I OVERVIEW OF RECENT ACTIVITY

The macroeconomic outlook for 2018 seems quite promising: the first signs of recovery of the Italian economy observed at the end of 2017 seem to have strengthened in the first half of 2018. Indeed, industrial production in the north is recovering and growing, and other areas are now starting to achieve good results. The recent electoral outcome (in March 2018) showed that although the majority of Italian citizens voted for anti-establishment parties, the current political environment does not seem to be an issue for the markets. As a result, even though market volatility in Italy is still higher than in other European countries, it has not raised any specific concerns.

After the turmoil of the past few years, the banking sector seems to have gained more stability, as non-performing loans (NPLs) are no longer an emergency, and consequently Italian banks' capital position is stronger. While more challenges are ahead – for example, in the fintech sector – last year Italian banks experienced a weak but steady return to profitability that continued in the first months of 2018.

The recent announcement by the European Central Bank Governor implying a gradual run-down of quantitative easing measures (to be completed by the end of 2018) has not caused any major concerns in the Italian market thus far. Moreover, this is not expected to result in increased interest rates until the end of 2019, which means that Italian banks will have to continue dealing with the trend of low interest rates for a while longer. This means that banking products (i.e., bonds and other deposits) will probably continue not to appeal to investors, thus making investment funds an increasingly popular alternative to traditional banking products, as they tend to perform better.

The asset management industry, both in Italy and other European countries, has benefited from this situation for some time now. The European regulator's intervention (e.g., through the Alternative Investment Fund Managers Directive (AIFMD)) has played a major role in expanding investment opportunities for investment funds (e.g., by allowing alternative investment funds (AIFs) to acquire loans from non-customer originators against their own capital), while at the same time making the sector trustworthy for less sophisticated investors.

The introduction of long-term individual saving plans (PIRs)2 by the Italian regulator has given the asset management industry a major boost. The tax benefits associated with this
form of investment3 are the main reason for their great success to date, which was not entirely expected. It is also uncertain whether PIRs will continue to be as successful in the future.

II GENERAL INTRODUCTION TO REGULATORY FRAMEWORK

The Italian regulatory framework is characterised by rigorous and incisive rules, and supervisors with extensive powers.4

The principles governing asset management are contained in the Italian Financial Act,5 and were primarily implemented – after the adoption of the AIFMD and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS V)6 rules – by Ministerial Decree No. 30/2015, which sets out the general criteria applicable to Italian UCIs; the Bank of Italy's regulation of 19 January 20157 on the collective asset management rules and the relevant explanatory notes; and regulations issued by the National Commission for Companies and the Stock Exchange (Consob).8

In November 2017, Consob and the Bank of Italy updated the regulatory framework on UCIs' and asset management companies' reporting duties,9 with the aim of reducing the reporting burden for asset management companies operating in Italy and aligning the reporting duties to the European legislation.10

The asset management industry is represented and supported by Assogestioni, a private organisation,11 which has developed several codes of practice and guidelines. Other organisations such as the Italian Association of Private Equity (AIFI) are active in different fields of the industry.

The rules governing the marketing in Italy of AIF units or shares fully reflect the regime set out in the AIFMD (including the marketing of non-EU AIFs or AIFs by non-EU AIFMs)12 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 (2) 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: the EU AIFM is required to, in addition to obtaining the authorisation under (1) above, request Consob's authorisation.13

As to the marketing in Italy of foreign collective investment schemes under the UCITS framework, the home country regulator must notify Consob before any marketing begins.

In light of the product governance provisions under MiFID II, which entered into force in January 2018, the investment management sector has started questioning the fall-backs of these provisions on their activities. Even though management companies do not fall within the scope of the product governance regulation, the distribution channels are required to comply with this regulation, and various initiatives have been adopted to facilitate the exchange of information between manufacturers (i.e., management companies) and distributors concerning, for example, the target market and the distribution strategy. This has been considered by Consob as a best practice that ultimately benefits retail investors.

