I OVERVIEW OF RECENT ACTIVITY
Although the macroeconomic landscape improved consistently throughout 2016 and in the first few months of 2017, the Italian economy is still weak. One of the consequences of a vulnerable economy is increased volatility – and the Italian market is more volatile than other European markets. The Italian banking sector has also been affected by the increasing exposure to non-performing loans and consequent weakening of their capital position. This led, at the beginning of the year, to the first application in Europe of the precautionary recapitalisation to Banca Monte dei Paschi di Siena SpA (MPS) and, in July 2017, the compulsory winding-up of Banca Popolare di Vicenza SpA (BPV) and Veneto Banca SpA (VB), two of the larger banks located in the north-east of the country.
Broadly speaking, the Italian system has been affected by the trend of low interest rates – as a consequence of the European Central Bank’s liquidity measures – that has also influenced the performance of traditional banking products (i.e., bonds and other deposits), which are now far less appealing to investors.
The evolution in the European and Italian legal framework regarding the investment management sector shows awareness of these issues. First, asset management products can be seen as an alternative means of financing for Italian small and medium-sized enterprises (SMEs). For example, alternative investment funds (AIFs) are now allowed to acquire loans from non-customer originators against their own capital. Moreover asset management products are becoming increasingly popular in the Italian market because they tend to perform better than traditional banking products. But the most recent development in this respect is the introduction of long-term individual saving plans (PIRs), which can be classified as ‘investment containers’ that can be made up of funds, deposits, insurance products, etc. (and can also be established as undertakings for collective investments (UCIs)2) provided that 70 per cent of the portfolio is made up of securities issued by Italian or EU SMEs.3 Moreover, holders of PIRs are granted a tax exemption provided that the investments last at least five years and no more than €30,000 is invested per year. Almost six PIR-compliant products exist on the Italian market, but this number is expected to increase by up to five times by the end of 2017.
In this context, net inflows of savings to Italian and foreign open-ended investment funds rose to €16 billion in the first quarter of 2017. Investors largely preferred bond, balanced, flexible and equity funds.4 Further, current market trends show that national and foreign investment funds’ role in M&A transactions involving Italian banks and other regulated entities has substantially increased over the past few years.
II GENERAL INTRODUCTION TO REGULATORY FRAMEWORK
The Italian regulatory framework is characterised by rigorous and incisive rules, and supervisors with extensive powers.5
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 Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities Directive (UCITS V)6 rules – by:
- a Ministerial Decree No. 30/2015, which sets out the general criteria applicable to Italian UCIs;
- b the Bank of Italy’s regulation of 19 January 2015,7 on the collective asset management rules, and the relevant explanatory notes; and
- c regulations issued by the National Commission for Companies and the Stock Exchange (Consob).8
On 1 June 2017, Consob issued a consultation paper9 concerning the operational requirements of reporting duties for UCIs and companies that manage them and the relevant regulation is expected to be adopted by the end of the year.
In this framework, a key role is played by Assogestioni,10 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)11 and can be summarised as follows:
- a EU AIFs to professional investors: the EU AIFM is required to (1) obtain prior authorisation in an EU jurisdiction that has already implemented the AIFMD, and, subsequently, (2) 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: the EU AIFM is required to, in addition to obtaining the authorisation under (1) above, request Consob’s authorisation.12
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.
Moreover, the future impact of MiFID II (specifically the ‘product governance’ and ‘product intervention’ provisions) on the asset management industry should also be taken into consideration. Although the Italian implementing measures and the amendments to the Italian Financial Act have yet to be adopted, in light of Consob’s consultation papers on the topic – which were published in July 2017 and concern, among other things, product governance and product intervention – the new regulation is expected to influence, the content of distribution agreements (in relation to, e.g., the identification of target markets and the distributors’ ongoing assessments of compliance with the target markets).
III COMMON ASSET MANAGEMENT STRUCTURES
Under Italian law, 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 management company incorporated as 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 that are open-ended collective investment schemes set up as joint-stock companies with variable capital; or
- c SICAFs that are newly introduced close-ended collective investment schemes set up as joint-stock companies with fixed capital.
