a rate of 3.9%, unless the sale occurs outside the normal activities of the company.
In a sale of the participation into the Italian vehicle, the capital gain is subject to Italian taxes at a rate of 26% on 100%, starting from 2019. Double tax treaties in force between Italy and the country of residence of a foreign investor may provide for exclusive taxation in the country of residence of the foreign investor.
Financial transactions tax (Tobin Tax) is payable (at a rate of 0.2% on the agreed price) by the purchaser of shares in an Italian resident joint stock company, even if the purchaser and the seller are not Italian residents.
Capital gains derived from the sale of real estate directly owned by a foreign investor without a permanent establishment in Italy are not subject to IRES if the property is sold more than five years after its acquisition. If the sale occurs within five years, IRES applies at a rate of 24%. Since depreciation is not permitted in the absence of a permanent establishment, taxable gains comprise the difference between the acquisition cost at the time of purchase and the price agreed for the sale of a property.
Capital gains from the sale of property owned by an Italian REIF are included in the fund's net income and taxed at the level of the investors when the income is distributed.
In a sale of the participation into the Italian fund, capital gain would be, in principle, exempt from taxation if the foreign investor is resident in a white-listed country.
Capital gains from the sale of real estate by a SIIQ are included in the taxable income for IRES and IRAP purposes.
Italian corporate vehicles are allowed to deduct real estate depreciation, while direct investment from abroad is not eligible for any deduction. No benefits are allowed for residential real estate properties that are rented by Italian companies.
The Functioning Scheme of Italian Reserved Real Estate Alternative Investment Funds of a Corporate Nature (SICAFs immobiliari)
Following the implementation in Italy of Directive 2011/61/EU on alternative investment fund managers (AIFMD), sponsors and funds initiators may develop their real estate fund projects by way of the new SICAF corporate scheme (with each being a Corporate RE Fund).
Legal Nature, Management and Key Transaction Documents of Corporate RE Funds
Anyone wishing to start and manage a real estate fund project must be licensed in advance by the Bank of Italy, acting in its capacity as national competent supervisory authority in the investment management sector. The licensing procedure applies irrespective of the size of any assets under management/gearing level.
Corporate RE Funds’ initiators must file a set of documents in advance with the Bank of Italy to obtain the Bank of Italy investment management licence. Reference is made, inter alia, to the Corporate RE Fund’s by-laws; activity programme (programma di attività); and report on the organisational structure (relazione sulla struttura organizzativa).
Corporate RE Funds fall within the wider undertakings for collective investments (UCIs) genus. Therefore, they must comply with any UCIs’ general requirements. UCIs, including Corporate RE Funds, are established for the provision of collective portfolio management services and their assets are:
Corporate RE Funds qualify as Italian alternative closed-end undertakings for collective investments established in accordance with company law as joint stock companies (società per azioni), with fixed capital and registered (or having their head office) in Italy. The sole scope of Corporate RE Funds is the collective investment of the funds they raise into real estate assets. Corporate RE Funds may issue shares and/or other equity instruments (strumenti finanziari partecipativi) for their fundraising.
Corporate RE Funds may be formed under a self internally-managed scheme or in accordance with an externally-managed scheme. Self internally-managed Corporate RE Funds retain any investment management power (buy, hold and sell decisions relating to their assets) directly at the level of their management body. Externally-managed Corporate RE Funds entrust any investment management power to an external licensed player, such as an investment manager. The Corporate RE Fund and the investment manager enter into an investment management agreement ruling the investment manager’s duties and the fees to be paid by the Corporate RE Fund to the investment manager.
Any fund project developed by way of a Corporate RE Fund structure generally provides for the following main set of transaction documents: an investment agreement between the Corporate RE Fund’s managers and limited partnerships (LPs); the Corporate RE Fund’s constitutional documents (articles of association and by-laws); and a deed of adherence relating to the Corporate RE Fund’s constitutional documents to be executed by each LP.
The share capital of a reserved Corporate RE Fund may be subscribed by professional investors only, eg, alternative investment fund managers, banks, insurance companies, investment firms, pension schemes and undertakings for collective investments.
The minimum share capital for a Corporate RE Fund reserved to professional investors is equal to EUR500,000 which has to be entirely down-paid upon licensing of the Corporate RE Fund. Generally, this capital is down-paid by the fund’s initiators/managers.
