The Italian loan market is constantly growing and changing, owing to the recent reforms aimed to ensure easier access to credit for enterprises by widening the platform of licensed lenders.
In general, Italian companies rely on bank intermediation as a source of financing. However, structural and cyclical reasons led to the preference of a diversified financial system, which includes not only banks but also other kinds of intermediaries as well as the capital markets, which contribute to a significant extent to the financing of companies and enterprises in general.
In particular, recent legislation has opened the Italian loan market to other categories of participants, such as Italian securitisation companies, insurance companies, pension funds and closed-end investment funds.
In Italy, the Loan Market Association (LMA) plays an important role, especially for banks, in establishing transactions models. In 2017, the LMA announced the launch of template documents for use in Italian private placement transactions with the hope that standardisation of Italian law documentation will assist in creating a more unified and efficient private placement market. The template documents include a form of facility agreement.
II LEGAL AND REGULATORY DEVELOPMENTS
i Recent developments affecting the lending market
Recent amendments to the Italian Securitisation Law2 were introduced by the 2019 Budget Law3 and the Growth Decree4 issued by the Italian government, to encourage alternative finance channels (other than banks and financial intermediaries). In particular, in addition to the provisions that allowed Italian securitisation companies to take part in lending activities in favour of small and medium-sized enterprises (i.e., enterprises with a balance sheet equal to or in excess of €2 million) and clarified that a special purpose vehicle (SPV) may both advance loans and purchase receivables (mixed securitisation). Other significant amendments also concern the establishment of 'auxiliary' SPVs, aimed at purchasing, managing and valorising real estate assets (ReoCos) or registered movable assets securing the securitised receivables, or assets leased under financial lease agreements (LeaseCos), as well as the introduction of a new type of securitisation of proceeds arising from the ownership of real estate and registered movable assets, or other rights in rem or personal rights over such assets provided that certain conditions are met.5 In relation to ReoCos and LeaseCos, the Growth Decree introduced provisions leading to the neutrality for, inter alia, direct tax of the proceeds and expenses derived and accrued by such companies in relation to the segregated assets. Other advantageous tax provisions have been introduced as to indirect taxation of transactions carried out by RecoCos and LeaseCos.
Other relevant developments introduced by the Growth Decree concern the securitisation of non-performing loans deriving from credit agreements. The Italian government, urged by European institutions, is intending to accelerate the process of the disposal of non-performing loans by Italian banks. To this end, the assignor bank may also transfer to another bank or financial intermediary the commitments and faculties to grant the financings arising from the credit agreements, and, at the same time, maintain the bank account related to each credit agreement on which payments are made by the borrowers.
Other incentives to alternative financial sources are provided by the Growth Decree in granting guarantees of the Guarantee Fund6 in favour of investors that finance projects through lending and crowdfunding platforms.
ii Basel III, Capital Requirements Directive IV and increased costs
After Basel III and the other global impact initiatives, access to credit has become increasingly difficult for small and medium-sized enterprises due to increasingly complex and burdensome banking rules and the high costs to adapt to the new regulations. For small and medium-sized enterprises, access to credit is not easily available and may be expensive, also in light of contractual provisions shifting transaction costs on borrowers.
iii Sanctions and anti-corruption laws
Generally, borrowers are usually requested to grant lenders with wide-ranging representations and undertakings in facility documentation that address sanctions and anticorruption laws specifically. However, the acceptance of these provisions and the regulation of a breach of the same represent a crucial point in the negotiation of transaction documents, considering that borrowers may be not able to monitor and comply with these provisions.
III TAX CONSIDERATIONS
i Withholding tax on payments and deductibility of interest
Withholding tax does not apply to interest on loans paid by Italian borrowers to Italian banks, or non-Italian banks lending through an Italian branch (if non-Italian banks do not lend through an Italian branch, a withholding tax of 26 per cent is instead due). A similar regime applies to payments of interest from an Italian borrower to a securitisation issuer (being a company incorporated in Italy) and there will be no cross-border interest payment.