Under the new MiFID II framework, the marketing of UCIs by asset management companies is subject to MiFID II conduct rules and to product intervention measures (such as the prohibition, restriction or suspension of the marketing) when investor protection or market stability, or both, are threatened.14 Similarly, asset management companies authorised to provide investment advisory, portfolio management or the reception and transmission of orders are subject to MiFID II conduct rules for the provision of investment services.

Moreover, asset management companies that intend to market UCIs to retail investors are now required to publish a key information document on their website to enable retail investors to understand and compare the key features and risks of an investment.15

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 closed-ended collective investment schemes set up as joint-stock companies with fixed capital.

Option (a) is by far the preferred choice of Italian market operators.16 Specifically:17

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; 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.18

IV MAIN SOURCES OF INVESTMENT

In the first quarter of 2018, the asset management industry proved to be in good shape, with total assets under management (AUM) of €2 trillion – approximately 120 per cent of Italy's GDP – split between individual portfolio management mandates (49.2 per cent, continuing a slight decrease that began in 2013) and funds (48.3 per cent open-ended and 2.5 per cent closed-ended).19

In 2017, the percentage of Italian investors in asset management products was 35 per cent,20 which is higher than the pre-crisis level (14.7 per cent) for the first time in a while. In particular, asset management products are the prevalent financial products for Italian investors even though Italian household investments are more focused on banking bonds and government securities.21

At the end of 2017, the asset value of the funds marketed in Italy was almost €984 billion, recording growth of approximately €100 billion from 2016. Notably, monetary and hedge funds decreased, whereas bond funds represented the prevalent share in the Italian market.22 Flexible funds experienced the most significant increase in 2017: 36 per cent of Italian investors chose them. 23

V KEY TRENDS

The recent trends in the Italian asset management sector can be summarised as follows:

a successful performance of PIRs;24

b confirmation of the role of funds as financing providers for the real economy and a source of liquidity for distressed banks;25

c predominant interest in bond funds, progressive contraction of interest in monetary and hedge funds, and substantial stability of interest in share funds;26

d slightly increased number of foreign funds marketed in Italy;27

e increased number of AUM;28 and

f increase in AUM (up by 11.64 per cent in March 2018 compared to March 2017) of exchange-traded products (the vast majority of which are UCITS-compliant exchange-traded funds (ETFs)).29

To support recovery, specific measures have been adopted in recent years, including:

a the possibility granted in 2013 to the SMEs Guarantee Fund30 to provide coverage also to SGRs, in addition to banks and other financial intermediaries;31

b the opportunity given in 201432 for Italian AIFs and, in 2016, for EU AIFs, to carry out direct lending activities;33

c the introduction of PIRs, launched to boost investment in financial instruments (shares, bonds, etc.) issued by Italian small and medium-sized enterprises (SMEs) thanks to the tax exemption they are granted;

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);

e the review of the equity crowd-funding framework so as to expand the scope of eligible investors and reduce certain regulatory entry hurdles;34 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 increased profits (of approximately 37 per cent),35 mainly owing to the positive performance of collection (compared to the

previous year). Conversely, private equity fund profits continued to suffer from the difficulties in raising capital.36

VI SECTORAL REGULATION

i Insurance

Following the implementation of the Solvency II framework, and in light of the appeal of asset management products for Italian investors (see Section I), the measures adopted by the Italian regulator in terms of eligible investments were particularly favourable to the insurance Industry.

In this respect, IVASS allowed Italian insurers to decide 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.37 Importantly, this new framework confirmed the possibility for insurance companies to provide direct lending.38

IVASS has also introduced new rules for determining the average rate of return of separately managed accounts, allowing insurers to temporarily suspend the accounting of gains and losses deriving from the trading of derivatives, and to hold the revenues gained during favourable economic cycles for distribution to policyholders during less favourable accounting periods.39

At the end of 2017, insurance companies held technical reserves of €729 billion, whereas assets covering the technical reserves amounted to €737 billion. These assets (excluding the technical provisions concerning linked policies and pension funds) are mainly invested in government bonds (59.3 per cent, a decrease on the previous year), whereas corporate bonds, UCIs and shares are less significant.

