i Investment vehicles in real estate
Vehicles commonly used in Italy for investment in real estate properties include both non-regulated vehicles and regulated vehicles.
Non-regulated vehicles are usually in corporate form, such as real estate limited liability companies or joint-stock companies. In certain specific circumstances, partnerships, which are transparent for tax purposes, may be used.
Regulated vehicles can be either in contractual form such as real estate investment funds or in corporate form such as real estate investment companies with fixed capital (SICAF). SICAFs have been recently introduced by the Legislative Decree No. 44 of 4 March 2014, which implemented in Italy the AIFMD (Directive 2011/61/EU on Alternative Investment Fund Managers).
Finally, as regards the listed real estate market, Italian listed real estate investment companies (SIIQ) have been introduced by Law 27 December 2006, No. 296 and the related civil law and tax regime has been recently amended in 2014 to take into consideration similar vehicles in other European countries (i.e., EU REITs regimes).
ii Property and transfer taxes
The ownership of real estate properties located in Italy is subject to the property taxes IMU and TASI.
The IMU tax base is equal to the cadastral value increased by 5 per cent and adjusted applying certain parameters provided for by the law. The IMU rate is determined annually by the municipality where the real estate property is located, within a range set out at national level (from 0.76 to 1.06 per cent) by Legislative Decree 14 March 2011, No. 23 (IMU Law). The TASI tax base is determined under the same rules used to determine the IMU base. The TASI standard rate is 0.01 per cent and the municipality where the real estate property is located may reduce it to zero per cent or increase it. In any case, the cumulative rate of IMU and TASI may not by law exceed 1.14 per cent.
IMU and TASI are payable with respect to the ownership of real estate properties in Italy, regardless of the type of investment vehicle holding the properties (corporate vehicle, real estate investment fund, real estate, SICAF or SIIQ).
The transfer of the ownership of real estate properties located in Italy triggers the following indirect taxes: VAT, registration tax, mortgage tax, cadastral tax and minor stamp duties (See Section II.iii).
II ASSET DEALS VERSUS SHARE DEALS
i Legal framework
Investments in real properties may occur either through an asset deal, whereby the investor acquires directly the properties, or through a share deal, whereby the investor acquires a participation in a company that owns the relevant properties.
With respect to due diligence requirements, asset deals are usually straightforward. The purchaser acquires only the real estate property. From a tax perspective, the relevant due diligence is usually focused on the assessment of the existence of any possible real estate lien provided for by the Italian Civil Code or by the tax laws that may derive from certain tax liabilities related to the property (e.g., certain unpaid indirect taxes).
However, with respect to acquisition formalities, asset deals are generally more complicated than share deals. Indirect taxes are due on the registration of the deed of transfer (registration tax) and on the formalities in the real estate public registries (mortgage and cadastral taxes). In addition, VAT may apply depending on the real estate property being purchased (see Section II.iii).
Share deals entail that the investor acquires a participation in the entity that owns the real estate property. This investment structure usually requires a broader tax due diligence on the whole entity (e.g., formalities related to the tax returns, payment of direct taxes and other specific issues for real estate companies). In addition, the structuring is more complex since any financial flow (such as interest on shareholders' loans, dividend distributions and exit strategies) would require an investor to take into consideration the evolution of the international tax framework in order to reduce or minimise taxation, and prevent double taxation.
With respect to indirect taxes, share deals are subject only to minor registration tax duties on the deed of transfer of the shares (i.e., no mortgage and cadastral taxes are due). Furthermore, the transfer of the shares would be exempt from VAT.
ii Corporate forms and corporate tax framework
The most common non-regulated vehicles for real property investment are limited liability companies, joint-stock companies or in minor cases partnerships, the latter being transparent for tax purposes by law.
Real estate companies are subject to corporate income tax (IRES) at a 24 per cent rate on a tax base equal to the net income resulting from the profit-and-loss account, duly adjusted according to the tax rules.
Deductible expenses from the IRES tax base include, inter alia, the following: interest expenses, depreciation of real estate properties,4 a portion of IMU on non-residential properties5 and other inherent expenses.
In particular, interest expenses are deductible according to the following rules:
- the ordinary rule: interest expenses (net of interest income) paid by the company on third-party loans and shareholders' loans are deductible from the IRES tax base up to 30 per cent of the gross operative income determined for tax purposes (approximately equal to the EBITDA) of the relevant tax period; and
- the specific rule for real estate companies: interest expenses on mortgage bank loans are fully deductible from IRES tax base provided that the company mainly leases real estate assets, based on certain parameters provided by the law.6
In addition, it must be carefully considered whether companies investing in real estate properties fall within the scope of the dormant companies regime.7 A company may be considered dormant if the income resulting from the profit-and-loss account of the relevant tax year is lower than a deemed income, which is derived from the application of the rates as defined by the law to the value of the fixed assets accounted for in the relevant annual financial statements (e.g., 6 to 5 per cent for real estate properties accounted for as fixed assets).
If a company is considered 'dormant', certain negative consequences apply. In particular, the IRES rate is increased by 10.5 per cent (i.e., to 34.5 per cent) and applied on a deemed income, calculated as a percentage of the value of the assets accounted for in the balance sheet (e.g., 4.75 per cent for real estate properties accounted for as fixed assets). Furthermore, certain limitations to the recoverability of VAT credits would apply.
Finally, the real estate company would be subject to the regional tax on business activities (IRAP) levied annually on the net value of the company production derived from the activity carried out in the territory of each Italian region. The IRAP standard rate is 3.9 per cent and may be locally increased up to 8.5 per cent, depending on the activity carried out.
However, partnerships are transparent for tax purposes, therefore, income realised by them is subject to tax in the hands of the partners, irrespective of the effective distribution, and proportionally to the shares held.11
iii Direct investment in real estate
This subsection is focused on indirect taxes (on purchase) and direct taxes (on holding and disposal) applicable in the case of direct investment by a non-resident entity in real estate properties in Italy (i.e., asset deals).
Indirect taxes on the sale and purchase of real estate properties
The indirect taxes regime applicable to the sale and purchase of real estate properties located in Italy mainly depends on the characteristics of the seller. If the seller is registered for VAT in Italy, in principle the transfer is subject to VAT.
Furthermore, the indirect taxes regime depends on whether the property qualifies as commercial building or residential building according to the cadastral classification in the public real estate registries.
The transfer of commercial buildings located in Italy made by a VAT-registered person is subject to the following VAT regimes:12
- VAT exemption;
- VAT under the reverse charge procedure (10 or 22 per cent) if the seller opts for the application of VAT in the sale-and-purchase agreement and for these purposes the non-resident purchaser should obtain a VAT position in Italy (i.e., a VAT identification number or appointment of a fiscal representative);13 or
- VAT (10 or 22 per cent) without the reverse charge procedure, if the seller built the property or carried out and completed renovation works listed under Article 3(1)(c),(d),(f) of Presidential Decree No. 380/2001 in the five years before the sale.
Regardless of the VAT regime, the deed of purchase in respect of commercial buildings that are subject to VAT is also subject to registration tax at the fixed amount of €200.14 Mortgage tax and cadastral tax (transfer taxes) apply respectively at rates of 3 and 1 per cent15 on the fair market value.
The purchase of residential buildings located in Italy is subject to the following VAT regimes:16
- VAT exemption (in principle);
- VAT under the reverse charge procedure (10 or 22 per cent) if the seller has built the property or carried out renovation works more than five years before the sale and opts for the application of VAT in the sale-and-purchase agreement. For those purposes, a non-Italian EU resident purchaser (who is subject to VAT in his home country) should obtain a VAT position in Italy (i.e., a VAT identification number or appointment of a fiscal representative);17 or
- VAT (10 or 22 per cent) without the reverse charge procedure, if the seller has built the property or carried out renovation works in the five years before the sale.
