On 23 December 2016, the Bank of Italy supplemented the regulation on the collective investment management (the "Regulation") which, inter alia, implements article 46-ter of Legislative Decree. n. 58/1998 ("Consolidated Financial Act"), introduced by article 17 of Law Decree n. 18/2016, as subsequently converted into law, (the "Decree"), which sets out the conditions under which the EU Alternative Investment Funds (the "EU Credit AIFs") may carry out investment activities in Italy both in the form of purchasing credit receivables and providing direct credit. The Regulation entered into force on 5 January 2017.
The Regulation completes the regulatory framework and eliminates some legal and interpretive uncertainties allowing EU Credit AIFs to proceed in this type of investment activity in Italy with the benefit of a clearer regulatory framework.
In order to put article 46-ter in context, below is a brief overview of the main provisions of the Consolidated Financial Act with regard to the activities of EU Credit AIFs (including Credit Italian AIFs investing in credit (the "Italian Credit AIFs")) including as a result of the amendments introduced by the Decree.
The Decree amended the Consolidated Financial Act in order to regulate lending and investment activity by both Italian and EU funds as follows:
Article 46-bis of the Consolidated Financial Act provides express confirmation that Italian Credit AIFs may provide direct credit to borrowers (other than consumers) as long as in compliance with the Consolidated Financial Act and its implementing provisions.
This completes the legislative process which began in 2014 aimed at extending the scope of the activity of Italian Credit AIFs. The process also saw Law no. 116/2014 incorporating the definition of "undertaking for collective investment" in article 1, letter. k) of the Consolidated Financial Act ("UCITS"), providing that UCITS can grant loans, including from funds constituting its own assets.
Article 46-bis of the Consolidated Financial Act clarifies that the current regulatory framework applying to other categories of UCITS also applies to Italian Credit AIFs, and among these there are in particular:
In light of the above, a UCITS:
- may invest its assets in loans and credit receivables;
- is by definition an alternative investment fund;
- can only be managed by the AIF managers ( "AIFM") authorised by and registered with the Bank of Italy;
- may not have a duration which expires after the maturity date of the credit receivables in which it - has invested its assets; and
- can only be a closed-ended AIF.
Under the Regulation as amended, EU Credit AIFs may now carry on in Italy the activity of (i) direct provision of credit and (ii) purchase of credit receivables.
The Regulation, in accordance with Article 46-ter of the Consolidated Financial Act, requires managers of EU credit UCITS intending to operate in Italy by investing in loans out of their own assets, to communicate in writing their intention to the Bank of Italy at least 60 days before the commencement of their operations (the "Communication"). The Regulation details the information to be included in the Communication and the supporting documentation which must be provided.
Upon receipt of the Communication, the Bank of Italy will assess, in particular, the existence of the following conditions:
The Bank of Italy can start a proceedings within 30 days of receipt of the Communication, aimed at the possible issue of a prevention order against the relevant EU Credit AIF applying for an authorisation and, thus, preventing the start of its operations in Italy.
After expiry of sixty days from the Communication, and always provided that the Bank of Italy has not issued a prevent order, the EU Credit AIF may proceed with the disbursement of direct credit.
We should point out that, the Communication as introduced by Article 46-ter of the Consolidated Financial Act, is an additional and different requirement to those currently imposed by AIFM Legislation and the relevant Italian implementing legislation on EU AIFM for the start of their operations or the marketing of units or shares in Italy.
In the light of the new rules, we describe below some additional considerations on the application of existing transparency rules and tax treatment of financing operations by EU Credit AIFs in Italy.
Article 46-quater of the Consolidated Financial Act, as confirmed by the Regulation, introduces certain specific obligations with regard to the existing provisions on the transparency of contractual terms and relationship with customers of Decree. No 385/1993 ("Consolidated Banking Law").
In accordance with such provisions of the Consolidated Banking Law, Italian Credit AIFs and EU Credit AIFs operating in Italy must also comply with the Order issued by the Bank of Italy dated 29 July 2009 on "Provisions on the transparency of banking and financial transactions and services". The obligations set out therein are mainly concerned with:
In addition, each EU Credit AIF operating in Italy must:
The Bank of Italy can also assess, for EU Credit AIFs investing in credit that will be admitted to operate in Italy, the application of additional provisions requiring their participation in the Credit Risk Central system, through other financial intermediaries authorized under Article 106 of the Consolidated Banking Act or authorised banks.
Finally, by virtue of falling within the broader definition of undertakings for collective investment (UCITS) as provided by article 17-bis of Presidential Decree n. 601/1973, finance operations carried out in Italy by the EU Credit AIFs may, if the parties so elect, be subject to the substitute tax regime (0.25% of the loan), provided that the loan is disbursed in Italy and have a duration of more than 18 months.
If the loan is subject to a substitute tax of 0.25%, the same and related mortgages and other security interests are exempt from any registration tax, stamp duty, mortgage, land or government concession taxes otherwise applicable.
In addition, no withholding tax should be applicable on interest paid on such loans provided that: