Italy: New Italian Rules Allowing Direct Lending And Purchasing Of Claims By EU Alternative Investment Funds

Law Decree 14 February 2016, No. 18 (as converted by Law 8 April 2016, No. 49) expressly allows EU Alternative Investment Funds ("EU AIFs") to carry out, under certain conditions, direct lending and purchasing of claims in Italy. On 23 December 2016, the Bank of Italy issued rules which implemented the new regulation concerning collective asset management activity ("Bank of Italy Regulation").

The above-mentioned rules have been introduced with the aim of providing Italian companies with new financing instruments to facilitate access to credit. The new rules follow previous legislative measures concerning (i) the facilitation of the issuance of bonds by private companies, and (ii) the possibility for Italian insurance companies, securitization companies and AIFs to perform direct lending.

Therefore, direct lending and purchasing of claims in Italy might represent an opportunity for existing and/or newly-formed EU AIFs to create new lines of business.

The Consolidated Financial ACT

Article 46 of Legislative Decree 24 February 1998, No. 58 (the "Consolidated Financial Act") sets out several conditions that govern how EU AIFs invest in credit to Italian entities. These conditions cover direct lending and the purchase of claims and can be summarized as follows:

  • the EU AIF must be authorized to invest in loans by the relevant authority in its home Member State;
  • the EU AIF must be structured as a closed-end fund and its operational system be equivalent to the operational system of an Italian AIF investing in loans;
  • the risk management rules applicable to the EU AIF according to its home Member State law and regulations (including provisions governing leverage thresholds) must be equivalent to those applicable to Italian AIFs permitted to invest in loans.

According to Article 46, Paragraph 2 of the Consolidated Financial Act, managers of EU AIFs intending to operate in Italy are required to file a prior notice with the Bank of Italy.

Moreover, to ensure sound and prudent management of such funds, the Bank of Italy may require the addition of the EU AIF to the Italian central credit register (Centrale Rischi), a system operated by the Bank of Italy which collects data supplied by banks and financial intermediaries on the credit they grant to their customers. Pursuant to Article 46, Paragraph 3 of the Consolidated Financial Act, the Bank of Italy may also require participation in the Centrale Rischi by banks or financial intermediaries duly authorized to operate in Italy.

The Bank of Italy Regulations

The new rules set forth by Title VI, Chapter V of the Bank of Italy Regulation

  • restate the conditions provided for by Article 46 of the Consolidated Financial Act , and
  • detail the requirements of the prior notice procedure applicable to EU AIFs intending to start their operation in Italy.

As far as the prior notice procedure is concerned, Article 2.2, Chapter V, Title VI of the Bank of Italy Regulation provides that the prior notice of intention to offer loans in Italy must be sent at least 60 days before the commencement of operations, and must contain the following:

  • the name, registered office and directorate-general of the EU AIF's manager;
  • the name of the EU AIF, or the relevant sub-fund that intends to operate in Italy;
  • the personal and legal capacity of the signatory of the communication;
  • a statement released by the relevant authority in the EU AIF's home Member State confirming authorization in the Member State and that the fund manager is authorized to manage the EU AIF;
  • a legal opinion or statement provided by the relevant authority in the EU AIF's home Member State confirming the ability of the EU AIF to originate loans;
  • a copy of the management rules/by-laws of the EU AIF and those governing its manager, along with a statement from the home Member State's relevant authority confirming the validity of these documents;
  • alternatively (i) a declaration signed by the legal representative of the EU AIF's manager, setting out the AIF's home Member State's rules on risk mitigation and diversification, including thresholds on leverage (these provisions must be considered equivalent to provisions applicable to Italian AIFs and a legal opinion to that effect must also be supplied), or (ii) a statement released by the relevant authority in the home Member State that it is actively supervising the conduct of the AIF manager with the rules on risk mitigation and diversification in mind;
  • a copy of the most recent annual report, and half-year report if available;
  • a note outlining the operational scheme of the EU AIF, with particular reference to rules governing the subscription and redemption of units/shares, and the scope and investment policy. The note must state whether or not the AIF manager has signed, or intends to sign, side letters with investors of the EU AIF and, if so, their content must be disclosed.1

Please also note that an EU AIF that has already been authorized to invest in loans in Italy, and intends to subsequently commence operations in respect to a different sub-fund, does not need to re-submit data or information previously sent to the Bank of Italy.

Tax Considerations

The Italian government also introduced new and important changes to the tax regime applicable to financing transactions executed by, inter alia, EU and Italian AIFs which now benefit from significant tax reforms summarized below:

  • application of the "sostitutiva" tax regime which is considered a key requirement for real estate finance transactions. Hence, medium and long term loans (i.e. having a maturity date longer than 18 months) granted by EU AIFs may benefit, upon option, from an umbrella tax regime of 0.25% on the advanced amount of the loan which replaces ordinary and higher taxes such as stamp duties, property and mortgage taxes (the latter being not lower than 3% of the secured obligations); the same regime is applicable in the event that EU AIFs purchase the relevant receivables); and
  • disapplication2 of the ordinary withholding tax to be levied by Italian borrowers on facilities interests paid to foreign creditors equal to 26%.3

Accordingly, cross-border financing (as well as purchasing of receivables, including portfolios of credits, securitization transactions, acquisition on the secondary market and syndication activities) will be rendered freer for a greater number of entities and will be more cost efficient at the same time, augmenting the competitiveness of the Italian market and making negotiations of the relevant agreements easier and less burdensome (e.g., no need to agree on gross-up basket).

Footnotes

1. Once the Bank of Italy has reviewed all the documentation, and any necessary amendments or additions have been made, the Italian Authority has 60 days to notify the fund if it has failed to meet the requirements. Unless this express notification of failure is sent within a 60 day time period, the EU AIF is entitled to start lending in Italy.

2. Provided that Italian law and regulations on lending capability are respected.

3. Or such other percentage as determined by any applicable bilateral tax treaty - if any - entered into by and between Italy and the relevant country.

New Italian Rules Allowing Direct Lending And Purchasing Of Claims By EU Alternative Investment Funds

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