I OVERVIEW OF RECENT ACTIVITY
Market turbulence and weaknesses in the Italian banking system in 2015 also affected the asset management industry.
The decrease in the stock values of Italian banks, together with the significant weight of non-performing loans in their portfolios, called for an urgent intervention through private capital injections. In this scenario, private equity funds were deemed to be the most suitable legal structure to support the structural diseases of the banking systems. In this respect, the emergence of funds statutorily aimed at subscribing share capital increases of Italian banks and purchasing their non-performing loans at a targeted price (such as the Atlante fund set up in April 2016) is the most significant evidence of this unprecedented trend.
Moreover, the first half of 2016 saw further legal and regulatory provisions being issued in order for funds and their managers to provide financing capital to the real economy, including through credit origination. This need for Italian firms to emancipate from banks as financing providers in favour of collective investment undertakings had never been perceived by the Italian regulators to be so urgent as in 2016.
Consequently, numerous initiatives were also started to enhance the role of funds as alternative financing providers for start-ups and innovative small and medium-sized enterprises (SMEs).
II GENERAL INTRODUCTION TO REGULATORY FRAMEWORK
The Italian regulatory framework is characterised by rigorous and incisive rules and supervisors with extensive powers.2
The principles governing asset management are contained in Legislative Decree No. 58/1998 (the Italian Financial Act) and were primarily implemented – after the adoption of the AIFMD rules3 – by:
- a Ministerial Decree No. 30/2015, which sets out the general criteria applicable to Italian undertakings for collective investments;
- b the Bank of Italy’s regulation of 19 January 2015, on the collective asset management rules, and the relevant explanatory notes;4 and
- c regulations issued by Consob.5
This framework crystallises the Italian AIFMD implementing process, which was formally concluded with:
- a the Bank of Italy’s communication of 25 March 2015 that sets out the final term for Italian-based AIFMs to ensure their compliance with the AIFMD rules (i.e., 30 April 2015); and guidelines on the transitional regime and the adoption of certain technical rules;
- b the Consob reporting instructions for asset management entities of 8 June 2015, concerning practical guidelines as to the transmission of supervisory data by Italian-based AIFMs;6 and
- c the Bank of Italy’s explanatory note of 15 December 2015 clarifying the scope of application of certain outsourcing requirements on AIFMs.7
In the above, a role is also played by Assogestioni, which has developed several codes of practice and guidelines.
The rules governing the marketing in Italy of AIF units or shares fully reflect the passport regime set out in the AIFMD (including the marketing of non-EU AIFs or AIFs by non-EU AIFMs)8 and can be summarised as follows:
- a EU-AIFs to professional investors: the EU AIFM is required to obtain prior authorisation in an EU jurisdiction that has already implemented the AIFMD; and, subsequently, notify Consob through the home country regulator, otherwise the marketing in Italy of the relevant EU AIF units is prevented; and
- b EU-AIFs to retail investors: in addition to obtaining the authorisation under (a) above, the EU AIFM is required to request Consob’s authorisation.9
As to the marketing in Italy of foreign collective investment schemes under the UCITS framework, the home country regulator must first notify Consob before any marketing begins.
III COMMON ASSET MANAGEMENT STRUCTURES
Under Italian law, undertakings for collective investment (UCIs) can be set up as:
- a funds, notably independent pools of assets divided into units, which are:
• set up as open-ended or closed-ended investment schemes and managed by a joint-stock company (SGR) in accordance with a defined investment policy;
• set up without legal personality, as the SGR is the sole entity empowered to undertake obligations and exercise rights on behalf of the funds;
• segregated completely from the SGR’s own assets, the other assets managed by the same SGR, and each investor’s assets; and
• divided into units assigned to a plurality of investors;
- b SICAVs, which are open-ended collective investment schemes similar to funds and are set up as joint-stock companies with variable capital; or
- c SICAFs, which are newly introduced closed-ended collective investment schemes set up as joint-stock companies with fixed capital.10
- a open-ended funds (at the end of 2015, approximately 895 Italian funds and about 3,620 foreign funds) – participants may exercise the right to redeem units at any time, in accordance with the procedures established by the fund’s regulation;
- b closed-ended funds (at the end of 2015, more than 600 Italian funds) – participants may exercise the right to redeem units only at predetermined maturities, under specific circumstances and for limited amounts;
- c hedge funds – see Section VI.iv, infra; and
- d funds reserved to qualified investors, which now qualify as reserved AIFs, can be either open-ended or closed-ended, and their units can be placed by, or reimbursed or sold to, qualified investors only.13
IV MAIN SOURCES OF INVESTMENT
In the first quarter of 2016, asset management industry proved to be in good shape as its products soared to the record amount of €1.8 trillion – more than 86 per cent of GDP – split between individual portfolio management mandates (51.7 per cent, continuing a slight decrease that begun in 2013) and funds (45.6 per cent open-ended and 2.7 per cent closed-ended).14
In 2015, the percentage of average families that invested in asset management products was 10.6 per cent,15 which is still lower than the pre-crisis level (14.7 per cent); unlike in other EU countries, Italian household investments are mainly focused on direct investments and, specifically, governmental and banking bonds (mostly Italian ones) rather than shares or corporate bonds. Funds therefore experienced a wavering trend that showed a rise until 1999 (+18 per cent) and then a significant drop that was reversed only from 2013 onwards.