- a open-ended funds (at the end of 2016, approximately 1,000 Italian funds and 3,680 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 2016, approximately 660 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.15
IV MAIN SOURCES OF INVESTMENT
In the first quarter of 2017, the asset management industry proved to be in good shape as its products soared to reach the record amount of €2 trillion – approximately 120 per cent of Italy’s GDP – split between individual portfolio management mandates (50.1 per cent, continuing a slight decrease that began in 2013) and funds (47.5 per cent open-ended and 2.4 per cent closed-ended).16
In 2016, the percentage of Italian investors in asset management products was 11 per cent,17 which is still lower than the pre-crisis level (14.7 per cent). In detail, Italian household investments are more focused in Italian banking bonds and less on Italian government securities, asset management products and Italian listed shares.18
At the end of 2016, the asset value of the funds marketed in Italy was almost €900 billion, recording growth of approximately €100 billion on 2015. Notably, equity funds diminished, whereas bond funds slightly increased compared to the previous year.19
V KEY TRENDS
The recent trends in the Italian asset management sector can be summarised as follows:
- a funds’ emerging role as financing providers for the real economy and source of liquidity for distressed banks;20
- b slightly increased interest in bond funds, but a decreased interest in share funds;21
- c increased number of foreign funds marketed in Italy;22
- d increased number of assets under management (AUM), although the growth rate was lower than that of 2015;23 and
- e notable increase in AUM (up by 22.42 per cent in March 2017 compared to March 2016) of exchange-traded products (the vast majority of which are UCITS-compliant exchange-traded funds (ETFs)).24
To support recovery, specific measures have been adopted in recent years, including:
- a the possibility granted in 2013 to the SMEs Guarantee Fund25 to provide coverage also to SGRs, in addition to banks and other financial intermediaries;26
- b the opportunity given in 201427 for Italian AIFs and, in 2016, for EU AIFs to carry out direct lending activities;28
- c the introduction of PIRs, launched to boost investment in financial instruments (shares, bonds, etc.) issued by Italian SMEs thanks to the tax exemption they are granted (see Section VII, infra);
- d 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) owing to the implementation of the AIFMD (see Section II, supra);
- e the review of the equity crowd-funding framework so as to expand the scope of eligible investors and reduce certain regulatory entry hurdles;29 and
- f the increase in investment in ETFs.
With regard to the financial results of the asset managers of open-ended funds and individual portfolio managers, they closed the last financial year with decreased profits (a fall of approximately 1 per cent).30 The profit decrease in 2016 was mainly owing to the lower collection (compared to the previous year), and while tax burden reduction measures fostered real estate operators’ performances, private equity fund profits also decreased, mainly owing to the difficulties in raising capital.31
VI SECTORAL REGULATION
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 providing regulatory tools, in terms of eligible investments, which might pose a threat to the banking monopoly.
In this respect, in 2016 the Institution for the Supervision of Insurance (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.32 Importantly, this new framework confirmed the possibility for insurance companies to provide direct lending.33
At the end of 2016, insurance companies held technical reserves of €708 billion, whereas assets covering the technical reserves amounted to €715 billion. These assets (excluding the technical provisions concerning linked policies and pension funds) are mainly invested in government bonds (61.2 per cent, an increase on the previous year), whereas corporate bonds, UCIs and shares are less significant.
IVASS Regulation No. 24/2016 sets out the framework for loan origination by insurers, but until now insurance companies have only granted loans for a minor amount (€191 million, corresponding to 0.00003 per cent of the assets covering the technical reserves). On a separate note, in 2016 Italian insurers experienced a reshuffling of the product offer with a significant decrease in unit linked policies’ volumes. In addition, the regulators (especially at EU level) put a spotlight on these products to ensure consumer protection and prevent potential conflicts of interest arising from the cooperation between insurers and asset managers when structuring unit-linked policies.
Over the past 30 years, the Italian pension system has undergone significant reforms34 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 199335 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.