It is worth noting that without the reverse charge procedure, the seller would issue an invoice with 10 or 22 per cent VAT and the purchaser would pay it to the seller together with the price. The purchaser would have the right to recover input VAT paid as a deduction from output VAT, depending on its activity and under specific rules. Conversely, under the reverse charge procedure, the seller issues an invoice without VAT (to be integrated by the purchaser) and no financial flow of VAT is paid by the purchaser to the seller, thus eliminating the financial burden related to the funding of VAT. Rules to deduct input VAT would apply as well.
The VAT taxable amount is the consideration agreed for the sale between the parties,18 namely the price resulting from the transfer deed.
For residential buildings, if there is a VAT exemption, the registration tax applies at the rate of 9 per cent on the fair market value,19 while transfer taxes apply at the fixed amount of €50 each.20 If the seller opts for VAT to be applied or VAT is compulsory, then registration tax, mortgage tax and cadastral tax apply in the fixed amount of €200 each.21
Income taxes on rental income
Rental income received by a non-resident entity from the lease of real estate properties located in Italy is subject to IRES.
If the non-resident entity does not have a permanent establishment (PE) in Italy for tax purposes, the income is determined as the higher between the deemed income of the property pursuant to Italian cadastral law, and 95 per cent of the annual rent.22
IRAP is not applicable, if the non-resident entity does not have a PE in Italy.23
Capital gains from the sale of real estate properties located in Italy by a non-resident entity may be, alternatively:24
- subject to IRES, if the sale occurs within five years from the purchase of the property, or
- exempt from IRES, if the sale occurs after five years from the purchase.
As clarified by the Italian Supreme Court,25 the mere ownership and lease of real estate properties in Italy by a non-resident entity does not, per se, give rise to a PE in Italy. However, if the property is used to carry out a business activity by the non-resident entity or it is itself the object of the business activity (e.g., the activity of sale and purchase of real estate properties), this circumstance may in principle entail a PE issue.
The question is relevant since, if the non-resident entity has a PE in Italy, it would be subject to IRES and IRAP on the profits attributable to that PE (see Section V).
iv Acquisition of shares in a real estate company
This subsection is focused on indirect taxes on the purchase of shares or quotas of a real estate property company, and on withholding and substitutive taxes on dividends and capital gains at disposal, applicable on the acquisition by a non-resident entity of shares in an Italian real estate company (i.e., share deals).
Indirect taxes on share purchases
The purchase of shares in real estate companies is outside the scope of VAT.26 The deed of purchase, if executed in Italy, is subject to registration tax at a fixed amount of €200;27 conversely, if not executed in Italy, it is outside the scope of the registration tax.28
If the real estate company is incorporated as a joint-stock company, the purchase of its shares is in principle subject to the financial transaction tax29 (Tobin tax), at 0.2 per cent of the price of the shares. The Tobin tax is paid by the intermediary involved in the transaction or by the public notary (on behalf of the purchaser) or directly by the purchaser.30 The Tobin tax is paid filing a specific form of payment (F24) within 16 days following the month in which the purchase occurs.31
Dividends distributed by a real estate company to a non-resident shareholder are subject to the following withholding tax regime in Italy:
- in principle, a domestic withholding tax applies at the rate of 26 per cent;32
- reduced rates are available under the applicable double tax treaty between Italy and the state of the non-resident shareholder, provided that the non-resident shareholder qualifies as a beneficial owner of the dividends and is eligible to benefit from the double tax treaty;
- the domestic rate is reduced to 1.2 per cent, provided that the non-resident shareholder is resident for tax purposes in an EU or EEA country and subject there to corporate income tax;33
- no withholding tax applies under the EU Parent-Subsidiary Directive (Directive 2011/96/EU), as implemented in Italy,34 provided that the non-resident shareholder, as beneficial owner of the dividends:
- has one of the legal forms listed in the Annex to the Directive;
- is resident for tax purposes in an EU Member State;
- is subject to one of the taxes listed in the Annex to the Directive without the possibility of benefit from an exemption; and
- holds at least 10 per cent of the capital of the company for at least one year;
- to benefit from the withholding tax exemption, specific documentation (i.e., a self-certificate and tax residence certificate) must be collected by the company distributing the dividend, before the dividend distribution; and
- according to guidelines issued by the revenue agency,35 the application of the exemption under Parent Subsidiary Directive must be verified analysing the actual features of the non-resident entity, considering, inter alia, its organisational structure in the context of its business activity (i.e., holding company), its financial structure and its autonomy with respect to the management of dividends received. Furthermore, recent decisions of the Court of Justice36 of the European Union and the Italian Supreme Court37 must be taken into consideration.
As mentioned in Section II.ii, income realised by partnerships is subject to tax in the hands of the shareholders, irrespective of the effective distribution and proportionally to the shareholding held.38 In the case of a partner that is a non-resident entity, that income is considered Italian-source income and is subject to 24 per cent IRES.39 Conversely, no withholding tax is applied on profits when distributed.
Capital gains on the sale of the shares or quotas
Capital gains realised by a non-resident shareholder on the disposal of the real estate company's shares are subject to the following tax regime in Italy:
- In principle, a substitute tax in lieu of IRES and IRAP applies at a rate of 26 per cent.40
- Under domestic rules41 the substitute tax does not apply provided that the real estate company's shares are 'non-qualified' shares (i.e., for non-listed companies, shares representing no more than 20 per cent of the voting rights and no more than 25 per cent of the share capital) and the non-resident shareholder is resident for tax purposes in a white-list state42 or qualifies as a certain investor (i.e., regardless of its tax status, an 'institutional investor' established in a white-list state, an international organisation, or a central bank or a sovereign wealth fund).
- Under the applicable double tax treaty between Italy and the state of the non-resident shareholder it is generally provided that capital gains from the disposal of the company's shares are taxable only in the state of the non-resident shareholder.43 In this respect, double tax treaties may also provide that capital gains from the disposal of shares are taxed in the state where the real estate properties are located if more than 50 per cent of the value of the shares derives from such immovable properties.44 However, generally, Italy has not included such provision in its double tax treaties. Finally, it is worth to be noting that provisions in double tax treaties with respect to capital gains may be amended, under certain conditions, once the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) will enter into force in Italy (see Section V for the analysis on MLI).
III REGULATED REAL ESTATE INVESTMENT VEHICLES
i Regulatory framework
The Italian regulatory framework provides two different regulated real estate investment vehicles: real estate investment funds (REIFs); and real estate investment companies with fixed capital (SICAFs). Italian regulated investment vehicles are commonly used to invest in Italian real estate assets, especially by institutional investors.
Both REIFs and SICAFs are undertakings for collective investment regulated by the Legislative Decree 24 February 1998, No. 58, as subsequently amended (the Consolidated Law on Finance) and by the implementing provisions issued by the Ministry of Economics and Finance, the Bank of Italy and Consob (the public authority responsible for regulating the Italian financial markets).
In particular, REIFs and SICAFs are alternative investment funds (AIFs) in the meaning of the Alternative Investment Fund Manager Directive 2011/61/EU (AIFMD).45 REIFs may only be externally managed by Italian management companies authorised and supervised by the Bank of Italy and Consob or by non-resident EU-passported alternative investment fund managers (AIFMs). SICAFs may be, alternatively, externally managed or internally managed by a board of directors.
ii Overview of the different regulated investment vehicles
Pursuant to the Consolidated Law on Finance,46 REIFs are collective investment schemes established as independent pool of assets, divided into units, pertaining to a plurality of investors and managed on a collective basis by a third-party management company independently and in the investors' interest, on the basis of a predetermined investment policy.
REIFs, to qualify as such, should invest at least two-thirds47 of the total value of their assets in real estate assets, which include, inter alia, buildings, lands and equity holdings in real estate companies or in other REIFs, including foreign REIFs.
More specifically, the main requirements of REIFs can be summarised as follows.
The REIF is an independent and segregated pool of assets, separated from the assets of the management company and from the assets of each investor, as well as from any other investment fund managed by the same management company. Therefore, claims on the REIF's assets by creditors of the management company (or other REIFs managed by the same management company) or in the interests of those parties are not allowed.
Plurality of investors
The capital of the REIF must be raised from a plurality of investors. The requirement is fulfilled if a single investor invests on behalf of a plurality of investors (e.g., foreign investment funds, pension funds, insurance companies,and portfolio asset managers). The requirement would be satisfied if the REIF is participated in only by a single unit holder, to the extent that the unit holder represents a plurality of interests.
Independence of the management company
The management company should act independently and in the interest of the REIF's investors. It has the decision-making powers on the day-to-day management of the assets of the REIF. The REIF's investors do not have any decision-making powers on operational matters relating to the daily management of the REIF's assets. This requirement would be subject to supervision by the Consob and the Bank of Italy, since the management company is a regulated fund manager.48 The management company would have certain reporting obligations to Consob and Bank of Italy. EU-passported AIFMs would be subject to supervision in their home country.
Pursuant to the Consolidated Law on Finance, SICAFs are closed-ended undertakings for collective investment incorporated in the form of a joint-stock company with fixed capital, having as their exclusive purpose the investment of their capital collected through the issue of shares, among a plurality of investors, managed as a whole in the interest of its investors and independently from them.
SICAFs are generally subject to the same regulations provided for REIFs with respect to, inter alia, investment activity, risk concentration limits, plurality of investors, etc. Specific differences are provided to consider the different nature of the SICAF (as an AIF incorporated in the form of a company) as opposed to REIFs (as an AIF established in contractual form).
SICAFs can be either externally or internally managed. The establishment of a SICAF is subject to prior authorisation by the Bank of Italy. However, it is worth noting that the authorisation procedure of an internally managed SICAF may be longer than for those that are externally managed since the process also requires the authorisation of the company as a manager.
iii Tax payable on acquisition of real estate assets
The acquisition of real estate assets by REIFs or SICAFs may be pursued either by direct purchase against cash payment or by contribution of the real estate assets by the investor in exchange for units or shares.
Indirect taxes on the purchase of real estate properties
The purchase of real estate assets by REIFs or SICAFs is subject to VAT and registration tax pursuant to the ordinary rules (see Section II.iii, 'Indirect taxes on the purchase of real estate properties').
Conversely, mortgage and cadastral taxes apply, respectively, at the reduced rates of 1.5 and 0.5 per cent,49 which are half the ordinary rates. That reduction applies to the extent that the agreement is entered into by a REIF or by a SICAF (as purchaser or seller).
Indirect taxes on the contribution of real estate properties
The contribution of real estate properties to REIFs or SICAFs (i.e., the transfer of the properties to the vehicles in exchange for units) is subject to the same indirect tax regime applicable to the sale of real estate properties. The tax is on the value of the assets contributed.
A special tax regime is provided on the contribution of a 'plurality of real estate properties mainly leased at the time of the contribution' to REIFs or Real Estate SICAFs.50 According to that regime, the contribution is outside the scope of VAT and is subject to registration, mortgage and cadastral taxes at the fixed amount of €200 each.
Based on the clarification provided by the revenue agency:51
- The 'plurality' requirement is satisfied if the portfolio includes more than one 'single real estate asset'. To this end, 'single real estate asset' is an asset recorded as single unit in the cadastral registry.
- The 'mainly leased' requirement is satisfied if, at the time of the contribution, more than 50 per cent of the value of the portfolio contributed consists of leased real estate properties.
Income taxes on the sale or contribution due from the seller or contributor
The sale or contribution of real estate properties, in principle, may generate a taxable gain in the hands of the seller or contributor, which is subject to ordinary direct taxes on the difference between the value of the consideration received and the tax base of the asset in the hands of the seller.
In the case of contribution, capital gains would be subject, alternatively, to income taxes under the ordinary rules (including the possibility of offsetting with available tax losses) or to a 20 per cent substitute tax52 in lieu of the ordinary income taxes.
iv Tax regime for the investment vehicle
In principle, REIFs are taxable persons for the purpose of IRES and IRAP, since they qualify as undertakings for collective investments established in Italy.53
However, REIFs are exempt from IRES (24 per cent) and IRAP (3.9 per cent) if, and to the extent that, they satisfy the regulatory requirements to qualify as undertakings for collective investment provided by the Consolidated Law of Finance (such as, inter alia, plurality of investors and independence of the fund manager).54
In any case, REIFs are exempt from IRES and IRAP if they are participated in exclusively by 'institutional investors'. In this case, they qualify as 'institutional funds' and are exempt from IRES and IRAP regardless of any further analysis about the regulatory requirements set out for alternative investment funds.55
The category of 'institutional investor' includes:
- the Italian state and other Italian public entities;
- undertakings for collective investment;
- complementary pension funds and statutory social security entities;
- insurance companies, when the investment is intended to cover technical provision;
- banking and financial entities if subject to regulatory supervision;
- all the above entities established in a state that allows the adequate exchange of information for tax purposes included in a list in Ministerial Decree, 4 September 1996;
- private entities resident in Italy who carry out their activities in non-profit areas and cooperatives pursuing the mutual benefit of their members and certain third parties; and
- vehicles in corporate or contractual form, owned for more than 50 per cent by any of the aforementioned entities.
The tax treatment of SICAFs for IRES purposes would be the same as for REIFs. Conversely, differently from REIFs, SICAFs are subject to IRAP, whose tax base is equal to the difference, if any, between subscription fees received by the SICAF and certain fees paid by the SICAF for the placement of the shares,56 if any. The general applicable IRAP tax rate is 4.65 per cent.57
A specific VAT regime is provided for REIFs, pursuant to which the management company, and not each of the REIFs managed, is the taxable person for VAT purposes.58 In particular, the sale of 'goods' (the sale of real estate assets) and the supply of services (the lease of real estate assets) carried out by the REIFs established and managed by the management company represent separate accounts for VAT purposes of the management company.
Accordingly, the management company applies the VAT separately with respect to each REIF managed. To this end, the management company determines and calculates the VAT separately with respect to the activity carried out by itself and by each REIF managed, keeping separate VAT registers, issuing invoices with different numbering and recording the transactions distinctly.
However, being a single VAT person, the management company files a single VAT return (which includes separate forms for each of the REIFs managed) and makes a single cumulative payment for the VAT due by itself and by all the REIFs managed (or accounts for single VAT credits).
The VAT regime provided for REIFs is applicable also to real estate SICAFs.59
Withholding taxes on incoming income
REIFs and SICAFs are exempt from most of the withholdings or substitute taxes generally applied on financial income.60
Furthermore, the revenue agency has clarified that REIFs are not subject to withholding taxes on dividends distributed by Italian companies (e.g., SPA and SRL).61
v Tax regime for investors
Tax regime for resident investors
Proceeds distributed by REIFs and SICAFs to resident investors are subject to a 26 per cent withholding tax62 applied, upon distribution, by the management company or by the depository bank of the units.
The withholding tax is applied in advance with respect to entrepreneurs, partnerships, companies and other commercial entities subject to IRES, and the Italian PE of non-resident entities. The withholding is final with respect to any other resident investor.
The withholding tax does not apply to proceeds distributed to Italian complementary pensions funds and undertakings for collective investment.
The above-mentioned regime would apply when proceeds distributed to Italian 'institutional investors', as defined in Section III.iv. Conversely, the tax regime applicable to Italian 'non-institutional' investors depends on the share of their participation in the REIF, and specifically:
- 5 per cent or less – the investor is subject to the tax regime described above; and
- more than 5 per cent – the investor is taxed on a look-through approach, based on the profits resulting from the financial statements (i.e., the profits are attributed proportionally to the units held, regardless of their actual distribution).63
Capital gains realised by resident investors by the transfer of the units of REIFs or SICAFs are subject to a 26 per cent substitute tax.64 The revenue agency clarified that if the capital gain is realised by an investor that holds the units in connection with its business activity, the relevant gain is subject to ordinary IRES.65
Tax regime for non-resident investors
Proceeds distributed by REIFs and SICAFs to non-resident investors are subject to withholding tax at the 26 per cent rate or at the reduced 10 per cent rate under the applicable double tax treaty with the state of residence of the investor.66 The revenue agency67 clarified that, unless specific provision is provided in the double tax treaty, the proceeds can be considered as 'interest' within the meaning of Article 11 of OECD Model Tax Convention.