The withholding tax rate (where applicable) may be reduced if a treaty against double taxation is applicable.
Infra-bank deposits and loans are not subject to withholding tax.
This tax regime has been partially amended, providing that no withholding tax shall be levied on interests and other incomes deriving from medium to long-term loans if granted by the following:
- credit institutions established in EU Member States;
- entities listed by Article 2(5) (Nos. 4–23) of Directive 2013/36/EU;
- insurance companies established and authorised under regulations issued by EU Member States; or
- foreign institutional investors, established in a white list jurisdiction, subject to supervision in the foreign countries where they are established.
Starting from tax year 2019, and subject to a transitional regime, interest expenses and similar financial charges are deductible in each tax period up to the total amount of the interest income and similar financial incomes realised in the same period and reported from previous tax periods.
The excess of interest expenses and similar financial charges is deductible up to the amount of 30 per cent of the gross operating income (ROL) resulting from the same tax period and 30 per cent of the ROL reported in the previous five tax periods.
However, interest expenses incurred by insurance companies and parent companies of insurance groups, as well as by financial intermediaries, are deductible within the limits of 96 per cent of their amount.
Pursuant to the 2019 Budget Law, the limitations for the deductibility of interest expenses do not apply to interest expenses on loans secured by mortgages on rental properties incurred by property management companies.
ii Stamp and documentary taxes
The substitute tax regime
In the Italian lending practice, banks tend to benefit from the substitute tax regime. Substitute tax takes the place of any mortgage, cadastral registration, stamp or governmental concession taxes that may be payable on the documents relating to the transaction), which may achieve significant tax savings.
The substitute tax regime will apply if:
- loans are granted by, inter alia, a lender that is either an Italian bank or an EU bank, an Italian-authorised branch of an EU or non-EU bank, or an Italian or an EU financial intermediary;7
- the duration of the loan exceeds 18 months (i.e., it is a medium to long-term loan); and
- the loan documentation is executed in Italy.
Substitute tax is applied even if the loan is granted by an EU non-resident bank, provided that the agreement is executed in Italy.
If all such conditions are met, the substitute tax will apply at the rate of 0.25 per cent (reduced or increased for specific types of loans), on the amounts of the loan (the taxable base being equal to the amounts drawn down by the borrower).
If the substitute tax does not apply, the tax treatment of the mortgage loan and the related security documents would be as follows.
As a general rule, documents providing for the granting of security concerning the grantor's own obligations are subject to registration tax at the fixed amount of €200. However, third parties' obligations on a gratuitous basis are subject to registration tax at the rate of 0.5 per cent.
The general rule is that registration tax will be calculated and paid on the secured amount.
If a consideration is paid for the granting of security or giving of guarantees by the relevant party, the granting of the security is subject to value added tax (VAT), but exempted from the payment of such tax and subject to registration tax at the fixed rate on the basis of the principle of alternative applicability between VAT and proportional rate registration tax. This solution, however, is not used much in practice, since there is the risk that the tax authorities recharacterise the transaction as a non-VAT transaction if the consideration is nominal.
Mortgage and cadastral taxes
Mortgage tax shall be due at a maximum rate of 2 per cent of the secured amount to be paid for the mortgage registration upon the filing of the relevant application.
Cadastral tax shall be due at the rate of 1 per cent of the value of the mortgaged assets.
Stamp duty would generally apply at the fixed amount of €16 for each four pages of each security or guarantee document.
iii Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act was signed on 10 January 2014 between the United States and Italy through an intergovernmental agreement. At present, its domestic implementation has occurred through relevant legislation (Law No. 95 of 18 June 2015 and the Decree of the Ministry of Economics and Finance of 6 August 2015) and several regulations issued by the competent Italian authority.