At the end of 2015, the asset value of the funds marketed in Italy was above €800 billion, further boosting the extraordinary 2014 results (plus 18 per cent). Notably, bond funds slightly shrank whereas flexible funds continued their growth thanks to the persisting low interest rates environment.16
V KEY TRENDS
The recent trends in the Italian asset management sector can be summarised as follows:
- a funds have an emerging role as financing providers for the real economy and source of liquidity for distressed banks;17
- b there is decreased retail investor interest in fixed-income asset management products, in favour of alternative asset classes;
- c there has been an increase in product innovation, thanks to the renewed legal and regulatory framework (see Section II, supra); and
- d there has been increased diversification of the distribution channels, thanks to the widening of digital tools adopted by Italian financial markets players.18
Although approximately 150 of the more than 210 operators in the Italian asset management market are domestic,19 the vast majority of products are marketed by foreign (mainly Luxembourg and Irish) entities. Since 2000, the market share of foreign entities has been growing inexorably and is driven by the choice of the main Italian banking groups to:
- a start a de-localisation process towards less bureaucratised jurisdictions; and
- b refocus a substantial part of their Italian clients’ savings on foreign group companies and their ‘round-trip’ funds.
To support recovery, specific measures have been adopted in the past years, including:
- a the possibility granted in 2013 to the SMEs Guarantee Fund20 to also provide coverage to SGRs, in addition to banks and other financial intermediaries;21
- b the opportunity given in 2014 for Italian AIFs and, in 2016, for EU AIFs to carry out direct lending activities;22
- c the levelling of the playing field between rules governing alternative funds and UCITS managers (as a result of the convergence of their respective sets of regulations) due to the implementation of the AIFMD (see Section II, supra); and
- d the review, effective from the early months of 2016, of the equity crowdfunding framework so as to expand the scope of eligible investors and reduce certain regulatory entry hurdles.23
Signs of recovery can also be seen in the financial results of SGRs, which closed the last financial year with increased profits. Specifically, the open-ended funds managers’ significant profit increase in 201524 was mainly due to the high level of net inflows, while cost containment activities and tax burden reduction measures fostered private equity and real estate operators’ performances respectively.
With reference to the Italian regulators’ approach, in 2015 they specifically focused their supervision on:
- a compliance with the newly established AIFMD implementing rules, especially in terms of governance measures (e.g., conflicts of interest and remuneration);
- b procedures that govern the structuring and launching of new products; and
- c transparency and rules of conduct with regard to investors to ensure that the distribution of highly complex and remunerative products (such as structured funds and funds using index tools) is not driven by interests that contrast with safeguarding investors, especially retail ones.25
VI SECTORAL REGULATION
In recent decades, the total assets invested by insurers in the financial market has grown in many OECD countries, including Italy (in 2015, investments by insurers increased by 13.8 per cent). Nevertheless, the role of insurers is still far less important than that of banks or other intermediaries.
However, following the implementation of the Solvency II framework and in light of the real economy’s increasing need for institutional investors other than banks (see Section I, supra), Italian insurers are now provided with regulatory tools, in terms of eligible investments, which might pose a threat to the banking monopoly.
In this respect, in 2016 IVASS allowed Italian insurers to freely decide on how to cover their technical reserves (i.e., which asset classes to choose for investing their own funds) provided that certain conditions – namely in terms of governance – are met, in accordance with the freedom to invest under Article 133 of Solvency II.26 Importantly, this new framework confirmed the possibility for insurance companies to provide direct lending.27
The above changes are expected to impact on the current asset allocation strategy for technical provision coverage: this is currently focused on governmental bonds (59 per cent, declining compared to the previous year), whereas corporate bonds, funds and shares are less significant. Besides regulatory constraints, these figures are linked to the still wide circulation among Italian investors of conservative life insurance products (rather than linked policies) that oblige insurers to cover the corresponding technical provisions with assets that ensure long-term stable revenues.
Over the past 30 years, the Italian pension system has undergone significant reforms aimed at progressively controlling public expenditure and setting up private sources of retirement income in addition to the mandatory state pension system.
An initial set of rules comprehensively regulating supplementary pension schemes was introduced in 1993 and radically reformed in 2005 (Legislative Decree No. 252). The reform’s cornerstones were voluntary and defined contributions, individual capitalisation mechanisms, and transferability of positions from one pension scheme to another.
The nearly 500 private pension structures in place in Italy at the end of 2015 can be divided as follows: contractual pension funds, open-ended pension funds, individual insurance pension plans and ‘pre-existing’ pension funds. The Italian private pension market is highly concentrated, as the 12 larger funds (with more than 100,000 members each) cover nearly 50 per cent of the market, whereas the small funds only have a joint market share of 1 per cent.
The sums contributed to private pension schemes must be managed according to the principles of prudence, transparency, investment diversification, risk fragmentation and cost containment (see Ministerial Decree No. 166/2014)28. Eligible assets include:
- a UCITS and AIFs;
- b certain derivative contracts; and
- c certain non-listed and non-rated bonds issued by SMEs and securities backed by the same assets and issued as part of securitisation transactions.
As at the end of 2015:
- a approximately 65 per cent of the assets under management were invested in bonds, although an increase in alternative investments is sustained by COVIP to support the Italian economy and pursue appropriate portfolio diversification, also considering the negative outlook regarding the returns on fixed-income instruments; and
- b returns proved to be positive, boosted by favourable financial market trends, and expansive monetary policies.
Italian workers are becoming increasingly aware of the advantages of private pensions, whose market is steadily growing (in terms of participants and assets under management),29 also due to the widespread distribution network used and the rewarding remuneration policy adopted.
Open-ended funds are witnessing increased dynamism, also as a consequence of the automatic enrolment mechanism that was recently introduced for employees in the real estate sector.
To incentivise participation in private pension schemes, COVIP has taken specific measures over the past years, including:
- a a ban on the exclusive or automatic reliance by pension schemes on credit rating agency ratings;30
- b a simplification of the bureaucratic burdens related to certain corporate actions and extraordinary transactions; and
- c incentives to mergers so as to reach sizes that ensure efficiency and economies of scale.
iii Real property
Real estate UCIs are set up as closed-ended funds to support their liquidity needs and, following the implementation of the AIFMD, it was no longer mandatory to list the units of funds with a minimum subscription below €25,000.31
Italian real estate UCIs invest no less than 66 per cent of their assets (or 51 per cent, in certain circumstances) in real property, real estate rights, stakes in real estate companies and units of other real estate UCIs. To safeguard investors’ interests and an SGR’s independence, the assets of real estate UCIs are valued by external and independent appraisers (however, this valuation is not binding on the fund managers).
The development of real estate funds was initially hindered by a set of regulatory and operational constraints, which were progressively removed. Therefore, the history of Italian real estate funds can be divided into different phases: 2000–2004, when the real estate fund market was dominated by retail products; and 2005–2015, when the number of funds reserved to qualified investors increased sharply (currently, only 10 per cent of the existing real estate funds are retail-oriented).
Following a positive trend registered in 2014, in terms of both contributions and capital raised, the first half of 2015 saw a slight decrease as to asset value, despite the setting up of two new funds.32 This increase was boosted by initiatives targeting qualified investors, and mainly resulted in contributions from the real estate portfolios of banks, insurers and social security entities.
The strategy of nearly two-thirds of real estate funds is to purchase and lease real property for non-residential use, mostly located in the central or north-western part of the country.
By the end of 2016, 72 out of the existing 348 real estate funds will reach their maturity: in light of the ongoing unfavourable market trend, this phasing-out stage will expose operators to a new challenge, as they will be required to preserve the funds’ returns. With this in mind, Italian regulators enhanced the divestment process by increasing the maximum duration of closed-ended funds to allow operators to defer sale in the event of adverse market conditions.
In 2015, Italian real estate funds reversed the deleveraging trend experienced in 2014.33
iv Hedge funds
Italian UCIs can also be set up as hedge funds, thus enabling them to invest in a wider range of eligible assets than UCITS, and derogating from the Bank of Italy’s general rules for risk containment and fragmentation. Following the implementation of the AIFMD, Italian hedge funds now qualify as reserved AIFs.
In light of the higher risks to which hedge-fund investors are generally exposed, the Italian regulator introduced a set of limits affecting the distribution of and investment in these funds. For example, the fund regulation must expressly set out the maximum level of leverage and flag the risks of the investment. Moreover, the initial minimum subscription amount is €500,000 and hedge fund units cannot be elusively distributed to retail investors through the individual portfolio management service.34
Owing to these structural constraints, hedge funds have developed more slowly in the Italian market compared to foreign countries and are still mainly targeted at institutional investors.
Since 2007, amendments to the applicable framework have been introduced to support the hedge fund sector. The provisions requiring the establishment of a special purpose SGR to set up and manage hedge funds were repealed, thus opening up the market to any legal entity licensed as an SGR and boosting restructuring and merger transactions.
Despite these measures, the Italian hedge fund market is still in a comparatively weak position with limited fund offers. Developments are expected as a result of the full implementation of the AIFMD (see Section II, supra).
However, to be effective, the revision of the regulatory framework must be accompanied by a change in the cultural approach to alternative investments. Traditionally, Italian investors tend to be risk-averse, and although this has helped them protect their assets during the financial crisis, it has also hindered Italy’s ability to compete in innovative market segments (such as that of hedge funds).
v Private equity
The history of the Italian private equity market can be divided into the following main stages:
- a 1996–2000: characterised by a favourable economic backdrop and a strong increase in investments, which were traditionally used to perform leveraged buyouts or expansion transactions to support the growth of already existing companies;
- b 2001–2008: characterised by a complex macroeconomic backdrop that caused a reduction of internal rates of returns despite increased investment volumes;
- c 2009–2012: characterised by the credit crunch and a drop in performances and investment volumes; and
- d 2013–2016: characterised by a partial recovery and a slight increase in investments and operators (growing trends in the ‘early stage’ and ‘expansion’ segments), with independent fundraising remaining the main challenge for operators.