However, proceeds distributed to the following non-resident investors are exempt from withholding tax in Italy:
- pension funds and undertakings for collective investment established in a state that allows the exchange of information for tax purposes;
- international entities established in accordance with international agreements enforced in Italy; and
- central banks or entities that manage the official reserves of a state (sovereign wealth funds).68
Capital gains deriving from the sale for consideration or from the redemption of units of REIFs or SICAFs, realised by non-resident investors without a PE in Italy, are deemed to be accrued in Italy if the units are not traded on regulated markets.69 Those capital gains are in, principle, subject to a 26 per cent substitutive tax, in lieu of ordinary income taxes.70 However, if the applicable double tax treaty provides the exclusive right to tax to the state of residence of the investor, capital gains are not taxable in Italy.71
A domestic tax exemption is provided for capital gains realised by certain non-resident investors.72 In particular, capital gains realised by the following non-resident investors73 are not included in the taxable income and, therefore, exempt from the 26 per cent substitutive tax:
- entities resident in a state that allows the exchange of information for tax purposes;
- international entities or bodies established on the basis of international treaties implemented in Italy;
- institutional investors (i.e., entities whose principal purpose is investment management activity) established in a state that allows the exchange of information for tax purposes, regardless of their legal form and their tax status in the foreign states in which they are established; and
- central banks or organisations that also manage the official reserves of a state.
IV REAL ESTATE INVESTMENT TRUSTS AND SIMILAR STRUCTURES
i Legal framework
The Italian SIIQ regime has been introduced in Italy by Article 1, paragraphs 119–141 bis, of Law 27 December 2006, No. 296, with the purpose of providing for a special civil law and tax regime applicable to Italian listed real estate investment companies, that meet certain requirements and whose main activity is the rental of real estate properties, in line with similar institutions in other European countries (e.g., see the chapters on Spain and France).
The regime applies also to Italian non-listed real estate investment companies that are subsidiaries of SIIQs and meet certain requirements (SIINQ).
Moreover, the SIIQ regime applies to Italian PEs of foreign REITS that mainly carry out letting activities of real estate properties through participations in SIINQs74 and are established in EU and EEA States that allow an adequate exchange of information for tax purposes with Italy.
The SIIQ and SIINQ regime has been subsequently amended by Article 20 of the Law Decree 12 September 2014, No. 133 (converted by Law 11 November 2014, No. 164), which introduced relevant changes in the conditions to access the regime. However, the implementing provisions for the SIIQ and SIINQ regime are contained in the Ministerial Decree 7 September 2007, No. 174, which at the time of writing has not yet been amended to implement the changes introduced in 2014.
Finally, the revenue agency clarified the application of the SIIQ and SIINQ regime with the Circular Letter No. 8/E/2008, the Circular Letter No. 32/E/2015 and the Regulations of the Director of the Revenue Agency of 18 December 2015 (which established the procedures to exercise the option for the special regime).
ii Requirements to access the regime
Subjective, shareholding and statutory requirements
SIIQs are joint-stock companies, resident for tax purposes in Italy, whose main activity is the rental of real estate properties, and whose shares are listed on the Italian stock exchange or on regulated markets of EU or EEA States that allow an adequate exchange of information for tax purposes with Italy. In addition, there are the following requirements to access the regime:
- no single shareholder should own, directly or indirectly, more than 60 per cent of the voting rights and more than 60 per cent of the profit participation rights (the control threshold); and
- at least 25 per cent of the shares are owned by shareholders that, at the moment of the option for the special regime, individually do not hold, directly or indirectly, more than 2 per cent of voting rights and more than 2 per cent of profit participation rights (the free-floating threshold).
The control threshold must be satisfied continuously. If the threshold is exceeded due to M&A transactions or capital market transactions, the SIIQ regime is suspended until the requirement is restored.
The free-floating threshold must be satisfied only to access to the SIIQ regime and at the time of access. The requirement is not applicable to companies already listed on regulated markets.75
The requirements must be met by the end of the first fiscal year of application of the SIIQ regime; in this case the SIIQ regime has effect starting from the first day of that fiscal year. However, if at the end of the first fiscal year only the free-floating threshold is met, the control threshold must be met within the following two years; in this case the SIIQ regime has effect starting from the first day of the year in which the control threshold is met.
Until both requirements are met, IRES (standard rate 24 per cent) and IRAP (standard rate 3.9 per cent) are due pursuant to the ordinary rules. Conversely, the entry tax due for the access to the SIIQ regime (see Section IV.iii) and other taxes (direct and indirect taxes on the contributions of real estate properties to the SIIQ) are applied temporarily according to the more favourable rules set forth by the SIIQ regime. If the requirements are not met on a timely basis, the taxes are re-determined on the basis of the ordinary rules and the amounts already paid can be offset as tax credit.76
To access to the SIIQ regime, eligible companies must file a specific form with the revenue agency by the end of the fiscal year prior to the year from which they intend to apply the special regime.
Starting from the year in which the SIIQ regime has effect, the company's name must include the words società d'investimento immobiliare quotata or SIIQ and the company's by-laws must be amended accordingly (together with other amendments required by law).77
SIINQs are joint-stock companies, resident for tax purposes in Italy, whose main activity is the rental of real estate properties, whose shares are not listed, in which a SIIQ (also jointly with other SIIQs) owns at least 95 per cent of voting rights and at least 95 per cent of profit participation rights.78
In addition, SIINQs must adopt International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) in preparing their financial statements and must opt to consolidate with the SIIQ parent company for income tax purposes.
To access the SIINQ regime, eligible companies must opt for the special regime jointly with the SIIQ parent company. The Italian revenue agency79 clarified that 'jointly' means that the eligible companies must opt for the regime as for the same fiscal year for which the SIIQ exercised the option or for a subsequent fiscal year.
The requirements on SIIQs to amend by-laws must also be satisfied by the SIINQs.
SIIQs carry out as 'main' activity the rental of real estate properties if the following requirements are met:80
- The asset test: at least 80 per cent of the SIIQ's assets must consist of:
- real estate properties held for lease; and
- participations accounted as fixed assets in SIIQs, SIINQs, Italian real estate investment funds or Italian real estate SICAFs, at least 80 per cent of whose assets consist of real estate assets held for lease or participations in real estate investment companies, real estate investment funds and real estate SICAFs that carry out lease activity or SIIQs and SIINQs (qualifying REIFs and qualifying SICAFs).
- The profit test: at least 80 per cent of SIIQ's positive components of income must consist of:
- proceeds from the lease activity;
- dividends from participations in SIIQs, SIINQs, qualifying REIFs and qualifying SICAFs deriving from the lease activity; and
- capital gains realised on the disposal of real estate properties held for lease or of participations in SIIQs, SIINQs, qualifying REIFs and qualifying SICAFs.
The asset test and the profit test must be verified on the basis of the financial statements of each year, starting from the first year of application of the SIIQ regime.
The Ministerial Decree 7 September 2007, No. 174 and the Italian revenue agency provided further details regarding the assessment of the tests. It has been clarified, inter alia, that non-Italian real estate properties held for lease and real estate assets under construction or subject to renovation works (if subsequently they are intended to be leased) may be included in the asset test.
