Executive summary

On 19 November 2024, Italian Tax Authority (ITA) published Circular Letter No. 23/E (Circular), clarifying the Investment Management Exemption (IME) regime and providing several insights on transfer pricing (TP) documentation required for applying the IME regime.

The Circular clarifies certain selected requirements underlying the IME regime, such as independence requirements for foreign investment vehicles and for asset/investment manager/advisory companies. It also confirms that the IME regime cannot be applied by nonresident foreign asset/investment manager/advisory companies.

Lastly, the Circular focuses on the TP analysis to be made in relation to asset management businesses and on the documentation requirements that must be met to qualify for the IME regime.

Background

The IME regime was introduced by the 2023 Italian budget law,¹ which added paragraphs 7-ter, 7-quater and 7-quinquies to Article 162 of the ITC, and was subsequently implemented through a Ministerial Decree (Decree) and the ITA IME TP Guidelines (TP Guidelines).²

ITA clarifications in Circular

Application of IME regime: Exclusion for foreign asset/investment manager/advisory companies

The Circular confirms that the IME regime shall not be applicable in relation to nonresident foreign asset/investment manager/advisory companies but only in relation to foreign investment vehicles and/or their subsidiaries.

Consequently, for those entities, a case-by-case assessment must still be performed, aimed at determining whether the asset/investment management activities carried out in Italy may trigger an Italian permanent establishment.

Independence requirement for foreign investment vehicles

The Circular, following the explanatory note of the Decree, confirms that the independence requirement is deemed to be met by the following investment vehicles:

1. "UCIs EU" are 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 UCITS IV Directive³ or have a manager that is subject to supervision in the State where it is established under Directive 2011/61/EU (AIFMD)⁴
2. "UCIs non-EU" are UCIs, other than those referred to in letter (a) above, that:
1. 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
2. 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

In this respect, the Circular specifies that the requirement for "substantially equivalent regulations" to the UCITS IV Directive or AIFMD is met when the foreign jurisdiction's regulatory framework includes provisions that resemble the requirement under (b)(i), above, as well as provisions aimed at overseeing compliance with the mentioned requirement.

3. "Other Entities" are entities different from UCI EU and UCI non-EU that are subject to prudential supervision, have an exclusive or principal business purpose to invest the capital raised from third parties in accordance with a predetermined investment policy, and meet the following conditions:
1. No person holds more than 20% of share capital or assets, including shareholdings held by closely related persons.⁵ In this respect, the ITA clarifies that in a Master/Feeder structure⁶ reference has to be made to the investor following a look-through approach.
2. The capital raised is managed in the interest of the investors and independently from them. In this respect, whether the relevant entity is set up as a body corporate or a contractual form is irrelevant.

Finally, the Circular clarifies the prudential supervision requirement by:

• Stating that the requirement is deemed to be met if the investment vehicle or its manager needs to be authorized prior to starting its business activity and, moreover, if its business activity is continuously monitored by the relevant regulatory authorities in the jurisdiction of establishment
• Recalling the clarifications contained in other ITA official documents previously published on the prudential supervision requirement⁷

Independence requirement for asset/investment manager/advisory companies

The Circular confirms that for UCIs EU and UCIs non-EU, as defined above, the IME regime will automatically apply without verifying the independence of the asset/investment manager/advisory company.

The Circular also confirmed that the independence requirement for an asset/investment manager/advisory company can be deemed as met where a delegation or sub-delegation of functions occurs, to the extent that:

1. The delegation/sub-delegation complies with the UCITS IV Directive/AIFMD (or, for UCIs non-EU, with the foreign regulatory law framework substantially equivalent to the UCITS IV Directive/AIFMD) — i.e., the delegating manager must ensure that delegations do not result in the manager's becoming a mere "empty-box" entity.
2. The delegated and sub-delegated entities are resident in Italy or in a jurisdiction granting an adequate exchange of tax information with Italy.⁸
3. For UCIs non-EU, the foreign jurisdiction's regulatory framework provides for delegation/sub-delegation rules that adhere to UCITS IV Directive/AIFMD principles.

