Italian draft ministerial decree provides implementation rules for Investment Management Exemption regime

Executive summary

On 16 October, the Italian Minister of Economy and Finance released for public consultation a draft decree (Decree) aimed at implementing provisions added to the Italian consolidated income tax code (ITC) in December 2022 that introduced the so-called Investment Management Exemption (IME) regime. The IME regime is a protective regime under which a foreign investment vehicle and its direct or indirect subsidiaries should be able to claim that they have no Italian permanent establishment where the asset or investment manager, or an advisor operating in Italy on their behalf or for their benefit, can be assumed to be acting independently from them under the terms of the relevant law provision. Comments may be submitted through Friday, 27 October 2023.

Detailed discussion

Investment Management Exemption regime

The IME regime was introduced by Law No. 197 of 29 December 2022 (2023 Italian budget law), which added paragraphs 7-ter, 7-quater and 7-quinquies to Article 162 of the ITC.

Article 162(7-ter) of the ITC introduced a legal presumption that, subject to the conditions laid down by the following paragraph 7-quater, a person, whether an Italian resident or not (also a nonresident operating in Italy through a permanent establishment), who habitually concludes, in the name of or on behalf of the investment vehicle or its subsidiaries, contracts for the purchase, sale or negotiation of, or contributes to the purchase, sale or negotiation of financial instruments, participations and credits, will be considered to be independent of the foreign investment vehicle.

Article 162(7-quater) of the ITC provides for the conditions under which the legal presumption introduced of paragraph 7-ter applies. These conditions are summarized as follows:

a. The foreign investment vehicle (and its direct or indirect subsidiaries) is resident/established in a foreign State that allows an adequate exchange of information with Italy pursuant to Ministerial Decree 4 September 1996, as amended from time to time (White List).

b. The investment vehicle qualifies as an independent vehicle under the draft ministerial decree.

c. The asset/investment manager or advisor operating in Italy does not hold any role in the management and control bodies of the foreign investment vehicle, or any of its direct and indirect subsidiaries and it does not hold an interest granting more than 25% of the profit of the foreign investment vehicle; said percentage shall be computed according to the criteria set forth by the draft ministerial decree.

d. The remuneration received by the asset/investment manager/advisory company for its management or advisory activity, where stemming from an intercompany transaction, is supported by a set of documentation qualifying for local requirements under Article 1(6) of Legislative Decree No. 471 of 18 December 1997. Under Article 1(255) of the 2023 Italian budget law, the Italian Revenue Agency will issue specific transfer pricing guidelines applicable to the relevant transactions.

If the IME regime does not apply, the Italian Tax Authorities must perform a case-by-case assessment to evaluate the challenge that asset/investment management activities carried out in Italy may trigger an Italian permanent establishment.

Article 162(9-bis) of the ITC also clarifies that, under the above-mentioned conditions, a foreign investment vehicle is not necessarily deemed to have a "fixed place of business" at its disposal in Italy merely because a resident entity carries out an activity, in its own premises and with its own personnel, that may trigger benefits for foreign investment vehicle.

In this context, the draft ministerial decree has not only provided the rules aimed at implementing Article 162(7-quater) (b and c) of the ITC, but also seems to have introduced a sort of rule of order for the purpose of applying the conditions depicted above, depending on the features of the foreign investment vehicle involved.

The following table summarizes the main features of the IME, depending on the type of foreign investment vehicle involved:

Definition of foreign investment vehicles

Article 1(1) of the Decree, aimed at implementing Article 162(7, 7-ter and 7-quater) of the ITC, simply and substantially recalls Article 162(7-ter) of the ITC by stating that "a person, Italian resident or non-Italian resident (also operating in Italy through a permanent establishment), who, in the name or on behalf of the same vehicles or of companies controlled, directly or indirectly, by such investment vehicles, and even if with discretionary powers, habitually concludes contracts of purchase, sale, or otherwise contributes, also through preliminary or ancillary transactions, to the purchase, sale or negotiation of financial instruments, including derivatives and including equity interests or assets, and loans, is considered to be independent from investment vehicles not resident in the territory of the State indicated in paragraph 2."