The asset and profit tests must be satisfied also by SIINQs.
iii Tax regime
Access to the SIIQ regime requires that the fiscal value of the real estate assets held for lease, accounted for in the financial statements at the end of the last fiscal year in which the ordinary regime applies, is aligned to their fair value. The related capital gains (net of any capital loss) may be alternatively subject to a 20 per cent substitutive tax in lieu of ordinary IRES and IRAP (entry tax) or included in the taxable income for IRES and IRAP purposes under the ordinary rules.81
If capital gains are subject to the substitutive tax, the higher fiscal value of the assets is effective starting from the fourth fiscal year following the one in which the company exercised the option for the SIIQ regime. If the assets are sold before that date, capital gains are taxed pursuant to the ordinary rules (i.e., IRES and IRAP at an aggregate of 27.9 per cent) and the 20 per cent substitutive tax already paid can be offset as tax credit. The substitutive tax may be paid in five instalments (plus interest).
Conversely, if capital gains are included in the taxable income for IRES and IRAP purposes, the higher fiscal value of the assets is effective starting from the first fiscal year following the one in which the company exercised the option. Capital gains may be included for the whole amount in the taxable income of the fiscal year in which the company exercised the option or (only for IRES purposes) in equal instalments in that fiscal year and in the following four fiscal years.
Tax losses realised before the election for the SIIQ regime can be utilised to offset the tax base for the calculation of the 20 per cent substitutive tax or to offset IRES taxable income under the ordinary limits (i.e., in any case, within the limit of 80 per cent of the taxable income).
The same provisions apply also to SIINQs.
Ongoing tax treatment of SIIQs and SIINQs for direct taxes purposes
Starting from the fiscal year in which the SIIQ regime is effective, the SIIQ's income deriving from the lease activity is exempt from IRES and IRAP.82 In particular, the income from the lease activity includes:
- the rental income;
- dividends and proceeds from the lease activity distributed by SIIQs, SIINQs, qualifying REIFs and qualifying SICAFs;
- capital gains on the disposal of the leased real estate properties; and
- capital gains on the disposal of participations in SIIQs, SIINQs, qualifying REIFs and qualifying SICAFs.
Moreover, no withholding taxes are levied on dividends from the lease activity distributed by other SIIQs and SIINQs, and on proceeds from the lease activity distributed by qualifying REIFs and qualifying SICAFs to SIIQs.
As described in Section IV.iv, the income deriving from the lease activity is taxed when received by the shareholders of the SIIQ upon distribution.
Conversely, the income deriving from activities different from the lease activity is subject to ordinary IRES and IRAP taxation rules (at an aggregate rate of 27.9 per cent) on receipt by the SIIQ. The same treatment for direct taxes purposes applies also to SIINQs.
Finally, if the SIIQ regime is applied to a PE in Italy of a foreign REITs, starting from the fiscal year for which the option is effective, the lease income of the permanent establishment is subject to a 20 per cent substitutive tax in lieu of ordinary IRES and IRAP.
Ongoing VAT regime of SIIQs and SIINQs
SIIQs and SIINQs apply the VAT pursuant to the ordinary rules provided for by the Italian VAT Law (e.g., the lease of commercial real estate properties is exempt from VAT but the lessor has the possibility to exercise the option for the application of VAT, while the lease of residential real estate properties is exempt from VAT except for specific cases).83
Furthermore, SIIQs may apply for the tax consolidation regime for VAT purposes in respect of the companies controlled (SIINQs and standard companies), which allows them to pay the VAT on an overall basis for all the companies included in the consolidation, offsetting the respective VAT credits and VAT debits.
Indirect taxes on the purchase or contribution of real estate properties
The purchase or contribution of real estate assets by or to SIIQs is subject to VAT and registration tax, pursuant to the ordinary rules (see Section II.iii, 'Indirect taxes on the purchase of real estate properties').
Mortgage and cadastral taxes on the purchase or contribution of real estate assets by or to SIIQs apply, respectively, at the reduced rates of 1.5 per cent and 0.5 per cent,84 same as for REIFs and SICAFs.
In addition, the special tax regime provided for contributions of a plurality of real estate properties mainly leased at the time of the contribution applies also to SIIQs (see Section III.iii). Therefore, those contributions would fall out of the scope of VAT and are subject to registration, mortgage and cadastral taxes at the fixed amount of €200 each.85
The same treatment for indirect taxes purposes apply also to SIINQs.
Profit distribution obligations
SIIQs, each year, must distribute at least 70 per cent of the lower of:86
- net profits deriving from the lease activity or from participations in SIIQs, SIINQs, qualifying REIFs, qualifying SICAFs; and
- total profits available for distribution, according to Italian civil law.
In this respect for SIIQs, as IAS adopter entities, the depreciation of the real estate properties held for lease is not admitted for accounting purposes pursuant to IAS 40 (Investment Properties), thus increasing the actual amount of distribution obligations.
Furthermore, SIIQs must distribute at least 50 per cent of net capital gains realised on the disposal of real estate properties held for lease or of participations in SIIQs, SIINQs, qualifying REIFs and qualifying SICAFs, in the two years subsequent to the disposal.87 The revenue agency88 clarified that unrealised capital gains accounted for as a result of the application of the 'fair value method' under IAS 40 for the valuation of real estate properties are not subject to such distribution obligation.
The same distribution obligations apply also to SIINQs.
iv Tax regime for investors
Dividends deriving from the SIIQ's exempt lease activity are subject to a 26 per cent withholding tax upon distribution levied by the financial intermediaries where the SIIQ shares are deposited. That withholding tax is applied:89
- on account to individual shareholders carrying out a business activity and to corporate shareholders, therefore dividends are included respectively in the individual income tax (IRPEF) basis (at progressive rates up to 43 per cent) and in the IRES taxable income (at 24 per cent rate); and
- as final to other shareholders (e.g., individuals not carrying out a business activity and non-resident shareholders). For non-resident shareholders, double tax treaties apply, if the relevant conditions are met.
The withholding tax is not applied on dividends distributed to Italian pension funds and to Italian collective investment undertakings.
Dividends distributed to investors that derive from the SIIQ's taxable activities that are different from the exempt lease are subject to the ordinary tax regime. Accordingly, dividends distributed to:
- corporate shareholders, are subject to IRES (at 24 per cent rate) on the limited amount of 5 per cent;
- individuals carrying out a business activity, are subject to IRPEF (at progressive rates up to 43 per cent) on the limited amount of 58.14 per cent;
- individuals not carrying out a business activity, are subject to a 26 per cent final withholding tax; and
- non-resident shareholders (without a PE in Italy), are subject to a 26 per cent final withholding tax that may be reduced pursuant to the applicable double tax treaties if the relevant conditions are met (e.g., 15 per cent) or pursuant to domestic rules (1.2 per cent under specific conditions). The exemption from withholding tax under the Parent-Subsidiary Directive would apply.
Capital gains resulting from the disposal of SIIQ's shares are:
- for corporate shareholders, fully subject to IRES (at 24 per cent rate);
- for individuals carrying out a business activity, fully subject to IRPEF (at progressive rates up to 43 per cent);
- for individuals not carrying out a business activity, subject to a 26 per cent substitutive tax; and
- for non-resident shareholders (without a PE in Italy), subject to a 26 per cent substitutive tax, unless applicable double tax treaties allow to tax them outside of Italy.
v Forfeiture of REIT status
The forfeiture of the SIIQ status occurs if the company:
- ceases to be a joint-stock company tax resident in Italy, whose shares are listed on regulated markets;
- fails to meet the control threshold (unless this is due to M&A transactions or capital market transactions, in which case the exempted tax regime is suspended);
- fails to meet the asset test or the profit test for three consecutive years or fails to meet both the asset and profit tests in the same year;90 and
- fails to meet the profit distribution obligations.91
Those factors also lead to the forfeiture of SIINQ status. In addition, SIINQ status is forfeited if the company ceases to be participated in at least 95 per cent by a SIIQ and if it ceases to have in place the tax consolidation regime with the controlling SIIQ.92
There are no specific penalties in case of forfeiture of the SIIQ or SIINQ status.