Notwithstanding the rapid development that preceded the financial crisis, the Italian market is significantly undersized compared to France, Germany, Spain and the UK: domestic funds are suffering from the high market volatility and the limited willingness of institutional investors to invest in private equity funds.
However, according to AIFI, the Italian Private Equity and Venture Capital Association, in 2015 the Italian market boosted the already positive trends witnessed in 2013, with regard to fundraising activities (increased by 91.85 per cent compared to 2014 data) and investments (up 31 per cent) distributed over 342 deals and mainly concentrated in the early stage and expansion segments involving SMEs.35 Divestments amounted to €2.9 billion (plus 10 per cent compared to 2014).
Notably, the low interest rate environment caused buy-outs to be the preferred stage for investments.
Market operators are optimistic about the future economic scenario and thus encouraged measures aimed at providing venture capital for Italian start-ups.36
vi Other sectors
See Section III, supra, for a summary of the main features of Italian reserved funds.
VII TAX LAW
The tax regime currently applied to investment funds, including the tax treatment applied to their investors, was amended a few years ago. The underlying principles of the new tax regime of investment funds are: no taxation at the level of the investment vehicle; and taxation at the level of the investors at the moment of distribution. Certain significant exceptions may apply to investors in real estate investment funds (REIFs).
In addition, Law Decree No. 66/2014 provided, from 1 July 2014, for an increase from 20 per cent to 26 per cent in the rate of withholding tax and substitute taxes imposed on the profits from those investments specified by Article 44 of the Income Tax Code (including profits deriving from UCIs), and on the other profits of a financial nature specified by Article 67(1)(c bis) to (c quinquies) of the Income Tax Code, with certain exceptions.
i Italian real estate investment funds
The reform of the tax treatment of Italian REIFs was achieved through Law Decree No. 78/2010 and Decree No. 70/2011. The main changes include a more restricted definition of investment fund, particularly the concepts of plurality of participants and independence of the management company from the investors. As indicated in the government report on Decree No. 78/2010, the changes were mainly aimed at specifying the economic function of REIFs, and discouraging REIFs from being set up merely to benefit from the favourable tax regime. In particular, the report emphasised that the aim of the amendments was to limit the application of the REIF tax regime to widely held funds and funds that pursue public interest objectives.
The applicable REIF tax regime depends on the status of the investor (i.e., institutional or non-institutional) and the type of REIF (i.e., institutional or non-institutional). A REIF is not subject to corporate income tax (IRES) and regional tax on business activities, and therefore benefits from a favourable tax regime in connection with its investment activities. In general terms, any income, including capital gains on the sale of immoveable property or equity interests in real estate companies, as well as income from property leasing (i.e., rental income), is not subject to IRES or regional tax on business activities in the hands of the REIF. Furthermore, income from certain ancillary financial investments is not subject to withholding tax at source.
Under Italian law, the REIF tax regime applies if the REIF falls within the definition of a mutual fund from a legal and regulatory perspective.
Law Decree No. 1/2012 specifically provides that Italian REIFs must be considered as resident in Italy for corporate income tax purposes, and therefore as an autonomous person liable to income tax. This amendment would allow REIFs to access treaty benefits. In this respect, the Italian tax authorities have stated that tax treaties are usually applied on a reciprocal basis.
Institutional REIFs are REIFs whose units are entirely owned by one or more of the institutional investors stipulated in Article 32(3) of Decree No. 78/2010. The Italian tax authorities have pointed out that the beneficial tax regime, as previously described, applies to institutional REIFs irrespective of compliance with the concept of a mutual fund (e.g., autonomous management and plurality) provided by law and regulatory provisions.
Income received by investors in REIFs upon redemption of units or a periodic distribution of proceeds is, in principle, subject to withholding tax at a rate of 26 per cent. The 26 per cent withholding tax is levied as an advance payment of the total tax due from investors that receive proceeds in connection with business activities (inter alia, Italian-resident companies, public and private entities or trusts that carry out a business activity, or non-resident companies with a permanent establishment in Italy to which these proceeds are attributable).
The 26 per cent withholding tax is levied as a final payment in all other cases. It is not levied on proceeds paid to Italian UCIs or pension schemes identified by the law.
Capital gains realised on units issued by institutional REIFs are, in principle, considered other income, save for capital gains realised as part of a business activity, which are regarded as business income.
Non-institutional REIFs are REIFs whose units are not entirely owned by institutional investors. The tax regime applied to institutional REIFs also applies to non-institutional REIFs that meet the notion of a mutual fund according to regulatory law.
The tax regime applicable to Italian-resident investors in non-institutional REIFs depends on whether the unitholder owns more than 5 per cent of the units and whether the investor falls within the definition of an institutional investor.
Italian-resident investors (other than institutional investors) that own more than 5 per cent of the units of a non-institutional REIF are taxed, on a transparent basis, on the income realised by the REIF.