IV CREDIT SUPPORT AND SUBORDINATION
Forms of security interests
Lending transactions are typically followed by a combination of security interests. Accordingly, Italian law offers a wide range of legal arrangements, meant to ensure the debtor's solvency. Security documents are invariably entered into in writing. In many cases, this is a legal requirement; in other cases, this is done anyway to prevent the guarantor from raising any questions about the existence of the guarantee. The most common forms of in rem security interests are privilege, pledge and mortgage.
In broad terms, the law grants a privilege over the generality of a debtor's movable assets or the debtor's specific assets in favour of a specific credit because of legal purposes and the nature of said credit. As a consequence, the person entitled to the credit is entitled to satisfy in priority compared with other creditors over the proceeds of a given asset (pre-emption right). A privilege also gives the creditor a right of subrogation and a right of retention.
The law establishes the order of different privileges on the same asset, and the relationship between privilege and mortgage, as well as the relationship between privilege and pledge.
Special privilege pursuant to Article 46 of the Italian Banking Act
This special privilege is a lien available to secure debt claims under medium or long-term loans (over 18 months) granted to entrepreneurs by banks authorised to carry on banking business in Italy.
A special lien can be granted by a written document (describing, inter alia, the assets over which the lien is granted, and the amount and terms of the secured loan) but will only be effective regarding third parties once the special privilege is registered in a special register kept in the clerk's office of the court of the place in which the borrower's registered office is located, and, as the case may be, of the place in which the third party granting the special privilege has its registered office.
Under Italian law, a pledge is a security on movable properties, which is normally perfected when the pledged asset is delivered to the pledgee, although the dispossession of the pledgor is not always necessary and can be avoid under certain conditions. A pledge may also be given by a third-party pledgor.
A pledge gives the pledgee a pre-emption right over the proceeds of the pledged asset but does not allow the pledgee to dispose of the pledged asset.
A pledge requires a written agreement, with the date certain at law.
A non-possessory pledge, which has been recently introduced in Italy, allows the pledgor, who is engaged in entrepreneurial activities, to keep hold of the pledged asset and continue to use it for business purposes. In this perspective, a link to the relating entrepreneurial activity of the pledgor is necessary for the pledge to be valid.
By keeping possession of the assets, the pledgor has the chance to transform, transfer or otherwise dispose of them. Accordingly, the pledge would extend to any asset resulting therefrom.
A non-possessory pledge agreement requires a written form and shall indicate a maximum secured amount. However, the pledge is enforceable regarding third parties only upon registration on an electronic register of non-possessory pledges, to be set up within the Italian Revenue Agency. The pledge, in addition, will rank according to the time of registration with the electronic register, except for a special derogation in favour of those pledges (ordinary and non-possessory) granted as collateral for a loan, which prevail over the non-possessory pledge previously registered.
Foreclosure proceedings are in this case far simpler than the ordinary proceeding described by the Civil Code, allowing the creditor to protect his or her rights in several ways.
Pledge over shares of a joint stock company
A pledge over shares is valid if granted by a written document bearing the date certain at law, which specifically describes the receivable and the shares covered by the pledge. The share pledge is perfected by either endorsing the share certificate by way of a pledge or by entering the pledge in the share certificate and, in either case, by entering the pledge in the shareholder's book.
Specific rules apply to pledges over dematerialised shares.
The voting rights in the pledged shares are transferred to the pledgee on execution of the pledge. However, it is open to the parties to agree otherwise.
Pledge over quotas of a limited liability company
Under Article 2471 bis of the Civil Code, a debtor may grant a pledge over a limited liability company, namely a pledge over the rights of a quotaholder corresponding to its quota interest in the company. Quota pledges are granted by a notarised private writing and are perfected by entering the pledge in the Register of Enterprises and, where relevant, in the quotaholder's book. The legal regulation of voting rights is basically the same as for a pledge over shares of a joint stock company.
A mortgage over real property gives the lender a right to foreclose on the specific property made liable to secure its identified claim, even against a third-party transferee; and a preference in being paid from the proceeds of the foreclosure. Mortgages will have different rankings, depending on the date of registration. A mortgage may also be given by a third-party mortgagor. A mortgage may also be granted on assets that the mortgagor does not currently own (in this case, the mortgage can be validly perfected only upon acquisition of the asset by the mortgagor) and on future assets (in this case, it can be validly perfected only upon the asset coming into existence).
