October 19, 2023
Italian draft ministerial decree provides implementation rules for Investment Management Exemption regime
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.
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:
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:
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:
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:
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:
Article 3 of the Decree provides for common implementation rules as per the following:
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario, Financial Services Office, Milan
Ernst & Young LLP (United States), Italian Tax Desk, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor