The Italian budget law 2023 ("Budget Law") has introduced new tax rules concerning the investment funds industry which provide certainty as to whether the activities of an investment fund manager ("Manager") could give rise to a permanent establishment in Italy ("PE") for a non-Italian resident fund or its investors.
Cross-border fund investments often require the Manager to carry out managerial activities in the jurisdiction where the target company is located. In such cases, there is a risk that local tax authorities may argue that the Manager's activities trigger the threshold for a PE to exist. Where this is so, income attributable to the PE will be subject to local tax, resulting in double taxation (i.e. taxation in the country where the target company is established and in the country where the investors are located). Furthermore, failure to disclose a PE may trigger not just taxation but also administrative and criminal sanctions.
PE risk clearly affects the way the investment fund Manager operates, and the investment is structured. As a matter of fact, measures are usually taken by funds to avoid creating the grounds for a PE in the country they are investing in. This has a significant impact on the Manager's activities (and personnel) in the state where the target company is located.
New rules of permanent establishment
The new Budget law amends Article 162 of the Italian income tax code ("IITC"), and sets out the conditions under which investment funds/investors can avoid being deemed to have a PE in Italy (the so-called Investment Management Exemption) as a result of the activities carried out by its a Manager (the non-rebuttable presumption).
It is worth noting that the Investment Management Exemption does not cover the Manager's position and, thus, the non-rebuttable legal presumption does not apply to the Manager. Indeed, activities carried out in Italy by a non-Italian resident Manager through its personnel may give rise to PE for the Manager. However, the existence of a Manager's PE in Italy would only create a link between the Italian territory and the income the Manager derived from it. It would not affect the investment fund/investor's position (provided that the conditions of the Investment Management Exemption are met).
The Investment Management Exemption provides new legal certainty in order to encourage foreign investment in Italy and it has been welcomed by the funds industry. As such, the Exemption may drive the investment funds industry to reconsider their Italian investment structures and potentially to move personnel to Italy to manage Italian investments.
In such cases, Italy's beneficial tax regime (the so-called impatriati regime) would make the country even more attractive for individual inbound managers.
Provisions of the Investment Management Exemption
According to the new Budget Law, a non-Italian resident investment vehicle will be considered to be independent from its Manager (either resident or non-resident in Italy and operating through their own PE). This is also the case should the Manager be entrusted with discretionary powers.
For non-Italian resident investment vehicles conditions for the non-rebuttable legal presumption are listed below:
a) the investment vehicle must be resident or located in a state or territory that allows for an adequate exchange of information with Italy (according to Decree 4 September 1996);
b) the investment vehicle complies with independence requirements set out in a forthcoming decree;
c) the Italian resident or non-Italian resident person who carries out activities in Italy in the name and/or on behalf of the investment vehicle must not:
- be a director or hold controlling or administrative roles in the management bodies of the investment vehicle;
- hold an economic interest in the investment vehicle higher than 25%. Attention is also given to the existence of economic interests in the investment vehicle which are held by persons belonging to the same group as the Italian resident or non-Italian resident person.
All conditions listed above must be met for the non-rebuttable legal presumption to apply.
Furthermore, if anyone acting in the name and/or on behalf of non-Italian resident investment vehicles renders service to related parties, their remuneration must be supported by the appropriate transfer pricing documentation. A forthcoming decree will provide guidelines on transfer pricing rules should be applied.
This provision of the Budget Law also covers the subsidiaries of non-Italian resident investment vehicles.
The Budget law also provides that, as long as the above listed conditions are met, an Italian resident enterprise rendering services to a non-Italian resident investment vehicle cannot be deemed to trigger the existence of a fixed PE for the investment vehicle.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.