The explanatory report for the Decree clarifies that this legal presumption (i.e., the IME) also applies where the independent agent acts in Italy in the name of or on behalf of entities directly or indirectly controlled by the foreign investment vehicle provided that such controlled entities are resident in a foreign State included in the White List (refer to Article 1(3) of the Decree).

For the purposes of the IME regime, the Decree adopts a broad definition of foreign investment vehicle, covering any entity with a main purpose to carry out and manage investments on its own behalf or on behalf of third parties and that:

• Raises capital from a plurality of investors

• Adopts a predetermined investment policy

• Is subject to forms of supervision in the foreign State where the investment vehicle is established

As confirmed by the explanatory report to the Decree, the IME regime refers to investments of a financial nature, whose essential features are the use of capital, the promise/expectation of financial return and the assumption of a risk directly related to the use of capital.

Independence requirement for foreign investment vehicles

Article 1(2) of the Decree is aimed at implementing Article 162(7-quater) (b) of the ITC through the definition of the independence requirement for investment vehicles established in a foreign State included in the White List. The following investment vehicles are deemed to meet the independence requirement:

a. Undertakings for collective investment (UCI), established in a Member State of the European Union (EU) or the European Economic Area (EEA), that either comply with Directive 2009/65/EC of the European Parliament and of the Council of Europe and of the Council of 13 July 2009 (UCITS IV Directive) or have a manager who is subject to supervision in the State where it is established pursuant to Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 (AIFMD)

b. UCIs, other than those referred to in point a. above, that:

i. Raise capital from a plurality of investors and manage assets as a pool in the interest of the investors and independently from them according to a predetermined investment policy

ii. Are directly subject to, or have a management entity subject to, prudential supervision and have governing regulations that are substantially equivalent to UCITS IV Directive or AIFMD

c. Entities, other than those referred to in points a. and b. above, that are subject to prudential supervision, with an exclusive or principal purpose to invest the capital raised from third parties in accordance with a predetermined investment policy, and in which the following conditions are met:

i. No person holds more than 20% of share capital or assets, including shareholdings held by persons linked by close ties within the meaning of Article 1(6-bis.3) of Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation)

ii. The capital raised is managed upstream in the interests of the investors and autonomously from them

In this respect, the explanatory report to the Decree clarifies that the manner in which the relevant entity is set up is irrelevant, i.e., whether the entity is set up as a body corporate or a contractual form.

Under Article 1(4) of the Decree, the 20% threshold, relevant for letter c., point i., above, shall be computed as follows: (a) participations without administrative rights are excluded; (b) the application of the 20% threshold is temporarily suspended whenever the investment vehicle raises additional capital or reduces existing capital and for no more than 12 months each time; (c) if the vehicle begins the liquidation activities to redeem units or shares to investors, the 20% threshold ceases to apply.

As stated in the explanatory report to the Decree, it seems that the independence requirement may fail to be met vis-à-vis foreign investment vehicles established as family office or club deal.

Independence requirement of asset/investment manager/advisory company

Article 2 of the Decree, as clarified by the relevant explanatory note, has confirmed that:

• The foreign investment vehicles qualify among those regulated by Article 1(2)(a or b) of the Decree and they are resident/established in a foreign State included in the White List.

• The entities directly or indirectly controlled by the foreign investment vehicles are themselves resident in a foreign State included in the White List.

In those cases, the IME regime will apply without the need to verify that the asset/investment manager/advisory company is independent. This because in those cases, considering the features of the foreign investment vehicle/structure, it is assumed that the asset/investment manager/advisory company is independent without having to also assess whether the conditions laid down by Article 162(7-quater)(c) of the ITC are met, provided that the condition laid down by Article 162(7-quater)(d) of the ITC is met.

Conversely, where the foreign investment vehicles qualify among those regulated by Article 1(2)(c) of the Decree, pursuant to Article 2 of the Decree, to apply the IME regime it is mandatory to assess whether the asset/investment manager/advisory company can be considered as independent according to Article 162(7-quater)(c) of the ITC.