Currently, 452 private pension funds are in place in Italy.36 The structures of those pension funds take four different forms: (1) contractual pension funds; (2) open-ended pension funds; (3) individual insurance pension plans (PIPs); and (4) ‘pre-existing’ pension funds. The Italian private pension market is highly concentrated, as the six largest contractual funds (with more than 100,000 members each) cover nearly 65 per cent of members.37
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).38 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 of the end of 2016, approximately 61 per cent of the assets under management were invested in bonds (75 per cent of the bonds are public-debt bonds), and 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),39 also because of the widespread distribution network used and the rewarding remuneration policy adopted.
To incentivise participation in private pension schemes, the Pension Funds Supervisory Commission (COVIP)40 has taken specific measures in the past years, including:
- a a ban on the exclusive or automatic reliance by pension schemes on credit rating agency ratings;41
- 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.42
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, the units of funds with a minimum subscription below €25,000 need no longer be listed.43 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 have since been gradually removed. The history of Italian real estate funds can therefore be divided into two different phases: 2000–2004, when the real estate fund market was dominated by retail products; and from 2005 to the present day, during which time the number of funds reserved to qualified investors increased sharply (as at 31 December 2016, only 8 per cent of the existing real estate funds are retail-oriented)44. As to the recent trend in the real estate funds market, the number of funds and management firms (as of 31 December 2016, 289 and 21 respectively)45 is still quite low compared to other European countries. With regard to their activities, in 2016 disposals were higher than acquisitions and contributions (€1.2 billion of disposals versus €847 million of acquisitions and €570 million of contributions).46 Moreover, most of the portfolio belonging to Italian real estate funds is allocated to non-residential properties (mainly offices) in the north-west of the country that are bought and then leased; however, in the past few years investment in residential properties increased consistently.
Broadly speaking the real estate market is slowly recovering from the negative tendency of the past few years; therefore, in 2016 the asset management sector benefited from this market improvement and asset management products are thus expected to perform better in the near future. This trend is also likely to continue in 2017 through the growth of real estate investment in emerging markets (taking into consideration demographical aspects and development in infrastructure).
Most investments by real estate funds in Italy in 2016 concerned assets in Milan and Rome that are becoming more and more appealing to foreign investors. This trend is likely to continue and may be further amplified if the uncertainties regarding the future value of real estate assets in London persist. In fact, the UK real estate market may well experience a negative trend following the country’s exit from the European Union, especially if a ‘hard Brexit’ takes place, and particularly given the political instability following the election in June 2017.
iv Hedge funds
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 can now be classified as a sub-category of reserved AIFs (closed-ended or open-ended). Reserved AIFs may carry out a wide spectrum of investment strategies that are not limited to the typical policies of hedge funds.
In light of the higher risks to which hedge fund investors might be 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 for non-professional investors47 is €500,000 and hedge fund units cannot be elusively distributed to retail investors through the individual portfolio management service.48
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.
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 2013–2017: 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 the Italian Private Equity and Venture Capital Association, in 2016 investments in the Italian private equity and venture capital market were the highest ever, with a significant contribution from international players. In addition, fundraising decreased in comparison to 2015 and divestments continued to grow in terms of amount, despite a slowdown in the number of exits.
In detail, investments increased by 77.3 per cent, were distributed over 342 deals and were mainly concentrated in the early stage, buyout and expansion segments involving SMEs, whereas fundraising activities decreased by 39.4 per cent compared to 2015 data. As to divestments, they amounted to €3.6 billion (an increase of 26 per cent compared to 2015).49
Notably, the low interest rate environment caused the buyouts to generally 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.50
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 few years ago. The underlying principles of the new tax regime for investment funds are (1) no taxation at the level of the investment vehicle and (2) taxation at the level of the investors at the moment of distribution. Certain significant exceptions may apply to investors in real estate investment funds.
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 Real estate investment funds
The reform of the tax treatment of Italian real estate investment funds (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. Further, 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’ 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, which 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 as other income, save for capital gains realised as part of a business activity, which are regarded as business income.
Non-institutional REIFs’ 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 country51) are exempt from the 26 per cent withholding tax.52
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 Organisation for Economic Co-operation and Development Model Convention.
