Italian Lending Market Opens to EU Alternative Investment Funds - New Business Opportunity
On 23 December 2016 the Bank of Italy issued the long-awaited implementing rules outlining the ability of EU alternative investment funds (“EU Credit AIFs”) to engage in direct lending in Italy. As a result, EU Credit AIFs are now allowed to lend to Italian non-consumer borrowers, provided that the conditions set forth under article 46-ter of the Italian Financial Act are met.
The implementing provisions were hailed as a breakthrough, as they give EU Credit AIFs the chance to play an active role in the Italian lending market without being subject to the burdensome capital requirements necessary to establish an entity with a banking license and or the need to be present in the Italian territory.
This note is aimed at providing a high-level overview on:
the conditions to be fulfilled for lending into Italy by EU Credit AIFs;
the application process to be complied by EU Credit AIFs before carrying out lending transaction;
the tax regime applicable to EU Credit AIFs when lending into Italy.
Lending has been, historically, a restricted activity in Italy, traditionally reserved to banks and certain other financial intermediaries. Over the past two years, Italian companies have benefited from several legislative measures designed to increase their access to liquidity. Previous measures have permitted Italian insurance companies and securitization vehicles to lend directly to businesses, subject to certain restrictions, and facilitated the issuance of unlisted bonds by companies.
Conditions for Lending into Italy by EU Credit AIF
Pursuant to article 46-ter of the Italian Financial Act, EU Credit AIFs are authorized to lend directly to Italian borrowers (other than consumers) subject to the following conditions:
the EU Credit AIF is authorized by its home Member State to lend directly in its home jurisdiction;
the EU Credit AIF is set up as a closed-end fund and its operational framework, with particular reference to the rules of participation in the AIF, is equivalent to the operational framework of Italian credit funds; and
the risk mitigation and diversification rules, including those concerning leverage ratios, applicable in the EU Credit AIF’s home Member State are equivalent to the provisions applicable to Italian AIFs. Equivalence can be assessed also through the constitutional documents of the AIFs (i.e., its management rules or by-laws), provided that the home Member State authority ensures compliance by EU Credit AIFs with their constitutional documents.
EU licensed alternative fund managers (“AIFM”) intending to engage in direct lending in Italy shall file a prior notice (the “Notice”) with the Bank of Italy containing the corporate details of the AIFM and the EU Credit AIF, as well as the documentation listed below (which may be drafted either in English or in Italian):
a statement issued by the Member State supervisory authority of the AIFM confirming that the AIFM is authorized to manage AIFs in his home jurisdiction and is therefore authorized to manage the EU Credit AIF referred to in the notice.
In lieu of such statement, the applicant may alternatively file a copy of the authorization to manage AIFs granted by its supervisory authority together with a statement signed by its legal representative attesting to the AIFM’s enrolment under the relevant fund manager’s register;
a statement issued by the Member State supervisory authority evidencing the power of the EU Credit AIF to engage in lending transactions.
If direct lending activity is not subject to any specific authorization requirements in the applicant’s home jurisdiction, the AIFM may alternatively deliver a legal opinion confirming that the credit fund has the power to originate loans under the laws of the Member State in which it is established;
copy of the AIFM’s and EU Credit AIF’s constitutive document (by-laws and management rules) together with a declaration released by the competent supervisory authority certifying the validity and enforceability of such documents.
Alternatively, the applicant may file a statement executed by the AIFM’s legal representative;
a declaration signed by the AIFM’s legal representative pointing out the home Member State’s provisions on risk management, permitted leveraged ratio, and concentration limits deemed to be equivalent to the rules applying to AIFs based in Italy together with a legal opinion attesting such equivalence.
Alternatively, the applicant can deliver a statement of the competent Member State supervisory authority confirming that it supervises the AIFM’s compliance with the risk mitigation and diversification rules set forth under the constitutive documents of the EU Credit AIF;
copy of the last annual report (which is a mandatory requirement), as well the last half-year report (the latter must be delivered only if it is available);
a memorandum on the EU Credit AIF’s operation scheme, focusing in particular on the terms concerning the redemption and subscription of units and/or shares, as well as on the investment policy. The memorandum shall indicate whether the EU Credit AIF entered or intends to enter into side letters with its investor, and in this case, shall disclose their content.
The release of the authorization is based on a tacit-approval mechanism. The notice must be filed at least 60 days in advance prior to starting to originate any loans (nevertheless, some preliminary activities such as scouting for investment opportunities are allowed). The Bank of Italy evaluates the completeness of the filed documentation, and, if it approves, it confirms in writing the suitability of the application through a confirmation receipt (the “Confirmation Receipt”); otherwise it is entitled to request the applicant to provide additional information. The Bank of Italy may prohibit the applicant to engage in direct lending activity within 60 days following the issuance of the Confirmation Receipt. In the event no explicit refusal to grant the authorization is communicated, the EU will be free to start to originate loans.
In relation to security interests (mortgage, pledge, assignment by way of security), as a consequence of the above, the EU Credit AIFs will benefit from the same treatment of the Italian and EU passported banks. In this regard, we can provide a more detailed analysis as requested.
Under Italian tax rules, interest payments to foreign lenders are generally subject to a 26% withholding tax (which may be reduced under any applicable double tax treaties).
However, new rules enacted in 2014, and subsequently amended in 2015 and 2016, provide an exemption that is available to certain qualifying foreign lenders in certain specific circumstances. In particular, according to article 26, paragraph 5-bis, of the Decree 600/73, regulated EU AIFs lending into Italy in compliance with article 46-ter of the Italian Financial Act and the Bank of Italy implementing rules, benefit from a full withholding tax relief on Italian source interest payments, provided that the loan maturity is in excess of 18 months and that the borrowers are Italian enterprises.
In addition, loan agreements executed in Italy by EU Credit AIFs with a maturity in excess of 18 months are eligible for the optional 0.25% substitute tax regime under Article 15 of the Decree 601/73. If this regime is opted for, the loan itself and the related security package would be exempted from the registration, stamp, mortgage, and cadastral taxes otherwise due.