It is also possible to establish a Corporate RE Fund with a minimum initial entirely down-paid share capital of EUR50,000 (SICAF so-called sub-threshold) provided that: it manages assets, including those acquired through leverage, that do not exceed EUR100 million; or it manages assets that do not exceed EUR500 million, provided that it does not use leverage and the right of participants to redeem their units or shares cannot be exercised for at least five years from the date of the initial investment.
The “marketing” notion and the reverse enquiry option
Under the AIFMD, “marketing” means “a direct or indirect offering or placement at the initiative of the alternative investment fund manager or on behalf of the manager of units or shares of an alternative investment fund it manages for or with investors domiciled or with a registered office in the Union”.
Any marketing of an Italian undertaking for collective investments is subject to the advance clearance of the Italian national competent authority on marketing (Commissione Nazionale per le Società e la Borsa or CONSOB). The clearance procedure applies to any marketing (including with respect to Corporate RE Funds) carried out for the benefit of professional investors as well, since it is of no relevance what kind of investors the marketing is addressed to.
Without prejudice to the above, no marketing procedure applies to fund projects where an investor autonomously gets in touch with a manager on their own initiative without receiving any advance offer from the manager.
Certain Key Features of Corporate RE Funds
Segregation rule and limited liability regime
Any Corporate RE Fund asset is fully separated from those of its investors and any investor’s creditors have no rights in relation to Corporate RE Fund’s assets.
No Corporate RE Fund’s investors shall bear liabilities exceeding their total subscribed amounts since these kinds of funds employ corporate limited liability vehicles.
One may subscribe for Corporate RE Fund shares either in cash or by in-kind contributions of assets (eg, real estate assets). This is without prejudice to the rules on initial cash down-payments set forth herein under "Professional investors".
Qualified shareholdings in a Corporate RE Fund are subject to the Bank of Italy's advanced clearance. Qualified shareholding means a stake granting voting rights greater than 10% of the Corporate RE Fund’s share capital. This rule applies both upon subscription of shares and in relation to any share purchase.
A safe harbour exemption from the advanced clearance procedure applies in the case of equity investors holding a qualified stake in a Corporate RE Fund, as long as they enjoy one voting right irrespective of their stake amount (voto capitario).
Any fund project developed by way of a Corporate RE Fund may provide for different share classes based on the different roles played by each party in the project. As instance managers’ shares may give title to full voting rights and limited patrimonial rights (eg, the right to a preferred return only as long as certain income thresholds are met). Investors’ shares, in turn, enjoy limited voting rights and full patrimonial rights.
Corporate RE Fund’s managers must meet “fit-and-proper” requirements.
Corporate RE Funds may entrust third-party service providers to execute a number of tasks such as advisory, asset management and property management activities. Under certain conditions the appointment of a third-party service provider may qualify as a material delegation (esternalizzazione di funzioni essenziali o importanti). Any material delegation must be disclosed in advance to Italian national competent authorities.
Corporate RE Funds may undertake leverage. There is no general limit on leverage level although certain duties apply to funds materially employing leverage.
A number of fund projects' costs are borne directly by Corporate RE Funds and not by their investors. Generally, the main costs that may be charged over Corporate RE Funds are: set-up costs; brokerage and other service providers’ fees; real estate insurance coverage costs; acquisition costs; and divestment costs.
Exit and Liquidation
As a general rule, an exit from a Corporate RE Fund may occur only upon the term of its life based on its closed-end nature. However, Corporate RE Fund investors may enjoy early exit rights in a limited number of cases. Any exit procedure is mirrored under Corporate RE Fund constitutional documents.
An early exit from a Corporate RE Fund may occur upon new share issuances (capital increase) by employing any cash fundraised by way of new issuances to redeem existing investors.
The early redemption procedure must be mirrored under Corporate RE Fund constitutional documents.
Further Corporate RE Funds may carry out advance redemptions of any excess cash arising from disinvestment transactions.
Exit upon expiry of the fund’s term
Investors may exit a Corporate RE Fund at the end of its term. Their shares may be redeemed in cash or by way of assigning any RE asset held by a Corporate RE Fund to its investors (distribuzioni in natura). Any in-kind assignment procedure must be pointed out under Corporate RE Fund constitutional documents.