V INTERNATIONAL AND CROSS-BORDER TAX ASPECTS
i Tax treaties
The Italian tax treaties network includes more than 90 double taxation conventions which are generally based on the OECD Model, with some differences.
As regards recent developments, it is worth pointing out the new double taxation convention with China, signed on 23 March 2019. That convention, once in force and effective, will replace the current double taxation convention between Italy and China concluded on 31 October 1986.
On 7 June 2017, Italy has also signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which entered into force on 1 July 2018. However, as of today, Italy has not yet ratified the MLI, therefore the multilateral instrument has not yet become effective with respect to tax treaties in force with Italy.
From the perspective of cross-border real estate investments, it is worth pointing out that Article 13 of the OECD Model deals with the taxation of gains from the alienation of immovable properties (Paragraph 1) or shares in real estate entities (Paragraph 4). Under that rule, both gains from shares and from properties would be taxable in the state where the properties are located (if certain requirements are met).
In particular, under Paragraph 4, as amended, based on the Base Erosion and Profit Shifting Project Action 6, gains derived by a resident of a contracting state from the alienation of shares or comparable interests (e.g., interests in a partnership or trust) may be taxed in the other contracting state (e.g., Italy) if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from real estate properties situated in that other state (e.g., Italy).
The tax treaties currently in force with Italy, as a rule, do not include a clause based on Article 13, Paragraph 4, of OECD Model, with few exceptions.
It is worth noting that Article 9 of the MLI addresses the real estate clause set out by Article 13, Paragraph 4, of OECD Model to strengthen the application of that rule at international level, with respect to the tax treaties that already include that rule.
Furthermore, Article 9, Paragraph 3, allows a state to introduce into a tax treaty the following provision:
For purposes of a Covered Tax Agreement, gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting Jurisdiction if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting Jurisdiction.
Italy has opted for the application of Article 9, Paragraph 4, of the MLI with respect to its tax treaties (i.e., the rule addressing gains from the alienation of shares in entities deriving their value principally from immovable properties).93
Once the MLI becomes effective with respect to Italy, Article 9, Paragraph 4, will apply to a tax treaty with Italy only where the other contracting state has also chosen to apply the provision (pursuant to Article 9, Paragraph 8, of MLI). For example, the option has been exercised by France, and therefore the provision should apply with respect to the Italy–France tax treaty after the MLI becomes effective with respect to Italy.94
It is worth noting that tax treaties allocate taxing rights between the contracting states, while the taxable income is identified under domestic rules. Therefore, specific tax exemptions set out by Italian domestic rules with respect to gains realised by a non-resident person should continue to apply, even if Article 9, Paragraph 4, of MLI is applicable to the treaty between Italy and the state of residence of the non-resident person.
As regards the permanent establishment (PE), Article 162 of Income Tax Code sets out the domestic definition of PE, which is based on the definition in the OECD Model, with some material differences. It is worth pointing out that Law 27 December 2017, No. 205 amended the domestic definition of PE.
Under the revised Article 162, a PE may exist if there is a 'significant and continuous economic presence' in the Italian territory, arranged in a way that does not give rise to a physical presence in Italy (Article 162(2)(f bis) of the Income Tax Code).
The actual impact of that rule on persons resident in a state that has a tax treaty with Italy must be analysed on a case-by-case basis, considering the definition of PE in that tax treaty and whether the rule will be considered by the Italian revenue agency and tax courts as an expression of the general anti-abuse rule under Italian tax law.
With respect to cross-border real estate investments, in principle the mere ownership of an immovable property located in Italy does not per se give rise to a PE.95 The existence of a PE in Italy must be determined considering the business activity actually carried out in Italian territory by the non-resident entity in connection with the real estate investment and, in particular, where the management is located.
Furthermore, the Italian revenue agency addressed the PE issue with respect to alternative investment fund managers (AIFM) established in the EU that manage collective investment undertakings established in Italy (e.g., a REIF or SICAF) under the passport regime set out by the AIFMD.
The revenue agency clarified that the management activity under the passport regime does not entail per se a PE in Italy.96 In any case, the existence of a PE in Italy with respect to the activity of a non-resident AIFM must be verified on a case-by-case basis considering the activity actually carried out in Italy by that AIFM.
ii Cross-border considerations
Italian law does not provide specific restrictions on ownership or on investment by a non-resident person in real estate properties located in Italy, except for the 'reciprocity principle'.
Under the 'reciprocity principle', non-Italian investors are allowed to invest in Italy only if their state of residence allows equivalent rights to Italian investors, or if their country of residence has an international treaty with Italy that allows those investments.
That limitation would not apply, in any case, for European investors (e.g., EU investment platforms) while could be applicable in some residual cases involving non-EU investors.
iii Locally domiciled vehicles investing abroad
Based on market practice, investment vehicles for real estate investments abroad, namely in jurisdictions other than Italy, by non-Italian investors, including platforms for pan-European investments, are established in other jurisdictions rather than in Italy.
VI YEAR IN REVIEW
The Italian revenue agency has recently issued relevant clarifications for REIFs and SICAFs.
In particular, on the one hand, there were some public rulings97 in favour of taxpayers, which confirmed the applicability of the withholding tax exemption in Italy on proceeds distributed by Italian REIFs to non-resident collective investment undertakings subject to the supervision of the US Securities and Exchange Commission (SEC). Those clarifications resolved an issue for US investors seeking to invest in Italian REIFs and SICAFs, since the procedures and set of regulations governing the supervision of the SEC created some doubts as to the applicability of that exemption.
However, on the other hand, it is relevant to note that the revenue agency98 recently denied the application of the withholding tax exemption in Italy on interest expenses on loans granted by banks established in EU Member States to Italian real estate SICAFs. This creates a disadvantage for Italian SICAFs (and REIFs) as compared with Italian corporate vehicles, which may benefit from that exemption.
Those recent decisions of the revenue agency are described more detail below.
Foreign investment funds and SEC supervision
As mentioned in Section III.v, pursuant to Article 7(3) of the Law Decree 25 September 2001, No. 351, proceeds distributed by Italian REIFs to non-resident collective investment undertakings established in states that allow an adequate exchange of information with Italy (white-list states) are exempt from the ordinary 26 per cent withholding tax in Italy.
Based on the guidelines of the Italian revenue agency, that exemption is applicable provided that: (1) the non-resident collective investment undertakings have, according to the applicable law of the state in which they are established, the fundamental requirements and the same investment purposes of Italian REIFs, regardless of their legal form and tax status; and (2) those undertakings, or the entities appointed for their management, are subject to supervision, namely the beginning of the activity is subject to a prior authorisation and the carrying out of the activity is subject to controls on an ongoing basis under the rules in force in the foreign state.99
In previous tax rulings, the Italian revenue agency confirmed that the regulatory supervision requirement under (2) is satisfied for foreign collective investment undertakings externally managed by managers regulated by the Directive 2009/65/EC (UCITS IV) and by the AIFMD, considering that, pursuant to those directives, regulatory supervision is expressly required and must be recognised in all the Member States. Conversely, no clarifications were provided for foreign collective investment undertakings not regulated under those directives, such as US partnerships managed by entities regulated by the SEC.
In 2017,100 the Italian revenue authority recognised that the supervision exercised by the SEC on registered investment advisers, and on their 'relying advisers' also registered with the SEC under the 'umbrella registration' procedure, is considered valid for the purposes of the Italian withholding tax exemption on proceeds distributed by Italian REIFs. In the light of that, US limited partnerships managed by investment advisers or 'relying advisers' registered with the SEC may qualify for that exemption.
The existence of the regulatory supervision may be demonstrated by using the information on the SEC's public website101 and by submitting to the Italian withholding agent (i.e., the management company) the 'form ADV' filed with the SEC at the moment of the registration and any subsequent amendment.
Finally, the Italian revenue agency clarified102 that if the investment adviser is entitled to carry out the management and is registered with the SEC, the general partner of the foreign collective investment undertaking does not need to be registered with the SEC.