The tax regime applicable to institutional REIFs (and to their institutional investors) also applies to investors that do not own more than 5 per cent of the units (and to institutional investors, irrespective of the units owned) in a non-institutional REIF. Therefore, 26 per cent withholding tax applies as an advance or a final payment depending on the status of the investor. The same principle applies to capital gains realised on sales of units (e.g., other income, or business income if connected to business activities).
Non-Italian resident investors in institutional REIFs and non-institutional REIFs
The tax regime applicable to non-Italian resident investors in REIFs remains substantially unchanged irrespective of whether the REIF is classified as institutional or non-institutional. Proceeds received as a periodic distribution or redemption of REIF units by non-Italian investors are, in principle, subject to 26 per cent withholding tax that is levied as a final payment of taxes due in Italy. However, proceeds received by certain qualified non-Italian-resident investors (e.g., pensions funds and UCITs established in a White-Listed country) are exempt from the 26 per cent withholding tax.
Non-Italian resident investors that cannot benefit from the exemption regime provided under Italian law, but that satisfy the conditions for the application of tax treaties, may benefit from a reduced withholding tax rate in accordance with the specific tax treaty provisions. For the purposes of tax treaties, the Italian tax authorities believe that proceeds from REIFs should be considered interest in accordance with Article 11 of the OECD Model Convention.
Capital gains realised on sales of REIF units are, in principle, taxable in Italy as other income37. However, non-Italian resident investors may benefit from an exemption in Italy based on domestic provisions. In addition, tax treaty provisions remain applicable if certain conditions are met.
ii Foreign real estate investment funds
Article 13 of Legislative Decree No. 44/2014 modifies the taxation treatment of income derived from quotas held in foreign REIFs so as to align it to the treatment provided for income derived from quotas held in Italian REIFs. These changes are also necessary in light of the fact that the transposition of the AIMFD enables Italian SGRs to set up and manage real estate funds abroad under the EU free provision of service regime.
Therefore, on income deriving from quotas held in foreign REIFs, perceived by resident persons, the same taxation treatment provided for participants to Italian REIFs shall apply, including the transparency regime for participants other than ‘institutional investors’, listed in Article 32(3) of Law Decree No. 78 of 2010, that own quotas greater than 5 per cent of the fund.38
For income tax purposes, a foreign REIF must be framed within the ambit of non-resident persons liable for IRES pursuant to Article 73 of the Income Tax Code and is thus subject to IRES on income that is deemed to be Italian sourced. In case a resident owns a fund stake greater than 5 per cent, taxation on the fund (generally on cadastral income) coupled with quota-holders taxation (as a result of the transparency rule) gives rise to double taxation. In the said scenario it stands to reason that, in the absence of a specific rule, the application of the transparency regime implies application of the exemption regime at the level of the foreign real estate investment fund at least on the portion of income from immoveable property attributed to the Italian quota-holder by operation of the transparency principle.
iii Italian UCIs (other than Italian REIFs)
The profits of the UCIs are exempt from income tax and corporation tax. The UCIs receive investment income gross of withholding tax and applicable substitute taxes, with certain exceptions. In particular, the UCIs remain subject to the withholding at source of interest and other income from bonds, similar securities, and finance bills that are not negotiated in regulated markets or multilateral negotiation systems of the EU/EEA states included in the White List issued by non-listed resident companies as well as the withholding on income from atypical bonds.
The provisions governing the tax regime for Italian UCIs have been included in the provisions that identify persons liable to IRES by stating that Italian UCIs are considered resident for income tax purposes. However, income realised by UCIs is exempt from IRES provided that the UCI or the management company (e.g., the SGR) is subject to prudential supervision. In general, income from certain UCI investment activities are not subject to Italian withholding tax or substitutive taxes and, accordingly, the income is not subject to any taxation in the hands of the UCI. However, certain categories of income realised by UCIs are subject to withholding tax.39 This represents a final payment of taxes due, and no tax credit is available in the hands of the UCI.
Taxation of investors
A withholding of 26 per cent applies to investment income deriving from participation in the UCIs. The withholding is assessed on the total of the profits distributed during the period of participation in the UCIs and on the total of the profits included in the difference between the redemption, transfer or liquidation of the shares and the weighted mean cost of subscription for or acquisition of the same shares, net of 51.92 per cent of the proportion of the income that is referable to Italian sovereign bonds and securities and equivalents, to bonds issued by foreign states included in the White List and to bonds issued by regional entities of the above-mentioned states (in order to guarantee a tax rate of 12.5 per cent for such receipts). The 26 per cent withholding tax islevied as an advance or a final payment of taxes due, depending on the tax status of the investor. The 26 per cent withholding tax is levied as a final payment of tax payable by Italian individual investors that hold the units other than in connection with a business activity.
In regard to proceeds paid to corporate investors or commercial entities that are resident in Italy for tax purposes, the 26 per cent withholding tax is levied as an advance payment of the total tax due. Proceeds are considered taxable business income and are subject to IRES on a cash basis. The 26 per cent withholding tax is not levied on proceeds paid to Italian REIFs, pension schemes identified by the law or Italian UCIs that invest in other Italian UCIs.