A mortgage may be granted by either a unilateral deed or a bilateral agreement. In any case, the mortgage deed must be made in the form of a public deed or a written document with signatures certified as true by a notary public or other authorised public officer. If these formalities are not followed, the mortgage cannot be registered and therefore is not validly created. The instrument granting a mortgage must specifically designate and describe the immovable property involved and the secured amount.
The mortgage is perfected (for 20 years and subject to further renewals) and enforceable regarding third parties upon registration in the public register of immovable property of the place in which the immovable property is situated (the local land or property registry).
The details contained in the mortgage register would need to be amended if any changes occur in the parties secured by the mortgages, except for transfers made pursuant to Article 58 of the Italian Banking Act or pursuant to the Italian Securitisation Law to another bank authorised in Italy, as the formalities set out therein for a transfer to be effective regarding third parties will take the place of any other formalities to the same effect.
If the property over which the mortgage is granted and registered is transferred, the mortgage will also be transferred, but the third-party purchaser will either have the right to release the property to the secured creditors or pay to the creditors an amount determined pursuant to the applicable provisions of the Civil Code; but in the second case, the secured creditors will have the right to start foreclosure proceedings on the property, subject to certain conditions being met.
In addition to the general legislation applicable to mortgage lending, Italian mortgage loans over real property may fall within the provisions of a specific legislation. If a loan qualifies as a fondiario mortgage loan (as defined by Article 38 of the Italian Banking Act), certain material advantages are granted to the lending bank, namely advantages against certain restrictions on enforcement and other advantages to the borrower.
Forms of personal guarantees
The following forms of guarantees are commonly used in financing transactions: joint and several guarantees; and first demand 'autonomous' guarantees.
A joint or several guarantee is an undertaking by a guarantor to pay a debt if the debtor fails to do so. These guarantees are usually given on a joint and several basis by the guarantor and the debtor, allowing the creditor to choose whether to pursue its claim against either or both of the guarantor and the debtor (unless the parties have agreed that the guaranteed creditor shall claim payment from the principal obligor first). When future claims are guaranteed, the joint or several guarantee shall indicate a cap.
A first demand autonomous guarantee differs from a joint or several guarantee in that it is an independent undertaking, and therefore the guarantor is obliged to pay under the guarantee as a principal obligor and on demand from the beneficiary, regardless of any defence of the primary debtor.
Other matters relevant to security
In a cash flow securitisation made pursuant to the Italian Securitisation Law, the assets relating to each securitisation transaction will, by operation of law, be segregated for all purposes from all other assets of the issuer company that purchased the receivables and from those relating to other separate securitisation transactions carried out through the same issuer company. More particularly, prior to a winding-up of the issuer company, the assets will only be available to holders of the notes issued to finance the acquisition of the relevant receivables and to certain creditors claiming payment of debts incurred by the issuer company in connection with the securitisation of the relevant assets.
In addition, the assets relating to a particular transaction will not be available to holders of the notes issued to finance any other securitisation transaction carried out by the issuer company or to general creditors of the issuer company.
Because of these provisions of the Italian Securitisation Law, it is not necessary for an issuer company created in accordance with Article 3 to grant security interests over the receivables purchased by it in favour of the holders of the notes issued by it.
However, under Italian law, any creditor of the issuer company would be able to commence insolvency or winding-up proceedings against the issuer company in respect of any unpaid debt, and the enforceability of 'non-petition' covenants is not clearly established.
The segregation-related provisions are enforceable before and after insolvency, subject to the limitations contained in the law generally. However, the provisions of the Italian Securitisation Law concerning the segregated assets are not likely to apply in circumstances where the cash flow referred to above is commingled with the assets of a subject other than the issuer (e.g., the originator). Thus, if any such subject becomes insolvent, the cash flow held by it could not be included in the segregated assets.