Capital gains realised on sales of REIF units are, in principle, taxable in Italy as other income.53 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.54
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 and European Economic Area 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.55 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.56 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 tax of 26 per cent applies to investment income deriving from participation in the UCIs. The withholding is assessed on:
- a the total of the profits distributed during the period of participation in the UCIs;
- b 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; and
- c a net of 51.92 per cent of the proportion of the income that is referable to:
• Italian sovereign bonds and securities and equivalents;
• bonds issued by foreign states included in the white list; and
• bonds issued by regional entities of the foreign states (in order to guarantee a tax rate of 12.5 per cent for such receipts).
The 26 per cent withholding tax is levied 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 extends to SICAFs the tax rules regarding REIFs – should the SICAF invest in real estate assets in accordance with the rules set out by civil law provisions57 or of SICAVs, should the SICAF not be considered a REIF.
In 2016, GDP increased slightly as a result of economic activity stimulated by the revival of investments and the increase in household expenditure. The Italian economic outlook for 2017–2019 forecasts GDP growth of 1.4 per cent for 2017 and 1.2 per cent for 2019. It is also expected that in 2019, GDP will have fully recouped the ground lost as a result of the sovereign debt crisis that began in 2011.58
Although the Italian banking system’s capital ratios slightly improved from a prudential standpoint in 2016, in July 2017 BPV and VB went into compulsory winding-up proceedings following the European Central Bank’s declaration that the banks were failing or likely to fail.
The implications of the turmoil in the banking system will be tangible: the increasing difficulty for banks to provide credit, the risk aversion of small investors caused by the ‘bail-in’ rules, the burden-sharing measures applied as part of the precautionary recapitalisation of MPS and the winding-up of BPV and VB are all circumstances that will help open the door to alternative investors and lenders.
In this challenging environment, new opportunities for asset managers will come from transactions with banks and financial intermediaries. Indeed, it is expected that supervisory and regulatory actions to promote more efficient management of non-performing loans (NPLs) will translate into more business opportunities for investors in the NPL market and, thus, an increase in the volume of NPL transactions.
The significant changes and regulatory developments that the Italian financial sector will face in the short to medium term will bring new challenges and business opportunities for Italian and foreign investors looking to strengthen their presence in or enter the Italian market. More specifically, the future impact of the implementing measures of the Italian regulation on European long-term investment funds and MiFID II should be taken into account. In this respect, it is expected that the level of fees and distribution targets currently agreed between asset management companies and their distributors shall be reassessed from a holistic perspective, taking into account not only the applicable conduct duties, but also the Italian asset management market’s practice regarding fee retrocessions, which entails particularly high levels of management fee retrocessions, especially in favour of captive banking distribution channels.
As the pace of change has dramatically intensified and consequently triggered challenges and opportunities for incumbent and new players in Italy, technical knowledge and familiarity with Italian and European financial regulations is crucial, particularly given that the regulatory framework is becoming ever more sophisticated and complex.
1 Giuseppe Rumi and Riccardo Ubaldini are partners, and Giulio Vece, Benedetta Volpi and Michele Dimonte are associates, at BonelliErede.
2 The exchange-traded fund structure is highly suitable for this purpose.
3 PIRs must invest at least 70 per cent of their assets in financial instruments issued by Italian or European companies with a permanent establishment in Italy. In addition, 30 per cent of this share (21 per cent of PIRs’ total assets) will have to be invested in instruments other than those listed on the FTSE MIB market or other blue-chip indexes.
4 See Bank of Italy economic bulletin No. 3/2017.
5 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 and joint-stock companies);
b Consob – it supervises, among other things, the provision of investment services, and ensures transparency and correctness of conduct towards investors;
c the Institution for the Supervision of Insurance (IVASS) – the insurance regulator and supervisory authority since 1 January 2013; and
d COVIP – the supervisory authority for the private pension funds sector.
6 The key principles and general rules of the UCITS V (EU Directive 2014/91) were enacted in Italy in June 2016 (Legislative Decree No. 71/2016) when the Italian Financial Act was amended. The main changes concerned: (1) cooperation between ESMA and the competent national authorities, (2) activities that can be carried out by the custodian, (3) remuneration policies, and (4) sanctions for infringing the relevant legal provisions.
