International investment funds are set to benefit from measures issued by the Bank of Italy, aimed at facilitating direct investment into the country by EU alternative investment funds (AIFs).
The measures focus on collective investment management and set out a regulatory framework of conditions under which AIFs can carry out investment activity in Italy, both in terms of purchasing credit receivables and providing direct credit. Investors who are committed to long-term lending activity benefit from the greater certainty afforded by this regulatory framework, which is pursuant to Article 46 of the Italian Finance Law (IFL).
Article 46 of the Italian Financial Law
Article 46 sets out a number of conditions that govern how AIFs invest in loans to Italian borrowers, excluding consumers. These conditions cover direct lending and the purchase of claims. They require that
Paragraph 2 of Article 46 further imposes an obligation on managers of EU AIFs to send a communication to the Bank of Italy to inform the Bank in advance of their intention to operate in the country.
To ensure sound management of these funds, the Bank of Italy may consider it necessary to grant EU AIFs access to the Central Credit Register (Centrale di Rischi). The register is an informal system operated by the Bank of Italy that collects data supplied by banks and financial companies on the credit they grant to their customers.
The New Rules
The new measures set out the information that must be sent to the Bank of Italy to communicate the EU AIF’s intent to offer loans in Italy. The communication must be sent at least 60 days before the commencement of operations in Italy, and must contain the following:
Any firms not authorised to invest in Italy must adhere to this list rigorously.
Once the Bank of Italy has reviewed all documents, and any necessary amendments or additions have been made, the Bank has 60 days to notify the fund if it has failed to meet the requirements of Article 46. Unless this is express notification of failure is sent within the 60 day time period, the EU AIF is entitled to start lending in Italy.
An EU AIF that has already been authorised to invest in loans in Italy, and intends to subsequently commence operations in respect to a different sub-fund, need not re-submit data or information previously sent to the Bank.
Should the conditions of Article 46 not be satisfied (for example, because the fund is not an EU AIF), there are two other possible ways to carry out direct lending activity in Italy. The EU AIF may
Option two would involve the borrower taking a loan from an Italian securitisation vehicle that is financed through the issuance of bonds to the relevant fund. In this case it is possible to lend directly to Italian borrowers provided that
In the past, there was also the option of using the rather opaque Italian Bank Lender of Record structures. These structures have, however, been challenged by the Italian tax and regulatory authorities and are significantly less common than in the past.
Generally, interest payments from Italian borrowers to foreign investors are subject to 26 per cent withholding tax (subject to a reduction pursuant to any applicable Double Tax Treaty). No withholding tax applies, however, if the EU AIF satisfies the requirements of Article 46 as described above and fulfils the following conditions:
Even if the lender, despite being an institutional investor, is not an EU AIF, or is not subject to regulatory supervision in its home State, no withholding tax applies if (a) an Italian securitisation vehicle structure is used or (b) the Italian borrower issues bonds (i) that are listed on a regulated EU Market or an EU multilateral trading facility or (ii) that are not listed, but are subscribed exclusively and held by “qualified investors” as defined in Article 100 of the Italian Finance Law.
The lender does not have to be subject to regulatory supervision in its home State, but it is required (a) to be established in a white list country, (b) to have the skills and expertise required to carry out transactions in financial instruments and (c) not to have been set up for the purposes of managing investments carried out by a limited (or closed) number of investors from Italy or non-white list countries with a view to unduly benefiting from the withholding tax exemption.
By virtue of the new rules, from a regulatory perspective most closed-end EU AIFs are now able to lend directly to Italian borrowers and purchase the debt of Italian borrowers, provided they submit the required information to the Bank of Italy in advance. EU AIFs will also benefit from the withholding tax exemption if the conditions mentioned above are satisfied.
From a regulatory perspective, non EU AIFs, or EU AIFs that do not satisfy the conditions of Article 46 of the Italian Financial Law, are permitted to make available financing to Italian borrowers and purchase the debt of Italian borrowers, provided that they subscribe or purchase bonds (which shall be structured as securities), or use the securitisation structure described above. In these cases, the non-EU AIFs or the non-Article 46 compliant EU AIF will also benefit from the withholding tax exemption, provided the conditions described in the above paragraph are satisfied.