Taxation of non-resident investors
Proceeds collected by non-resident investors upon a redemption or sale of units, or a periodic distribution of proceeds, are in principle subject to the 26 per cent withholding tax, which is levied as a final payment of taxes due in Italy (provided that the non-resident investor does not have a permanent establishment in Italy to which the proceeds are attributed). However, proceeds realised by certain categories of non-resident investors are exempt from the 26 per cent withholding tax. In this respect, a case-by-case analysis should be performed to identify qualified investors.
If the exemption from the withholding tax provided under the relevant domestic provision does not apply, the 26 per cent withholding tax may be reduced under the provisions of the applicable tax treaty. In the absence of any guidance issued by the Italian tax authorities in respect of tax treaty characterisation of the proceeds in an Italian UCI, it may be argued that this income must be considered interest for tax treaty purposes. This conclusion may be supported by the similarities existing between Italian REIFs and Italian UCIs under the Italian regulatory law.
iv Italian SICAFs
SICAFs are closed-ended collective investment schemes set up as joint-stock companies with fixed capital. Article 9 of Legislative Decree No. 44/2014 provides for certain tax rules applicable to SICAFs. According to such a provision:
- a as far as the income tax is concerned, SICAFs are subject to the same tax regime provided for Italian REIFs if they qualify as real estate SICAFs according to the regulatory provisions.40 In all other cases, the same tax regime provided for SICAVs will apply; and
- b as far as IRAP is concerned, irrespective of the object of their investment (real estate assets or not), SICAFs are subject to the same tax regime applicable to SICAVs.
The domestic macroeconomic situation is expected to remain uncertain, especially due to the deteriorating performance of the banking sector, which is flirting with collapse: the apparent structural solidity of the Italian banking groups – based on the ECB’s 2014 Asset Quality Review – proved to be more fragile than expected and paved the way for the opening of the first banking resolution proceedings under the Banking Resolution and Recovery Directive, while additional measures are currently being assessed by the government to avoid further shortfalls. In this framework, the significant amount of non-performing loans on the banks’ balance sheets will remain a heavy legacy from the crisis, with an adverse impact on the banks’ profitability and share value, thus fostering a continuous fall in the assets of the largest funds tracking Italian capital markets.
The implications will be tangible: the banks’ increasing difficulty in performing their mission as credit providers, the small investors’ risk aversion caused by the ‘bail-in’ rules and the IPO freeze (that involved two of the main Italian banks) are all circumstances that will further assist in opening the door to alternative investors and lenders. In this challenging environment, private equity and private debt funds are gaining weight as white knights that provide a safety net in view of banking capital increases and exit from early intervention and crisis proceedings. Markets are responding positively to this initiative: institutional investors searching for yield are supporting funds in gaining market shares and consolidating their role in the M&A arena.
Against this background, Italian asset managers will also be called to play an increasingly relevant role in the pension sector and drive the changes in the regulatory framework that are expected to stem from the initiatives taken by EIOPA to create a simple, trustworthy and fully transparent Pan-European Personal Pension Product in the format of a long-term retirement savings product.
With these challenges in mind, consolidating the upturn experienced over the past year will largely depend on the ability of domestic market players to promptly react and drive change, both in their business models and in their asset allocation.
Despite the volatility in the markets and the uncertainty caused by the outcome of the Brexit vote, it appears to be a favourable moment for the Italian fund industry: low interest rates, a revamped appetite for financial products, local distributors experiencing an ongoing need for diversified and better-performing products and a boom in the local private pension scheme are just some of the main factors on which asset management players can leverage their growth.
Time alone will tell whether these actions will be sufficient to maintain momentum.
1 Giuseppe Rumi is a partner, Daniela Runggaldier is a managing associate, Riccardo Ubaldini is a tax partner and Michele Dimonte is a managing tax associate at BonelliErede.
2 The main supervisors involved are:
a the Bank of Italy – it seeks to ensure the sound and prudent management of banks and intermediaries (including Italian asset management companies, SGRs);
b Consob – it supervises, among other things, the provision of investment services, and ensures transparency and correctness of conduct towards investors;
c IVASS – the new Italian insurance regulator since 1 January 2013; and
d COVIP – the supervisory authority for the private pension funds sector.
3 The transposition of the AIFMD key principles and general rules at a legislative level occurred in March 2014, when the Italian Financial Act was thoroughly revised and the parameter of the asset management activity was redefined (see Legislative Decree No. 44/2014). The implementation of the technical aspects and details at regulatory level began in May 2014, following the launch of a number of consultation documents aimed at rewriting several regulations and defining a homogeneous set of rules that applies to both the managers of collective investment schemes under Directive 2009/65/EC (the UCITS IV Directive) and the managers of alternative investment funds (AIFs) and that, in January 2015, resulted in the regulatory framework depicted above.
4 On 16 July 2015, the Bank of Italy published a note aimed at clarifying certain provisions under the Bank of Italy:
a regulation of 19 January 2015 on collective investment (especially, regarding the use of leverage and prudential requirements); and
b Circular No. 189/1998 on the supervisory reporting duties by collective investment undertakings.