7 The Bank of Italy’s regulation of 19 January 2015 was last updated on 23 December 2016 to comply with the UCITS V Directive. One of the amendments concerns under-threshold Italian management companies, the prudential regulation of which has been simplified to ensure Italy is more aligned with other EU Member States.
8 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 (a) to (c) above.
9 The main changes suggested by the consultation paper concern the updates to Bank of Italy Circular Nos. 189 and 286 and Consob Resolution No. 17297/2010.
10 Italian Investment Management Association.
11 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.
12 The Italian legislature and regulatory authorities opted for a gold-plating provision in this regard, pursuant to Article 43(2) of the AIFMD.
13 Since 2012, no SICAVs have been enrolled in the relevant register under Article 35 ter of the Italian Financial Act.
As to the diffusion of the SICAF option, given the particularly broad definition of AIF, as implemented in Italy, a number of Italian investment vehicles traditionally falling outside the scope of the rules concerning collective asset management have been reclassified as AIFs, with the consequence of falling under the Bank of Italy’s supervision.
Provided that certain conditions are met, the Bank of Italy clarified that the following investment entities cannot be considered SICAFs and, therefore, are exempt from the asset management regulations: listed special purpose acquisition companies (SPACs); Italian listed real estate investment companies (SIIQs); and 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 is to 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).
Furthermore, Article 20, paragraph 119 ter, of Law Decree No. 133 of 12 September 2014 expressly clarifies that SIIQs cannot be classified as UCIs.
As of June 2017, No. 12 SICAFs have been set up and enrolled with the Bank of Italy’s register under Article 35 ter of the Italian Financial Act.
14 Bank of Italy Annual Report (Appendix), 31 May 2017.
15 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, para. 2, of Ministerial Decree No. 30/2015).
16 Assogestioni, Quarterly Map of the Italian Asset Management Industry, I, 2017.
17 The average investor in asset management products is male, approximately 59 years old, resident in Northern Italy and with asset allocation choices that focus on flexible funds. Female increased participation in funds is slowly eroding the male share (about 46 per cent of unit-holders are female, thereby confirming the percentage recorded in 2015, see Assogestioni Research Paper No. 2/2017).
18 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2017.
19 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2017.
20 See, by way of example, the case of the investments directly made by Atlante fund (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 (NPLs). See also the Atlante 2 fund established in August 2016 to invest in NPLs and financial instruments linked to NPLs.
21 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2017.
22 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2017.
23 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2017, €40 billion collected in 2016 compared to €90 billion collected in 2015.
24 Osservatorio ETFplus, Borsa Italiana, March 2017.
25 The SMEs Guarantee Fund is a governmental fund that provides a special guarantee to the benefit of SMEs that enter into banking loans or other credit facilities.
26 See Law No. 9/2014 which converted Law Decree No. 145/2013 (the Destination Italy Decree), which introduced a number of measures to encourage investments in SMEs.
27 See Law Decree No. 91/2014, converted with amendments into Law No. 116/2014.
28 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). The Bank of Italy’s regulation of 19 January 2015 was revised and updated to set out the legal framework for loan origination by AIFs.
29 See Consob Resolution 24 February 2016, No. 19520, which amended the Regulation on the collection of risk capital via on-line portals (adopted by Consob Resolution 26 June 2013, No. 18592), see also Bank of Italy Resolution of 9 November 2016 (which came into force on 1 January 2017).
30 Bank of Italy Annual Report, 31 May 2017.
31 Bank of Italy Annual Report, 31 May 2017.
32 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).
33 See Articles 13-16 of IVASS Regulation No. 24/2016.
34 See, among others, Law No. 335/1995, Law No. 449/1997, Law No. 243/2004 and Legislative Decree No. 201/2011.
35 See Legislative Decree No. 124/1993, which also established COVIP, the authority in charge of both the prudential supervision of pension funds and the protection of its beneficiaries’ rights.