On a separate note, in 2017 Italian insurers experienced a reversal of the 2016 negative trend of unit linked policies' volumes.

In addition, IVASS shone a spotlight on the phenomenon of 'dormant' life policies,40 requiring insurers to take actions to improve the processes for verifying the deaths of insured people and identifying beneficiaries.41 The payment of the insured capital related to 'dormant' life policies releases resources that could be directed to investments in funds, especially considering the trend of low interest rates that has made traditional banking products less appealing.

ii Pensions

Over the past 30 years, the Italian pension system has undergone significant reforms42 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 199343 and radically reformed in 2005 (Legislative Decree No. 252). The reform's cornerstones were voluntary, and defined contributions, individual capitalisation mechanisms and the transferability of positions from one pension scheme to another.

Currently, 415 private pension funds are in place in Italy.44 The structures of those pension funds take four different forms:

a contractual pension funds;

b open-ended pension funds;

c individual insurance pension plans (PIPs); and

d 'pre-existing' pension funds.

The Italian private pension market is concentrated, as the 38 largest private pension funds (with more than €1 billion of AUM) hold 66 per cent of the total resources.45

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).46 Eligible assets include UCITS and AIFs; certain derivative contracts; and certain non-listed and non-rated bonds issued by SMEs, and securities backed by the same assets and issued as part of securitisation transactions.

In the past three years, the prolonged expansive monetary policy, characterised by low interest rates, stimulated a portfolio diversification resulting in a decrease in AUM invested in sovereign bonds (from 50.2 per cent in 2014 to 41.5 per cent in 2017) compensated by increased investments in other assets (equity, deposits, UCITS and real estate).

Italian workers are becoming increasingly aware of the advantages of private pensions, whose market is steadily growing (in terms of participants and AUM) also because of the widespread distribution network used and the reduced costs to be borne by investment fund managers. Despite this growth, the participation rate in private pension funds is still modest (approximately 28.9 per cent of the workforce), which represents a market opportunity for pension funds that could target the Italian market to expand their business. However, the Italian regulator has some concerns in light of investors' low levels of expertise, which could damage them if aggressive sales strategies are adopted by pension funds.47

To encourage participation in private pension schemes, COVIP48 has taken specific measures in the past few years, including a ban on the exclusive or automatic reliance of pension schemes on credit rating agency ratings;49 a simplification of the bureaucratic burdens related to certain corporate actions and extraordinary transactions; and incentives to mergers so as to reach sizes that ensure efficiency and economies of scale.50

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.51 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 to 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 30 June 2017, only 7 per cent of the existing real estate funds are retail-oriented).52 As to the recent trend in the real estate funds market, the number of funds and management firms (as of 30 June 2017, 463 and 50 respectively)53 is still quite low compared to other European countries. With regard to their activities, in 2017 disposals were higher than acquisitions and contributions (€1,065 million of disposals versus €859 million of acquisitions and €134 million of contributions).54 Moreover, most of the portfolio belonging to Italian real estate funds is allocated to non-residential properties (mainly offices) in the north-west (47 per cent) and in the centre (30 per cent) of the country that are bought and then leased; however, in the past few years investment in residential properties has increased consistently.55

Broadly speaking, the real estate market is slowly recovering from the negative tendency of the past few years; therefore, in 2017 the asset management sector benefited from this market improvement, and asset management products are thus expected to perform better in the near future. As of 31 December 2017, the total assets of real estate UCIs amounted to €48.5 billion (only 2 per cent of the asset management market),56 with an increase of more than 5 per cent as compared to the previous year. 57 This trend is also likely to continue in 2018 through the growth of real estate investment in emerging markets (taking into consideration demographic aspects and developments in infrastructure).

Most investments by real estate funds in Italy in 2017 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.

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, a fund's 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 investors58 is €500,000, and hedge fund units cannot be exclusively distributed to retail investors through the individual portfolio management service.59

Owing to these structural constraints, hedge funds have developed more slowly in the Italian market compared to other countries and are still mainly targeted to 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. More specifically, at the beginning of 2018 foreign hedge funds showed a cautious attitude towards investing in Italy. However, since the 2018 election, hedge funds seem to be ready to invest in the Italian market again.