With respect to the Other Entities, the Circular confirms that the IME regime cannot apply unless the asset/investment manager/advisory company can be considered independent.

In this respect, the ITA specifies that the 25% threshold needs to be computed by considering the entire stake in the financial results of the foreign investment vehicle to which the person is entitled.

The threshold also includes the portion of the profit that exceeds the pro-rata profit of the investments — i.e., the carried interest. In this respect, to determine if the threshold is met, the carried interest should not be considered in its entirety in the fiscal year in which it is distributed. Instead, it must be allocated on a pro-rata basis over the duration of the investment (based on the maximum participation percentage provided for in the relevant constituent documents).

Finally, the Circular clarifies that, in the case of delegation/sub-delegation, the independence requirements need to be verified at the level of the delegated/sub-delegated party that materially performs the management functions.

ITA guidelines on TP for IME qualification

One of the conditions for claiming IME benefits is that the remuneration received by the asset/investment manager or advisor for any activity rendered within an intercompany transaction is supported by a set of TP documentation meeting local requirements under Article 1(6) of Legislative Decree No. 471 of 18 December 1997 (i.e., the penalty exemption regime in case of a transfer pricing challenge) and consistent with the applicable IME TP Guidelines.

The Circular clarifies that this condition applies when the relevant intercompany services are rendered by a resident entity, or by the Italian PE of a nonresident entity. If, instead, the operations of an asset manager do not involve any intercompany cross-border transaction, the IME safe harbor may still apply if the other conditions under Article 162, paragraph 7-quater of the ITC are met.

Also, the Circular comments on the key topics addressed in the TP Guidelines, which include the following:

1. For asset management related services, the method deemed most appropriate is the Comparable Uncontrolled Price (CUP) method. However, where it is found that counterparties involved in the transaction share the assumption of the same economically significant risks or separately assume economically significant and closely related risks, the CUP method may not be equally reliable, and the Profit Split Method, specifically based on a contribution analysis, is considered more appropriate.
2. The Circular provides further guidance concerning the factors that may be used to carry out the comparability analysis.
3. For the application of the Profit Split Method, the ITA emphasizes the importance of identifying the relative contributions generated by the intercompany transaction involving asset management activities, based on functions performed, risks assumed and assets deployed. For umbrella funds, it is deemed appropriate to determine the total contribution of each party involved at the level of each compartment, in the event that the asset management services rendered in Italy should refer to more than one specific compartment among those attributable to the vehicle. In addition, the multi-factor approach, if feasible, is the preferred method for determining each function's relative contribution to the earning of the combined profit from the asset management activity.⁹

The Italian-compliant set of TP documentation must be prepared in accordance with:

• Article 8 of the TP Decree¹⁰
• Guidance contained in the Order of the Director of the ITA of 23 November 2020, protocol number 2020/360494 (TP Measure)
• All necessary factual and economic information for verifying the correct application of the requirements included in the third to the sixth paragraphs of the IME TP Guidelines

In this regard, the Circular clarifies that the Italian-compliant set of TP documentation prepared by the taxpayer is considered appropriate whether it allows the ITA to verify that the transfer prices conform to the arm's-length value. Therefore, the provisions contained in the TP Decree and in the TP Measure¹¹ should also be considered applicable for purposes of the IME requirements.

Consequently, in case of audit, it would be important to first assess that, based on the indications included in ITA Circular No. 15/E of 26 November 2021, the Italian TP documentation has been prepared in accordance with the requirements laid out in the TP Decree and in the TP Measure. If the suitability assessment is positive for TP purposes, it will be necessary to verify that the TP documentation complies with the indications contained in the IME TP Guidelines.

If Italian tax authorities positively assess the TP documentation submitted by the taxpayer regarding its suitability for the purposes of applying the IME rules, an audit adjustment to the transfer prices should not result in a loss of protection under the IME safe harbor, nor under the basic documentation rules.

Conversely, if the Italian-compliant set of TP documentation is missing or is deemed unsuitable for the purposes of applying the IME regime, the taxpayer would not be protected by the IME safe harbor.