36 Of these, 36 are contractual pension funds, 43 are open-ended pension funds, 78 are PIPs and 294 are pre-existing pension funds.
37 See COVIP annual report for 2016.
38 This decree significantly amended the previous regime – which dated back to 1996 – by introducing specific provisions regarding investment criteria (e.g., diversification, risk and 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.
39 In 2016 approximately 7.8 million workers (approximately 27.8 per cent) participated in private pension schemes (an increase of 7.6 per cent on 2015), whereas AUM of private pension schemes amount to €151.3 billion (an increase of 7.8 per cent on 2015); see COVIP 2016 Report, President’s Remarks, 8 June 2017.
40 COVIP is the authority (established in 1993) in charge of both the prudential supervision of pension funds and the protection of its beneficiaries’ rights.
41 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.
42 COVIP takes a very favourable view of concentrations as a higher concentration rate can improve the efficiency of the system.
43 Ministerial Decree No. 30/2015.
44 Assogestioni, Half Year Report about Italian Real Estate Funds, 23 June 2017.
45 Assogestioni, Half Year Report about Italian Real Estate Funds, 23 June 2017.
46 Assogestioni, Half Year Report about Italian Real Estate Funds, 23 June 2017.
47 Reserved AIFs can be distributed to non-professional investors only if this is specified in the fund regulation. The fund regulation can also specify other categories of investors entitled to invest in the fund.
48 See Ministerial Decree No. 30/2015.
49 Italian Private Equity and Venture Capital Association (AIFI) Yearbook 2017.
50 See ‘VentureUp’, the start-up platform set up by AIFI in late 2015 in cooperation with certain prominent venture capitalists, advisers and law firms, which the EU Commission has included on a list of innovative European platforms.
51 On 22 August 2016, the Italian government published in the Official Gazette, Ministerial Decree of 9 August 2016 (the 2016 Decree), amending the list of jurisdictions that allow an adequate exchange of information with Italy (the ‘white list’). The 2016 Decree broadens the white list to include 51 new countries and reserves the right to remove countries that are not compliant with the exchange of information obligation.
52 Specifically, foreign investors established in a white-listed country qualify for the withholding tax exemption provided that, among other things, they meet the prudential supervision test, meaning that either the UCI itself or its asset management company are subject to regulatory supervision by the local competent authority. In order to meet this latter requirement, the foreign UCI or its asset manager must obtain an initial authorisation for the investment activity and must be subject to a continuing control over its activity.
Foreign UCIs, in order to comply with the prudential supervision test, need to provide a written statement issued by the competent foreign authorities confirming compliance with this requirement. However, it may happen that a foreign competent authority is not in a position or available to issue the above written confirmation.
The ITA clarified with resolution No. 78/2017 that a Cayman Limited Partnership in an Italian REIF can prove it is subject to prudential supervision of the local competent financial authority to the extent its general partner qualifies as a ‘relying adviser’ of a United States ‘investment adviser’ under the US Security Exchange Commission regulation (i.e., Investment Adviser Act of 1940). In this scenario, where the relying adviser is controlled by or under common control of an investment adviser and a single form ADV (which is the standard form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities) can be filed by the latter on behalf of itself and the other advisers (i.e., so-called umbrella registration), the form ADV together with the evidence of the registration on the SEC’s website are deemed sufficient elements to prove the requisite prudential supervision.
53 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 Income Tax Code). 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. Only 49.72 per cent of the relevant gain is included in the taxable income (Article 68(3) of the Income Tax Code). 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 (and therefore that are not treated as having an interest in a partnership) are, in principle, subject to taxation in Italy as other income (Articles 23(1)(f) and 67(1)(c ter) of the Income Tax Code). 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: in all cases, if the units of the REIF are listed on a regulated market; and 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 one specific category that benefits from the exemption regime applicable to proceeds from REIFs.
54 With regard to the application of such a 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.
55 See footnote 53, supra.
56 The Italian tax authorities confirmed that UCIs that meet the requirements set forth by Article 73 of the Income 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.
57 See Article 39(1) of the Italian Financial Act.
58 See Bank of Italy economic bulletin No. 3/2017.