Types of quasi-security devices include the following:
- the duty of care agreement. This agreement is entered into between the lender and the asset manager, whereby the latter undertakes, inter alia:
- to duly manage the property in a manner that would not result in the borrower's violation of the terms of the mortgage loans;
- to notify the lender of material breaches by any tenants of the leased assets, of any new lease and of the termination of any existing lease;
- to notify the lender of any damage to the property; and
- to notify the lender of any termination of the management agreement; and
- endorsement of the insurance policies whereby the lender is named as an additional insured party and is vested with certain additional rights in respect of the insurance policies, such as that of:
- being notified of any failure by the borrower to pay insurance premiums and the related right to cure the borrower's default;
- maintaining the insurance coverage until a given period has passed after receipt from the insurer of the above notification; and
- being paid any indemnity otherwise due to the borrower (a loss payee clause) (this is less common in the case of third-party liability insurance).
In general terms, subordination means that one creditor or group of creditors (the junior creditors) will not be paid by a borrower or other common debtor until another creditor or group of creditors (the senior creditors) have been paid.
In banking transactions, it generally takes the form of a contractual subordination, whereby the order and ranking of the debt is arranged by the creditors (usually through an intercreditor or subordination agreement).
V LEGAL RESERVATIONS AND OPINIONS PRACTICE
i Main legal reservations
Capacity and corporate benefit
Generally, the granting of security by Italian companies is restricted by the financial assistance rule (see below) and corporate benefit of the guarantor. In addition, the transaction shall be permitted by the company's articles of association. Though a corporate benefit for a downstream guarantee is usually self-evident, this may not always be true in the case of an upstream or cross-stream guarantee.
The corporate benefit must be carefully evaluated and determined by the company's directors (to this end, a cap of the guarantee can be provided).
Until the implementation of EU Directive 2006/68/EC by Legislative Decree No. 142 of 4 August 2008 (the Decree), Italian companies were prohibited from granting loans or credit support to a third party acquiring, or subscribing to, their own shares (financial assistance), except for those transactions carried out to promote the purchase of the shares by the employees of the company, or its parent or subsidiary. The entering into force of the Decree has allowed joint stock companies to provide financial assistance for the purchase and subscription of their own shares, subject to compliance with certain conditions and the special procedure (inspired by the 'whitewash' Anglo-Saxon model) set out by the Civil Code. In particular, the amount of financial assistance granted by the companies shall not exceed the sum of their net income, retained earnings and other distributable reserves as set out in their latest financial statements. However, the Decree did not amend the provisions regulating the financial assistance for limited liability companies, which are, therefore, subject to the financial assistance prohibition.
In the context of a bankruptcy procedure, the receiver is given powers to 'restore' the economic and financial substance of the bankruptcy estate to its pre-insolvency state by setting aside transactions or clawback payments, or both. These powers are limited, inter alia, to guarantees and securities granted or payments made within a certain period (six-month, one-year or, with respect to a gratuitous act, two-year periods, as the case may be, prior to the declaration of bankruptcy).8
A special 10-day clawback period applies to mortgages securing the fondiario loans that are hardened after 10 days of their registration.
ii Legal opinions practice
Legal opinions have become standard practice in Italian law secured lending transactions. In general, legal counsel to the borrower delivers legal opinions on status, capacity and authority of each borrower and guarantor. However, legal counsel to the lender delivers legal opinions on the validity and enforceability of the facility and security package documents, and the enforceability of security interests.
Foreign governing law
Generally, Italian courts would uphold a choice of foreign governing law made by the parties according to the Rome I Regulation ((EC) 593/2008) on the law applicable to contractual obligations, provided that the choice is not fraudulent and the application is not manifestly incompatible with the public policy of the forum, or overrides the mandatory provisions of the forum. The parties can select the law applicable to the whole or to only part of the contract. Final judgments obtained in a Member State from 10 January 2015 are enforceable in Italy without the need of a declaration of enforceability according to Brussels 1 bis Regulation ((EC) 1215/2012). In addition, if no bilateral treaty applies, enforceability in Italy of final judgments obtained in a foreign (non-EU Member State) court is also governed by Title IV of Law No. 218 of 31 May 1995 (a reform of the Italian system of private international law).