However, the revision of the regulatory framework still needs to be accompanied by a change in the cultural approach to alternative investments. Traditionally, Italian investors tend to be risk-averse, and although this 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 to 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 to 2008: characterised by a complex macroeconomic backdrop that caused a reduction of internal rates of returns despite increased investment volumes;

c 2009 to 2012: characterised by the credit crunch, and a drop in performance and investment volumes; and

d 2013 to 2017: characterised by a partial recovery, an increase in operators and in investments (with a significant increase in investments in 2016) with growing trends in the 'buyout' and 'early stage' segments, and 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 AIFI, in 2017 investments in the Italian private equity and venture capital market reached the third-highest amount of the past 10 years, despite the lack of mega deals (i.e., those in excess of €300 million) that characterised the previous year (even though the overall number of deals is consistent with the previous years and is now firmly confirmed at above 300). In any case, in 2017 the overall amount of private equity investments fell by 40 per cent compared to the significant increase in 2016, and were distributed over 311 deals (they were mainly concentrated in buyout transactions, infrastructure, and replacement, early stage and expansion segments involving SMEs), with a decline of 3 per cent compared with the 2016 figures representing a decrease of approximately €5 billion.

Despite positive results in 2017, divestments regarding the private equity sector continued to grow both in terms of the amount and number of exits, and were characterised by a new exit channel: sales to special purpose acquisition vehicles. In fact, taking into account the international players based in Italy, total capital inflows would reach €7,339 million. As to divestments, they amounted to €3.8 billion (an increase of 3 per cent compared to 2016).60

In addition, fundraising by private players, which remains the most critical part of asset management activity, slowed down in 2017 (a decrease of 29 per cent compared with the 2016 data), even though some developments took place in 2017, considering that the total resources collected by domestic operators amounted to €6,263 million compared to €1,714 million in the previous year. This increase was strongly influenced by the activity of some domestic institutional funds that reached important closings during the year.

Notably, the low interest rate environment caused buyouts to generally be the preferred stage for investments, and the one into which the largest portion of resources continued to flow (i.e., 70 per cent of the total amount). In addition, early-stage activity in 2017 registered a significant 29 per cent increase in amount (from €104 million to €133 million), and a 4 per cent increase in number.

Market operators are optimistic about the future economic scenario, and thus have encouraged measures aimed at providing venture capital for Italian start-ups.61

vi Other sectors

See Section III 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 for 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).

i 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 Law 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 immovable 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 a 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 IRES purposes, and therefore as autonomous persons 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

Institutional REIFs' units are entirely owned by one or more of the institutional investors pursuant to 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 by the management company or the relevant Italian qualified intermediary, 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.

Distributions of amounts formed with capital contributions are not subject to any income taxation at the level of the investor but reduce the tax basis of the units for a corresponding amount.

Pursuant to Article 5 of Legislative Decree 461/1997, the capital gain arising in the hands of an Italian resident individual who does not act in the context of a business activity is subject to a 26 per cent substitute tax.62 If the units are held in the context of a business activity, the relevant capital gain is included in the aggregate taxable income ordinarily subject to personal income tax.

Non-institutional REIFs

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 'look-through' 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 final payment depending on the status of the investor.

In the event of transfer of units by an individual who holds less than 5 per cent of the fund units, capital gains are subject to the same principles that apply to sales of units of institutional REIFs. In the event of transfer of units by an individual who holds more than 5 per cent of the fund units (that are taxed on a 'look-through' basis), for purposes of determining the relevant capital gain, the tax cost of the transferred units is increased or decreased, respectively, by the income or losses attributed to the investor, and is also decreased, up to the amount of the management results attributed, by the proceeds actually distributed to unitholders. In cases of transfer, such units are treated as a participation in an Italian partnership under Article 32(4) of Law Decree 78/2010, and the relevant capital gain, if realised outside the context of a business activity, is included, up to 58.14 per cent of the amount, in the relevant taxable income of the investor according to Article 68(3) of Presidential Decree 917/1986. This is similar to the tax treatment applicable to capital gains realised from 1 January 2018 to 31 December 2018 by Italian-resident individuals through the sale or disposal of a 'qualified' shareholding not held in connection with a business activity. However, Article 68(3) of Presidential Decree 917/1986 has been repealed by the 2018 Budget Law with respect to capital gains realised from 1 January 2019. If the units are held in the context of a business activity, the relevant capital gain is included in the aggregate taxable income ordinarily subject to personal income tax.

