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Bank of Italy Smooths Path for Direct Debt Investment into Italy via EU Alternative Investment Funds

International investment funds are set to benefit from measures issued by the Bank of Italy, aimed at facilitating direct investment into the country by EU alternative investment funds (AIFs). 

The measures focus on collective investment management and set out a regulatory framework of conditions under which AIFs can carry out investment activity in Italy, both in terms of purchasing credit receivables and providing direct credit. Investors who are committed to long-term lending activity benefit from the greater certainty afforded by this regulatory framework, which is pursuant to Article 46 of the Italian Finance Law (IFL).

Article 46 of the Italian Financial Law

Article 46 sets out a number of conditions that govern how AIFs invest in loans to Italian borrowers, excluding consumers. These conditions cover direct lending and the purchase of claims. They require that

  • The EU AIF must be authorised to invest in loans by the relevant authority in its home Member State 

  • The EU AIF must be a closed-end fund and its operational system be equivalent to the operational system of an Italian AIF investing in loans.

  • The risk management provisions applicable to the EU AIF according to its home Member State law and regulations (including provisions relating to leverage limits) are equivalent to those applicable to Italian AIFs permitted to invest in loans

Paragraph 2 of Article 46 further imposes an obligation on managers of EU AIFs to send a communication to the Bank of Italy to inform the Bank in advance of their intention to operate in the country.

To ensure sound management of these funds, the Bank of Italy may consider it necessary to grant EU AIFs access to the Central Credit Register (Centrale di Rischi). The register is an informal system operated by the Bank of Italy that collects data supplied by banks and financial companies on the credit they grant to their customers. 

The New Rules

The new measures set out the information that must be sent to the Bank of Italy to communicate the EU AIF’s intent to offer loans in Italy. The communication must be sent at least 60 days before the commencement of operations in Italy, and must contain the following:

  • The name, registered office and directorate-general of the EU AIF 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 by the EU AIF’s home Member State confirming authorisation in the Member State and that the fund manager is authorised to manage the EU AIF.

  • A statement confirming the ability of the EU AIF to originate loans, provided by either the home Member State ‘s competent authority, or as a legal opinion. 

  • A copy of the management rules/bylaws of the EU AIF and those governing its manager, together with a statement from the home Member State’s relevant authority confirming the validity of both these documents.

  • Either

  • 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 limits on leverage. These provisions must be considered equivalent to provisions applicable to Italian AIFs so a legal opinion to that effect must also be supplied; or

  • A statement by the home Member State’s authority that it is actively supervising the conduct of the AIF manager with the rules on risk mitigation and diversification in mind.

    • 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 object 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.

Any firms not authorised to invest in Italy must adhere to this list rigorously. 

Once the Bank of Italy has reviewed all documents, and any necessary amendments or additions have been made, the Bank has 60 days to notify the fund if it has failed to meet the requirements of Article 46. Unless this is express notification of failure is sent within the 60 day time period, the EU AIF is entitled to start lending in Italy.

An EU AIF that has already been authorised to invest in loans in Italy, and intends to subsequently commence operations in respect to a different sub-fund, need not re-submit data or information previously sent to the Bank.

Alternatives

Should the conditions of Article 46 not be satisfied (for example, because the fund is not an EU AIF), there are two other possible ways to carry out direct lending activity in Italy. The EU AIF may

  1. Obtain a banking licence pursuant to Article 107 of the Italian Banking Law (this method is quite onerous and time consuming); or 

  2. Use an Italian securitisation vehicle.

Option two would involve the borrower taking a loan from an Italian securitisation vehicle that is financed through the issuance of bonds to the relevant fund. In this case it is possible to lend directly to Italian borrowers provided that 

  • Banks or financial intermediaries are used in the origination process to identify the relevant borrower.

  • The bank or financial intermediary retains at least 5 per cent of the bonds.

  • The bonds issued by the Italian securitisation vehicle are subscribed to by qualified investors, which would normally include hedge funds or non EU AIFs.

In the past, there was also the option of using the rather opaque Italian Bank Lender of Record structures. These structures have, however, been challenged by the Italian tax and regulatory authorities and are significantly less common than in the past. 

Tax Considerations

Generally, interest payments from Italian borrowers to foreign investors are subject to 26 per cent withholding tax (subject to a reduction pursuant to any applicable Double Tax Treaty). No withholding tax applies, however, if the EU AIF satisfies the requirements of Article 46 as described above and fulfils the following conditions: 

  • The borrower is a business enterprise.

  • The financing is medium to long term.

  • The lender is an institutional investor, established in a white list country and subject to regulatory supervision in its home State.

Even if the lender, despite being an institutional investor, is not an EU AIF, or is not subject to regulatory supervision in its home State, no withholding tax applies if (a) an Italian securitisation vehicle structure is used or (b) the Italian borrower issues bonds (i) that are listed on a regulated EU Market or an EU multilateral trading facility or (ii) that are not listed, but are subscribed exclusively and held by “qualified investors” as defined in Article 100 of the Italian Finance Law. 

The lender does not have to be subject to regulatory supervision in its home State, but it is required (a) to be established in a white list country, (b) to have the skills and expertise required to carry out transactions in financial instruments and (c) not to have been set up for the purposes of managing investments carried out by a limited (or closed) number of investors from Italy or non-white list countries with a view to unduly benefiting from the withholding tax exemption. 

Comment

By virtue of the new rules, from a regulatory perspective most closed-end EU AIFs are now able to lend directly to Italian borrowers and purchase the debt of Italian borrowers, provided they submit the required information to the Bank of Italy in advance. EU AIFs will also benefit from the withholding tax exemption if the conditions mentioned above are satisfied.

From a regulatory perspective, non EU AIFs, or EU AIFs that do not satisfy the conditions of Article 46 of the Italian Financial Law, are permitted to make available financing to Italian borrowers and purchase the debt of Italian borrowers, provided that they subscribe or purchase bonds (which shall be structured as securities), or use the securitisation structure described above. In these cases, the non-EU AIFs or the non-Article 46 compliant EU AIF will also benefit from the withholding tax exemption, provided the conditions described in the above paragraph are satisfied.

© 2017 McDermott Will & Emery

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About this Author

Piero Carbone, McDermott Will, venture investments lawyer, buy and build transaction attorney
Partner

Piero Carbone focuses on cross-border corporate transactions, particularly in the area of private equity. He advises private equity firms on a variety of transactions, including venture investments, buy-and-build transactions, mid-market and large leveraged buyouts and public-to-privates. Piero also advises fund managers on multi-jurisdictional fund raisings. He helps clients with both private and public M&A work, corporate reorganizations, joint ventures and share issuances. His clients include US and European private equity firms and fund managers from a variety of...

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