VI LOAN TRADING
In the interbank loan market, loans are generally transferred via the procedure set out in Article 58 of the Banking Act, which provides that, inter alia, the transferee shall be a bank or a financial intermediary, or an Italian securitisation company or an authorised fund.
Pursuant to Article 58 of the Banking Act, the assignment of the loans will be effective regarding third parties upon registration of the assignment agreement with the competent register of enterprises and publication of a notice of the assignment in the Official Gazette, thus achieving a significant procedural simplification and reduction of costs.
Furthermore, transfer of any guarantee or security granted in respect of the assigned receivables is perfected by the same registration and publication. This means that no additional formality is required to such effect, which also results in a significant tax saving. In the absence of these conditions, a loan is transferred by way of either transfer of contract (which requires the consent of the borrower) or transfer of receivables.
VII OUTLOOK AND CONCLUSIONS
The new amendments and provisions introduced over the past few months by the 2019 Italian Budget Law and the Growth Decree have clearly shown the intention of the Italian legislator to foster the disposal of non-performing loans from banks' balance sheets, thus reducing timing and costs (including tax relief) of these transactions owing to the opportunity for investors to acquire and manage, through SPVs, the receivables and, at the same time, own and manage real estate and registered movable assets through one or more auxiliary SPVs. Real estate securitisation transactions have also been permitted.
From a legal and economic point of view, a positive reaction is expected from the credit system, considering that these new provisions have the purpose to ease the disposal of unlikely to pay receivables, even if uncertainties still remain. Therefore, to boost this trend of development of the lending market, it is reasonably expected that further amendments and clarifications will be introduced by the conversion into law of the Growth Decree.
1 Giuseppe Schiavello is the founding partner and Micol Mimun is a partner at Schiavello and Co Studio Legale.
2 Law No. 130 of 31 April 1999, published in the Official Gazette of the Italian Republic No. 111 of 14 May 1999.
3 Law No. 205 of 27 December 2017, published in the Official Gazette of the Italian Republic No. 302 of 31 December 2018.
4 Law Decree No. 34 of 30 April 2019, published in the Official Gazette of the Italian Republic on 30 April 2019 and effective as of 1 May 2019. This Law Decree is subject to conversion into law (with possible amendments) by the Italian parliament within 60 days of its publication. If the conversion of the Law Decree into law does not occur by 29 June 2019, the Decree will have no effect.
5 According to Article 7.2(2) of the Italian Securitisation Law, (1) the SPV must exclusively carry out real estate securitisation transactions (excluding, therefore, any other transaction); (2) assets and rights that secure the rights of the noteholders and hedging counterparties must be identified; (3) the assets relating to each real estate securitisation transaction are, by operation of law, segregated for all purposes from all other assets of the SPV and from assets relating to other securitisation transactions; and (4) no actions are permitted on the segregated assets by creditors other than the noteholders, grantors of financings or the hedging counterparties.
6 The Guarantee Fund was provided by Article 2 of Law No. 662 of 23 December 1996 to partially secure the financial loans granted by Italian banks in favour of small and medium-sized enterprises.
7 The Constitutional Court, with Judgment No. 242 of 20 November 2017, declared the constitutional illegitimacy of the provision that did not allow the applicability of tax relief to similar transactions carried out by financial intermediaries.
8 According to Article 166 of Legislative Decree No. 14 of 12 January 2019 (published in the Official Gazette of the Italian Republic No. 18 of 14 February 2019), which will enter into force on 15 August 2020, the 'suspect period' will take effect prior to the deposit of a bankruptcy petition, instead of 'the declaration of bankruptcy'.