5 See, among others:
a Resolution No. 11971/1999, which governs a fund’s key information document and the offering to the general public, etc.;
b Resolution No. 16190/2007, which sets out the rules of conduct applicable to collective asset management and investment services;
c Regulation of 29 October 2007 (jointly issued with the Bank of Italy) regarding the internal organisation and procedures of intermediaries and asset management companies; and
d Resolution No. 19094/2015, which supplemented and partially amended the above resolutions under letters a–c above.
6 With regard to the reporting duties imposed on AIFs, the Bank of Italy published a Communication on 19 June 2015 that aligned the terminology used within the supervisory reports to be submitted to the Bank of Italy with that used in the AIFMD (notably, the various definitions of reserved/retail and open/closed-ended funds).
7 This explanatory note was particularly welcomed by Italian real estate operators, as it prevented certain outsourcing requirements provided under the Bank of Italy and Consob Joint Regulation of 29 October 2007 (see footnote 5, c) from applying to various activities Italian real estate managers typically delegate to third parties (e.g., the management of insurance coverage on real assets, travel management and people care).
8 In this respect, the relevant passport rules will enter into force when the EU Commission issues the measures under Article 67(6) of the AIFMD.
9 The Italian legislator and regulatory authorities opted for a gold plating provision in this regard, pursuant to Article 43(2) of the AIFMD.
10 SICAFs were introduced into the Italian legal framework in the context of the AIFMD implementation and qualify as closed-ended and internally managed AIFs.
11 Since 2012, no SICAVs have been enrolled in the relevant register.
As to the diffusion of the SICAF option, given the particularly broad definition of AIF, as implemented in Italy, a number of existing Italian investment vehicles traditionally falling outside the scope of the rules concerning collective asset management are facing the risk of being reclassified as AIFs, with the consequent possibility of falling under the Bank of Italy’s supervision. In light of this reclassification risk, the Bank of Italy clarified that, provided certain conditions are met, the following investment entities cannot be considered SICAFs and, therefore, are exempt from the asset management regulations:
a listed special purpose acquisition companies (SPACs);
b Italian-listed real estate investment companies (SIIQs); and
c financial joint ventures that do not raise capital through equity issuance.
Remarkably, the Bank of Italy pointed out that the actual supervisory classification of the entities above will be made following a case-by-case assessment (see the Bank of Italy’s Final Report on the Public Consultation on the Amendments to the Collective Investment Management Regulation, 21 January 2015).
As at July 2016, two SICAFs have set up and enrolled with the Bank of Italy’s register (see Oltre II SICAF EuVECA SpA and United Ventures One SICAF SpA).
12 Bank of Italy Annual Report (Appendix), 31 May 2016.
13 Reserved AIFs might also be subscribed by non-professional investors, if certain conditions are met (including a minimum subscription amount of €500,000, see Article 14, paragraph 2 of Ministerial Decree No. 30/2015).
14 Assogestioni, Quarterly Map of the Italian Asset Management Industry, 2016.
15 The average investor in asset management products is male, approximately 59 years old, resident in Northern Italy, with a high level of education, and with asset allocation choices that focus on flexible funds. Interestingly, increased female participation in funds is slowly eroding the male share (about 46 per cent of unit-holders are female, against 45 per cent recorded in 2014, see Assogestioni Research Paper No. 2/2016).
16 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2016.
17 See, by way of example, the case of the investments directly made by Fondo Atlante (i.e., the €4 billion reserved alternative fund set-up by major Italian banks and Cassa Depositi e Prestiti SpA to, among other things, take on Italian distressed banks’ liabilities and participate in their capital increases) in Italian banks in terms of both equity and non-performing loans.
18 See the Consob Chairman Speech at the Annual Meeting with the Financial Market, 9 May 2016.
19 The main Italian operators in terms of assets under management belong to the following groups: Generali; Intesa San-Paolo, Pioneer Global Asset Management, Anima Holding and Poste Italiane (Assogestioni, The Italian Asset Management Market – Key Figures, 26 April 2016).
20 The SMEs Guarantee Fund (Fondo di Garanzia per le PMI) is a governmental fund that provides a special guarantee to the benefit of SMEs that enter into banking loans or other credit facilities.
21 See Law No. 9/2014, which converted Law Decree No. 145/2013 (Destination Italy Decree), which introduced a number of measures to encourage investments in SMEs.
22 Through the origination of receivables grounded on the AIFs’ assets (see Law No. 116/2014, which converted Law Decree No. 91/2014 and Law No. 49/2016, which converted Law Decree No. 18/2016).
23 See Consob Resolution 24 February 2016, No. 19520, which amended the Regulation on the collection of risk capital via online portals (adopted by Consob Resolution 26 June 2013, No. 18592).
24 Bank of Italy Annual Report, 31 May 2016.
25 Consob communication of 22 December 2014 concerning the marketing of complex financial products to retail investors. Within this context, the most important Italian asset management association provided certain guidelines validated by Consob on inducements and other incentives used by asset managers in the marketing of UCIs’ units (Assogestioni, Guidelines on Incentives for SGRs, SICAFs and SICAVs, 29 April 2015). Please also note that: on 9 May 2016, Consob opened a public consultation on principle-based guidelines on the key information to be given to retail investors when distributing financial products; and on 19 May 2016, Consob issued a communication aimed at transposing the ESMA recommendation on the closet index tracking issues (see ESMA statement on supervisory work on potential closet index tracking, 2 February 2016).