Based on those clarifications, foreign collective investment undertakings managed by entities regulated by the SEC may invest in real estate properties in Italy, through an Italian REIF, without income tax liability on the income realised by the REIF or on the proceeds distributed to the foreign unit holder.
Withholding tax on interest paid by Italian REIFs or Real Estate SICAFs
Under Article 26, Paragraph 5 bis, of the Presidential Decree No. 600/1973, interest expenses paid on medium- and long-term loans granted by banks established in EU Member States to enterprises resident in Italy for tax purposes are exempt, under certain conditions, from the ordinary 26 per cent withholding tax in Italy.
From a regulatory perspective, Italian REIFs and SICAFs do not carry out a business activity, therefore it was doubtful if they could qualify as 'enterprises' for the purposes of the above-mentioned provision and, therefore, if interest expenses on loans granted to those entities could benefit from the withholding tax exemption.
That issue has been recently addressed by revenue agency,103 which the clarified that Italian real estate SICAFs, as undertakings for collective investments, do not fall within the definition of 'enterprises'. Therefore, interest expenses on medium- and long-term loans granted by EU banks to Italian real estate SICAFs may not benefit from the exemption from withholding tax in Italy on related interest expenses.
As a consequence, such interest expenses are subject to withholding tax in Italy at the ordinary rate of 26 per cent, pursuant to Article 26 of Presidential Decree No. 600/1973, which may be reduced under the relevant double tax treaty (generally 10 per cent under Article 11 of OECD Model). Conversely, Italian vehicles established in corporate form may benefit from the withholding tax exemption under the domestic rule.
The revenue agency's clarification, although specifically concerning SICAFs, should apply also to REIFs, since those are undertakings for collective investment as well.
Such clarifications may imply a discrimination between investments in real estate properties through Italian REIFs and SICAFs, and investments through Italian corporate vehicles.
The regulated market in investments in Italian real estate, traditionally characterised by REIFs managed by resident management companies, in the past few years has seen the development and growth of investments carried out, especially by foreign investors, through REIFs managed by non-resident EU-passported AIFMs and Italian real estate SICAFs. However, as a market practice, REIFs managed by resident management companies are still the preferred investment structure for foreign investors.
With respect to EU AIFMs, the AIFMD introduced the 'European passport', which allows AIFMs to provide their services in other EU Member States without establishing branches in each state.104 In particular, AIFMs that have been authorised in their home Member States in accordance with their domestic rules implementing the AIFMD are allowed, pursuant to the European passport, to manage AIFs in other Member States and to sell units or shares of managed European AIFs to European professional investors of other Member States.105 For instance, an AIFM established in France could directly manage a REIF established in Italy. The competent authorities of the home state of the AIFM must provide to the competent authority of the other Member State the information and relevant documentation authorising the management activity or sale of units or shares of AIFs in Europe.
From a tax perspective, if an Italian REIF is managed by an EU AIFM the withholding tax on proceeds would be applied by the foreign AIFM directly or, alternatively, by a tax representative in Italy of the foreign AIFM appointed to satisfy all the withholding tax compliance requirements.106
If the AIFM is established outside Italy, certain tax aspects should be carefully considered and analysed, such as PE issues and VAT (e.g., the VAT position of the AIFM and of the REIF managed). In any case, as mentioned above, foreign investors still prefer investments in Italian real estate properties through REIFs managed by Italian management companies.
With respect to the recent growth of Italian real estate SICAFs, it is worth noting that, as described in Section III.ii, they have been introduced in 2014 through the domestic legislation that implemented the AIFMD107 to align Italy to other European states where such a vehicle is used both in the private equity and in the real estate sectors.
At first, the use of this investment vehicle was limited owing to the fact that the set-up of real estate SICAFs requires (so far) authorisations from the relevant Italian authorities (Bank of Italy and Consob) and, therefore, takes longer (about three to four months), compared with REIFs. In addition, real estate SICAFs must comply with ordinary corporate law provisions (being undertakings for collective investments but incorporated in the legal form of a stock-joint company).
Furthermore, from a purely tax perspective, real estate SICAFs do not provide additional benefits, compared with REIFs. The tax regime applicable to SICAFs is the same as the one provided for REIFs.
However, in recent years the Italian market has been experiencing growth in the use of externally managed real estate SICAFs, especially on the initiative of large foreign investors (such as German funds) that act as founding shareholders and select an Italian management company. In certain cases, some foreign institutional investors may benefit from the advantages that the real estate SICAFs may provide in terms of compliance with their home country investment rules, a compared with the REIFs, which are set up in contractual form. In other cases, the real estate SICAFs are more appreciated by foreign investors owing to their corporate form, which implies, for example, that they have legal personality and that governance tools that are typical of joint-stock companies can be used.
Less developed (but potentially the next step of development) is the set up of internally managed multi-compartment real estate SICAFs.108 While there is market demand for this structure, it suffers from a lack of regulatory and tax clarifications from the competent authorities.
1 Giuseppe Andrea Giannantonio is a partner and Gabriele Paladini is counsel at Chiomenti. The authors would like to thank Giulia Bighignoli, Stefano Corbara, Valentina Mollica and Alessandra Renzi (also at Chiomenti) for their contributions to this chapter.
2 Pursuant to Article 115 of Presidential Decree 22 December 1986, No. 917 (Income Tax Code). Implementing rules are set out by Ministerial Decree 23 April 2004.
3 Pursuant to Article 115(1), (2) of Income Tax Code and Article 1 of Ministerial Decree 23 April 2004, the tax transparency regime is eligible if the company is participated in solely by shareholders that qualify as companies or as non-resident entities, provided that profits distributed to them are not subject to Italian withholding tax and each hold a shareholding between 10 to 50 per cent.
4 Pursuant to Article 102(2) of Income Tax Code and Ministerial Decree of 12 December 1988, the maximum depreciation rate of real estate properties relevant for IRES purposes is generally equal to 3 per cent.
5 Pursuant to Article 14(1) of IMU Law, as amended by Article 3 of Law Decree 30 April 2019, No. 34, IMU on non-residential properties is deductible for 50 per cent of the amount, with respect to fiscal year 2019; 60 per cent of the amount, with respect to fiscal years 2020 and 2021; and 70 per cent of the amount for fiscal years from 2022 onwards.
6 Article 1(36) of Law 24 December 2007, No. 244.
7 Article 30 of Law 23 December 1994, No. 724.
8 Making reference to partnerships and companies that have elected the tax transparency regime under Article 115 of Income Tax Code.
9 Article 6(3) of Income Tax Code.
10 Article 56(1) of Income Tax Code.
11 Articles 5(1) and 115(1) of Income Tax Code.
12 Article 10(1)(8 ter) of Presidential Decree 26 October 1972, No. 633 (VAT Law).
13 Article 17(6)(a bis) of VAT Law.
14 Article 40 of Presidential Decree 26 April 1986, No. 131 (Registration Tax Law).
15 Article 1 bis of Tariff attached to Legislative Decree 31 October 1990, No. 347 (Legislative Decree No. 347/1990) and Article 10(1) of Legislative Decree No. 347/1990.
16 Article 10(1)(8 ter) of VAT Law.
17 Article 17(6)(a bis) of VAT Law.
18 Article 13(1) of VAT Law.
19 Article 40 of Registration Tax Law and Article 1(1) of Tariff, Part I attached to Registration Tax Law.
20 Article 10(3) of IMU Law.
21 Article 40 of Registration Tax Law; Note at Article 1 of Tariff attached to Legislative Decree No. 347/1990; Article 10(2) of Legislative Decree No. 347/1990.