In this latter respect, under Article 2 of the Decree, which implements Article 162(7-quater)(c) of the ITC, a person (acting as the asset/investment manager/advisory company), Italian resident or non-Italian resident (also operating in Italy through a permanent establishment) that carries on business in Italy on behalf of or for the account of the foreign investment vehicle or of its direct or indirect subsidiaries shall be deemed to be independent if it, or the employees and directors of the same person, fulfill the following conditions:

• The person must not hold roles in the administrative and control bodies of the foreign investment vehicle or of its direct or indirect subsidiaries. For these purposes, the roles under scrutiny are those covering general duties, with the exclusion of any appointment to perform a specific duty (refer to Article 2(2) of the Decree).

• The person shall not hold a stake in the economic results of the foreign investment vehicle exceeding 25% of the total economic results of the latter (refer to Article 2(3) of the Decree). For these purposes, the following criteria are deemed to apply:

i. The 25% threshold is computed by taking into account any demultiplication produced by the investment chain.

ii. The 25% threshold also includes any stake in the economic results of the foreign investment vehicle accruing to entities belonging to the same financial group as the person. All entities linked by a controlling relationship are deemed to belong to the same group as the person. The 25% threshold is computed by taking into account the entire share of the economic results of the foreign investment vehicle to which the person is entitled. Therefore, this threshold includes the portion of the profit that exceeds the pro-rata profit of the investments and that is configured as carried interest, calculated on the basis of the maximum percentage that this portion represents of the distributions from the investment vehicle, in light of the provisions of its constituent documents.

Article 3 of the Decree provides for common implementation rules as per the following:

• The control requirement relevant for the IME regime is regulated by Article 2359(1) of the Italian civil code — as stated in the explanatory report to the Decree; for these purposes any demultiplication produced by the investment chain should not be taken into account (refer to Article 3(1) of the Decree):

i. Another company holds, directly or indirectly, the majority of the votes at the shareholders' meeting.

ii. Another company holds, directly or indirectly, sufficient votes to exert a decisive influence in the shareholders' meeting.

iii. The company is under the relevant influence of another company due to a special contractual relationship.

• The person acting as asset/investment manager/advisory company may either be an Italian resident or a non-Italian resident that operates in Italy through its Italian permanent establishment (refer to Article 3(2) of the Decree).

• For the purpose of applying the IME regime, it is in any case required that the person acting as asset/investment manager/advisor in Italy in the name of or on behalf of the foreign investment vehicle or of its direct or indirect subsidiaries, must be in possession of documentation of the remuneration received, suitable to allow the verification of compliance with the arm's-length principle, as set forth in Article 1(6) of Legislative Decree No. 471 of 18 December 1997. In this respect, the explanatory report to the Decree clarifies that any adjustments to remuneration made by the Italian Tax Authorities have no consequences with regard to the application of the IME regime, but only with regard to the taxation of the person acting as asset/investment manager/advisory company in Italy (please refer to Article 3(3) of the Decree).

• The provisions of this Decree pursue exclusively the purposes set forth in Article 162 of the ITC; in particular, the IME regime, for what it specifically concerns the independence of the asset/investment manager/advisor, will apply regardless of whether, under Italian/EU regulatory law, the activities to be performed in Italy are subject to regulatory law constraints. This means that Article 162 of the ITC will be deemed to be applicable subject to the assessment of the conditions laid down therein, regardless of the qualification of the activities carried out in Italy from a regulatory law perspective.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, Financial Services Office, Milan

• Paolo Zucca

• Giuseppe Marco Ragusa

• Antonfortunato Corneli

• Giancarlo Tardio

• Gabriella Cammarota

• Alberto Fuccio

• Roberto Carotenuto

• Michele Tarantino

Ernst & Young LLP (United States), Italian Tax Desk, New York

• Emiliano Zanotti

• Gianmarco Metrangolo

• Filomena Iovino

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.