26 See IVASS Regulation No. 24/2016 that thoroughly revised the pre-Solvency II regime (contained in the ISVAP Regulation No. 36/2011). Previously, insurers had to cover their technical provisions with assets that met specific requirements, including the requirement to:
a be chosen taking into account the nature and complexity of risks and liabilities undertaken by the insurer to secure the safety, yield, liquidity, diversification and adequate spread of investments; and
b fall within one of the asset categories set out in the relevant IVASS Regulation, including:
• the units of harmonised UCIs mainly investing in the bond or share market;
• the units of closed-ended funds negotiated on a regulated market (up to 5 per cent of the technical provisions);
• the units of closed-ended real estate funds based in Italy or another EU member state (up to 10 per cent);
• alternative investments (up to 10 per cent), including shares or units of open-ended non-harmonised UCIs, shares or units of closed-ended funds that are not traded on regulated markets, reserved funds, and hedge funds, provided that specific conditions are met; and
• direct lending (up to 5 per cent provided all the requirements are met).
27 See Articles 13–16 of IVASS Regulation No. 24/2016.
28 The newly issued Decree significantly amended the previous regime – which dated back to 1996 – by introducing specific provisions regarding investment criteria (e.g., diversification, risk/return ratio and preference for listed financial instruments), limits for particular categories of investment categories or issuers (e.g., the concentration limit of 5 per cent of the portfolio for instruments of the same issuer, and of 10 per cent for instruments of group issuers), and conflict of interest rules. In particular, pension funds are allowed to invest in derivatives and repurchase agreements for hedging purposes only, and provided that counterparties are highly creditworthy. A specific focus is placed on risk assessment, the setting of investment goals and investment policy decision-making processes.
29 In 2014, almost a fourth of workers (approximately 7.2. million) participated in private pension schemes (6.5 million in 2014 and 6.2 million in 2013). Moreover, private pension schemes raised €13.5 billion in 2014 (€600 million more than in 2013; COVIP 2015 Report, President’s Remarks, 9 June 2016).
30 See Legislative Decree No. 66 of 7 May 2015, which aims to reduce excessive reliance on credit rating agency ratings and requires pension funds to set up adequate internal organisational measures to assess the creditworthiness of the relevant securities they invest in, so as to prevent their investment policies from exclusively or mechanically relying on credit rating agency ratings.
31 Ministerial Decree No. 30/2015.
32 Assogestioni, Half Year Report about Italian Real Estate Funds, 27 October 2015.
33 In the first half of 2015, the leverage rate used by real estate funds reportedly increased by 0.7 per cent (Assogestioni ibid).
34 Ministerial Decree No. 30/2015.
35 AIFI Yearbook 2016.
36 See VentureUp, the start-up platform set up by AIFI in late 2015 in cooperation with certain prominent venture capitalists, advisers and law firms.
37 In regard to a sale of units in a REIF, units that exceed the 5 per cent threshold owned by investors other than institutional investors are treated as an interest in a partnership (Article 5 of the ITC). In the hands of investors that receive proceeds other than in connection with a business activity, such a qualification implies that capital gains form part of taxable income, regardless of the fact that the units are held in Italy and that those units are traded in a listed market. Please note only 49.72 per cent of the relevant gain is included in the taxable income (Article 68(3) of the ITC). Moreover, guidance of the tax authorities confirms that tax treaty provisions remain applicable in regard to capital gains realised upon a sale of units when the relevant conditions are satisfied.
Capital gains realised by non-resident investors that do not own more than 5 per cent of the units of the Non-Institutional REIF; or by institutional investors, are not treated as an interest in a partnership and, in principle, are subject to taxation in Italy as miscellaneous income (redditi diversi) (Articles 23(1)(f) and 67(1)(c ter) of the ITC). The same rules applicable for institutional REIFs apply. Indeed, non-Italian resident investors may benefit from an exemption from Italian tax based on domestic provisions:
a in all cases, if the units of the REIF are listed on a regulated market;
b in regard to units not listed on a regulated market if the foreign investor is resident for tax purposes in a state included in the White List, or if the foreign investor falls within a category that benefits from the exemption regime applicable to proceeds from REIFs.
38 With regard to application of such peculiar mode of taxation of income derived from quotas held in real estate investment funds, reference is made to Circular letter No. 2 of 15 February 2012.
39 The Italian tax authorities confirmed that UCIs that meet the requirements set forth by Article 73 of the Italian Tax Code are entities that are considered as ‘subject to tax’. Consequently, UCIs benefit from double taxation conventions and are not subject to withholding taxes otherwise applicable under Legislative Decree No. 239/1996, nor to withholding tax on dividends paid by Italian-resident corporations otherwise applicable under Article 24(4) of Presidential Decree No. 600/1973.
40 See Article 39(1) of the Italian Financial Act.