22 Article 37(4 bis) of Income Tax Code and Circular Letter of 12 November 1998, No. 263, paragraph 2.
23 Article 12(2) of Legislative Decree 15 December 1997, No. 446.
24 Articles 23(1)(f) and 67(1)(b) of Income Tax Code.
25 Italian Supreme Court, Decision of 27 November 1987, No. 8815 and 8820.
26 Article 7 ter of VAT Law.
27 The €200 registration tax applies in any case where the purchase deed is in the form of a notarial deed or a private deed authenticated by the notary (Article 11 of Tariff, Part I attached to Registration Tax Law), or only under certain conditions if the purchase deed is in the form of a non-authenticated private deed (Article 2 of Tariff, Part II attached to Registration Tax Law).
28 Article 2 of Registration Tax Law.
29 Article 1(491-500) of Law 24 December 2012, No. 228.
30 Article 1(494) of Law 24 December 2012, No. 228 and Articles 5 and 19 of Ministerial Decree 21 February 2013.
31 Article 19 of Ministerial Decree 21 February 2013 and Implementing Rules (Provvedimento) of the Revenue Agency of 18 July 2013, Paragraph 3.2.
32 Article 27(3) of Presidential Decree 29 September 1973, No. 600 (Decree 600/73).
33 Article 27(3 ter) of Decree 600/73.
34 Article 27 bis of Decree 600/73.
35 Circular Letter No. 6/E of 30 March 2016.
36 Court of Justice Decision dated 8 March 2017, Case C-448/15 – Wereldhave; Court of Justice decision dated 26 February 2019, in the joined cases C-116/16 and C-117/16 – T Denmark.
37 Italian Supreme Court, Decision No. 32255 of 13 December 2018.
38 Articles 5(1) and 115(1) of Income Tax Code.
39 Article 23(1)(g) of Income Tax Code.
40 Article 5(2) of Legislative Decree 21 November 1997, No. 461.
41 Article 5(5) of Legislative Decree 21 November 1997, No. 461 and Article 6(1) of Legislative Decree 1 April 1996, No. 239.
42 States included in Ministerial Decree 4 September 1996, as subsequently amended.
43 Article 13(5) of OECD Model Tax Convention on Income and on Capital.
44 Article 13(4) of OECD Model Tax Convention of Income and on Capital.
45 Implemented in Italy by Legislative Decree 4 March 2014, No. 44.
46 Article 1(1)(k) of Consolidated Law on Finance.
47 The two-thirds investment requirement should be reached within 24 months from the start of the activity of the REIF (Article 2 of Ministerial Decree 5 March 2015, No. 30).
48 The management company qualifies as fully authorised alternative investment fund manager (AIFM) under the AIFMD as implemented in Italy.
49 Article 1 bis of Tariff attached to Legislative Decree No. 347/1990 and Article 10 of Legislative Decree No. 347/1990 and Article 35(10 ter), of Law Decree 4 July 2006, No. 223, converted into Law 4 August 2006, No. 248. Mortgage and cadastral taxes ordinary rates are, respectively, 3 per cent and 1 per cent.
50 Article 8(1 bis) of Law Decree 25 September 2001, No. 351, converted into Law 23 November 2001, No. 410.
51 Circular Letter No. 22/E of 19 June 2006, paragraph 2.2.
52 Article 1(137)(140) of Law No. 296 of 27 December 2006.
53 Article 73(1)(c) of Income Tax Code. In particular, pursuant to Article 73(3) of Income Tax Code an OICR established in Italy is a person resident in Italy for income tax purposes.
54 Article 6 of Law Decree 25 September 2001, No. 351.
55 Article 32(3) of Law Decree 31 May 2010, No. 78.
56 Article 9 of Legislative Decree 4 March 2014, No. 44.
57 Article 16(1 bis)(b) of Legislative Decree 15 December 1997, No. 446.
58 Article 8 of Law Decree 25 September 2001, No. 351.
59 Article 9 of Legislative Decree 4 March 2014, No. 44.
60 Article 6 of Law Decree 25 September 2001, No. 351.
61 Circular Letter No. 47/E of 8 August 2003, Paragraph 3.3.
62 Article 7(1) of Law Decree 25 September 2001, No. 351 and Article 9 of Legislative Decree 4 March 2014, No. 44.
63 Article 32(3 bis) of Law Decree 31 May 2010, No. 78.
64 Article 5 of Legislative Decree 21 November 1997, No. 461.
65 Revenue Agency, Circular Letter No. 2/E of 15 February 2012, paragraph 3.1.2 and 4.1.2.
66 Article 7(3 bis) of Law Decree 25 September 2001, No. 351.
67 Circular Letter No. 11/E of 9 March 2011 and Circular Letter No. 2/E of 15 February 2012, par. 4.3.
68 Article 7(3) of Law Decree 25 September 2001, No. 351.
69 Article 23(1)(f) of Income Tax Code.
70 Article 5 of Legislative Decree 21 November 1997, No. 461.
71 Revenue Agency, Circular Letter No. 2/E of 15 February 2012, para 4.3.
72 Article 5(5) of Legislative Decree 21 November 1997, No. 461.
73 Article 6(1) of Legislative Decree 1 April 1996, No. 239.
74 Article 1(141 bis) of Law 27 December 2006, No. 296, as amended by Article 12 of Law Decree 25 September 2009, No. 135, converted into Law 20 November 2009, No. 166.
75 Article 1(119) of Law 27 December 2006, No. 296.
76 Article 1(119 bis) of Law 27 December 2006, No. 296.
77 Article 1(120) of Law 27 December 2006, No. 296 and Article 3 of Ministerial Decree 7 September, No. 174.
78 Article 1(125) of Law 27 December 2006, No. 296.
79 Circular Letter n. 8/E/2008.
80 Article 1(121) of Law 27 December 2006, No. 296 and Article 6 of Ministerial Decree 7 September, No. 174.
81 Article 1(126 and 130) of Law 27 December 2006, No. 296.
82 Article 1(131) of Law 27 December 2006, No. 296.
83 Article 10(8) of VAT Law.
84 Article 1 bis of Tariff attached to Legislative Decree No. 347/1990 and Article 10 of Legislative Decree No. 347/1990 and Article 35(10 ter), of Law Decree 4 July 2006, No. 223, converted into Law 4 August 2006, No. 248. Mortgage and cadastral taxes ordinary rates are, respectively, 3 and 1 per cent.
85 Article 1(138) of Law 27 December 2006, No. 296.
86 Article 1(123) of Law 27 December 2006, No. 296.
87 Article 1(123 bis) of Law 27 December 2006, No. 296.
88 Circular Letter No. 32/E/2015.
89 Article 1(134) of Law 27 December 2006, No. 296.
90 Article 1(122) of Law 27 December 2006, No. 296.
91 Article 1(124) of Law 27 December 2006, No. 296.
92 Circular Letter No. 8/E/2008 (Paragraphs 1.5 and 4.1).
93 See MLI Matching Database provided by the OECD.
94 France deposited the ratification instrument of the MLI on 26 September 2018.
95 Supreme Court, 27 November 1987, No. 8815 and 8820; Resolution of the Ministry of Finance No. 460196 of 13 December 1989.
96 Revenue Agency, Circular Letter No. 21/E of 10 July 2014.
97 Resolution No. 78/E/2017 and Answers No. 43/2018, No. 44/2018 and No. 147/2018.
98 Answer No. 98/2019.
99 Revenue Agency, Circular Letter No. 2/E/2012, Resolution No. 54/E/2013, Guidelines 16 December 2011.
100 Resolution No. 78/E/2017.
102 Public Answers to tax rulings No. 43/2018, No. 44/2018 and No. 147/2018.
103 Public Answer No. 98/2019.
104 Article 41(1) of Consolidated Law on Finance, as amended by Article 4(6) of Legislative Decree No. 44 of 4 March 2014.
105 Articles 32 and 33 of AIFMD.
106 Article 14(2) of Legislative Decree No. 44 of 4 March 2014.
107 Legislative Decree No. 44 of 4 March 2014.
108 From a regulatory perspective this refers to the establishment of compartments of a SICAF, which are separated from each other.