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. As clarified by the tax authorities in Circular 11/E of 9 March 2011, the 26 per cent withholding tax could be reduced pursuant to a provision on interest payments set forth in a double tax treaty, if any, entered into by Italy and the country of residence of the recipient. However, proceeds received by certain qualified non-Italian resident investors (e.g., pensions funds and UCITs established in a white-listed country63) are exempt from the 26 per cent withholding tax.64

Capital gains realised on sales of REIF units are, in principle, taxable in Italy as other income.65 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 were 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, regarding income deriving from quotas held in foreign REIFs received by resident persons, the same taxation treatment provided for participants to Italian REIFs that own quotas greater than 5 per cent of the fund shall apply, including the transparency regime for participants other than 'institutional investors', listed in Article 32(3) of Law Decree No. 78 of 2010.66

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 cases where 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 REIF at least on the portion of income from immovable property attributed to the Italian quota holder by operation of the transparency principle.

iii Italian UCIs (other than Italian REIFs)

The profits of UCIs are exempt from income tax and corporation tax. UCIs receive investment income gross of withholding tax and applicable substitute taxes, with certain exceptions. In particular, 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 a UCI or management company (e.g., the SGR) is subject to prudential supervision.67 In general, income from certain UCI investment activities is 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.68 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 a UCI. The withholding is assessed on:

a the total of the profits distributed during the period of participation in the UCI;

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 (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 units other than in connection with a business activity.

With 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 an applicable tax treaty.69 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 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 a SICAF invest in real estate assets in accordance with the rules set out by civil law provisions70 or for SICAVs, the SICAF will not be considered a REIF.

VIII OUTLOOK

In 2017, Italy's economic growth strengthened considerably, driven by the global cyclical upswing and expansionary economic policies. Public debt appears to be stabilising, but still remains high compared to the country's GDP. The latter rose sharply during 2017, supported by domestic demand. Investment, which slowed in the first half of last year, has now increased again. In this context, the investment trend in Italy shows the increased interest of Italian investors in the asset management sector. More specifically, in 2017 the overall amount of investment fund subscription reached €7.2 million, an increase of €500,000 compared to the 2016 data. Consequently, investors in the asset management sector make up 12 per cent of the Italian population, with half of these individual investors having invested more than €14,000 each.71

In terms of future challenges, the asset management sector will have to face the sudden development of fintech solutions. More specifically, even though GAFA (Google, Amazon, Facebook, Apple) is focusing on the payment service sector, these companies are now likely to gradually approach the asset management sector, relying on the huge amount of data they hold. In this context, market players in the asset management sector are considering developing partnerships with the fintech industry, which the Italian supervisors are scrutinising closely.

Mifid II is also likely to continue to affect the asset management sector (see Section II). Indeed, full compliance with this regime entails higher costs, and will increase the overall transparency of the burdens clients must bear when receiving investment services, thus implying lower profitability and more competition in the market. However, the disclosure of costs and expenses regimes under Mifid II may have a deeper impact on the asset management sector compared with the banking and investment firm industry, which may encourage M&A transactions between asset management companies that will enhance their profitability with larger-scale businesses, even though M&A processes may weaken market competition.

Finally, the 2017 data on developments in Italian asset management is encouraging; although the issue of a low level of financial expertise among Italian investors still exists, Italian authorities are encouraging various initiatives in this respect in addition to promoting their own initiatives.

Furthermore, certain gaps in the regulatory landscape – including those related to the fintech phenomenon – pose, on the one hand, a risk to macroeconomic stability and development, but on the other, an opportunity for market players in the asset management sector. Consequently, extensive knowledge of the evermore sophisticated and complex European financial regulations is becoming increasingly crucial.


Footnotes

1 Giuseppe Rumi and Riccardo Ubaldini are partners and Michele Dimonte, Giulio Vece and Benedetta Volpi are associates at BonelliErede.

2 PIRs can be classified as 'investment containers' that can be made up of funds, deposits, insurance products, etc., provided that 70 per cent of the portfolio is made up of securities issued by Italian or EU SMEs and 30 per cent of this share (21 per cent of PIRs' total assets) is invested in instruments other than those listed on the FTSE MIB market or other blue-chip indexes.

3 Holders of PIRs are, in fact, granted a tax exemption if the investments last at least five years and no more than €30,000 is invested annually.

4 The main supervisors involved are:

athe 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);

bConsob: it supervises, among other things, the provision of investment services, and ensures transparency and correctness of conduct towards investors;

cthe Institution for the Supervision of Insurance (IVASS): the insurance regulator and supervisory authority since 1 January 2013; and

dthe Pension Funds Supervisory Commission (COVIP): the supervisory authority for the private pension funds sector.

5 Legislative Decree No. 58/1998.

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 cooperation between ESMA and the competent national authorities, activities that can be carried out by a custodian, remuneration policies and 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 amendment 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. 20307/2018, which sets out, among other things, the rules of conduct and the rules on internal procedures, conflicts of interest, complaint management and record keeping 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 of intermediaries and asset management companies; and

d  Resolution No. 19094/2015 and Resolution 20197/2017, which supplement and partially amend the resolutions under (a) to (c) above.

9 The main changes concern the updates to Consob Resolution No. 17297/2010 and Bank of Italy Circulars Nos. 189 and 286.

10 With particular regard, among other things, to Directive 2011/61/EU and Regulations (EU) 345 and 346 of 17 April 2013.

11 Italian Investment Management Association.

12 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.

13 The Italian legislature and regulatory authorities opted for a gold-plating provision in this regard, pursuant to Article 43(2) of the AIFMD.

14 The Bank of Italy and Consob, within their respective competences, may adopt such measures when, among others, the marketing of UCIs gives rise to significant investor protection concerns, or poses a threat to the orderly functioning and integrity of financial markets or to the stability of whole or part of the financial system (see Article 7-bis of the Italian Financial Act and Articles 39–43 of MiFIR).

15 See Regulation (EU) No. 1286/2014 on key information documents for packaged retail and insurance-
based investment products (PRIIPs).

16 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 their falling under the Bank of Italy's supervision.

Provided that certain conditions are met, the Bank of Italy has clarified that the following investment entities cannot be considered SICAFs, and, therefore, are exempt from the asset management regulations: listed special purpose acquisition companies, 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 assessed on case-by-case basis (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, 20 SICAFs have been set up and enrolled with the Bank of Italy's register under Article 35-ter of the Italian Financial Act.

17 Bank of Italy Annual Report (Appendix), 29 May 2018.

18 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).

19 Assogestioni, Quarterly Map of the Italian Asset Management Industry, I, 2018.

20 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2018. In 2017, the average investor in asset management products was male, approximately 59 years old, resident in Northern Italy and made asset allocation choices focused on flexible funds. Female investors increased their participation in investments funds (approximately 47 per cent of unitholders are female), confirming the trend of the previous year (2016) (see Assogestioni Research Paper No. 2/2018).

21 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2018.

22 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2018.

23 Assogestioni Research Paper No. 2/2018.

24 Assogestioni, Annual Report, 28 March 2018. In their first year of life, PIRs collected approximately €11 billion, contributing to achieving total AUM of €15.8 billion at the end of 2017.

25 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 NPLs. See also the Italian Recovery Fund (previously Atlante II) established in August 2016 to invest in NPLs and financial instruments linked to NPLs.

26 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2018.

27 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2018.

28 Consob Annual Report to the Ministry of the Economy and Finance, Rome, 31 March 2018, €75 billion collected in 2017 compared to €40 billion collected in 2016.

29 Osservatorio ETFplus, Borsa Italiana, March 2018.

30 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.

31 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.

32 See Law Decree No. 91/2014, converted with amendments into Law No. 116/2014.

33 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.

34 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). The Regulation on the collection of risk capital via online portals was subsequently amended also by Consob Resolution 29 November 2017, No. 20204; see also Bank of Italy Resolution of 9 November 2016 (which came into force on 1 January 2017).

35 Bank of Italy Annual Report, 31 May 2018.

36 Bank of Italy Annual Report, 31 May 2018.

37 See IVASS Regulation No. 24/2016, which thoroughly revised the pre-Solvency II regime (contained in ISVAP Regulation No. 36/2011). Previously, insurers had to cover their technical provisions with assets that met specific requirements, including the requirements to:

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

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).

38 See Articles 13-16 of IVASS Regulation No. 24/2016.

39 See IVASS Order No. 68/2018.

40 'Dormant' life policies are policies that, although having matured entitlement to payment of the insured capital, have not been paid by insurers that are awaiting the expiry of the contract. According to IVASS, approximately four million life assurance policies are potentially exposed to the risk of dormancy, for a counter value of approximately €190 billion. See IVASS – Thematic Review on Dormant Life Assurance Policies Results.

41 See IVASS letter to the market of 29 December 2017.

42 See, among others, Law No. 335/1995, Law No. 449/1997, Law No. 243/2004 and Legislative Decree No. 201/2011.

43 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.

44 Of these, 35 are contractual pension funds, 43 are open-ended pension funds, 77 are PIPs and 259 are pre-existing pension funds.

45 See COVIP annual report for 2017.

46 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.

47 In 2017 approximately 7.6 million workers participated in private pension schemes (an increase of 6.1 per cent on 2016), whereas AUM of private pension schemes amounted to €162.3 billion (an increase of 7.3 per cent on 2016); see COVIP annual report for 2017.

48 COVIP is the authority (established in 1993) in charge of both the prudential supervision of pension funds and the protection of its beneficiaries' rights.

49 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.

50 COVIP takes a very favourable view of concentrations, as a higher concentration rate can improve the efficiency of the system.

51 Ministerial Decree No. 30/2015.

52 Assogestioni, First Half Year Report about Italian Real Estate Funds, 8 November 2017.

53 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2018.

54 Assogestioni, First Half Year Report about Italian Real Estate Funds, 8 November 2017.

55 Annual Report of the President of Assogestioni, 28 March 2018.

56 Annual Report of the President of Assogestioni, 28 March 2018.

57 Consob Annual Report to the Ministry of the Economy and Finance, 31 March 2018.

58 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.

59 See Ministerial Decree No. 30/2015.

60 Italian Private Equity and Venture Capital Association (AIFI) Yearbook 2018.

61 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 European Commission has included on a list of innovative European platforms.

62 Such capital gain is equal to the difference between the sale price and the tax basis in the hands of the transferring party. The taxpayer may opt for one of three alternative tax regimes, namely the tax return regime, the non-discretionary investment portfolio regime and the discretionary investment portfolio regime; however, pursuant to Article 6 of Legislative Decree 461/1997, the non-discretionary investment portfolio regime is the regime applicable to transfer or reimbursement of investment funds units, unless another option is provided by the relevant investor.

63 On 22 August 2016, the Italian published Ministerial Decree of 9 August 2016 (2016 Decree) in the Official Gazette, 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.

64 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. ITo 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, 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 the 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., 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.

65 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 58.14 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.

66 With regard to the application of such a peculiar mode of taxation of income derived from quotas held in REIFs, reference is made to Circular letter No. 2 of 15 February 2012.

67 See footnote 65.

68 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.

69 See Circular letter 11/E of 28 March 2012.

70 See Article 39(1) of the Italian Financial Act.

71 Assogestioni, Quarterly Map of the Italian Asset Management Industry, I, 2018.