The Italian Government Introduces Measures to Boost the Italian Lending Market
In the last few years, Italy has embarked on a program of economic and financial reforms to ensure the country's future sustainability and growth. As part of this program, the Italian Council of Ministers enacted Law Decree No. 91 of June 24, 2014 (the "Law Decree"), which introduces new measures, including tax ones, aimed at facilitating the access to financing by Italian companies. The principal innovations introduced by the Law Decree concern securitization and lending transactions and the debt markets.
LENDING IN ITALY
The main changes introduced by the Law Decree are as follows: (i) allowing securitization vehicles incorporated under the Italian Securitization Law and Italian insurance companies (i.e., insurance companies incorporated under Italian law or authorized branches of an insurance company incorporated under the law of a non-EU Member state) to lend in Italy; (ii) broadening of the list of assets eligible for investments by undertakings for collective investment (organismi di investimento collettivo del risparmio); and (iii) broadening of the scope of certain favorable tax rules (see below) to (a) banks established under the laws of an EU Member State; (b) insurance companies established and licensed under the laws of an EU Member State; and (c) unleveraged undertakings for collective investment incorporated in an EU Member State or an EEA country.
Reserve of Activity
In Italy, the lending activity carried out on a professional basis and vis-à-vis the customers is reserved to authorized banks and financial institutions.
Italian Insurance Companies and Securitization Vehicles. The Law Decree extends to Italian insurance companies and to Italian securitization vehicles the possibility to make financing to businesses to the extent that (i) the borrower is identified by a bank or a financial intermediary enrolled with the Bank of Italy pursuant to article 106 of the Italian Banking Law; and (ii) the bank or the financial intermediary indentifying the borrower retains a "significant interest" in the financing transaction. In addition:
- In the case of securitization vehicles, the notes issued to fund financings to be granted by the securitization vehicle must be issued to "qualified investors" only; and
- In the case of Italian insurance companies, such entities shall (i) have an adequate internal control and risk management system, and (ii) be adequately capitalized.
The Bank of Italy and IVASS will issue implementing regulations providing for the operational limits and other details applicable to loans by securitization vehicles and by Italian insurance companies, respectively.
As a further incentive, the Law Decree establishes that financings granted by insurance companies may now represent an eligible asset for the purpose of the so-called "technical reserves" (riserve tecniche) that are mandatory for insurance companies.
In addition, SACE S.p.A., which is an export finance company owned by Cassa Depositi e Prestiti S.p.A. and by the Italian Ministry of Economy, is now allowed to lend to Italian businesses.
Undertakings for Collective Investment. The Law Decree has revised the definition of "undertakings for collective investment" (organismi investimento collettivo del risparmio) contained in the Italian Unified Financial Act. As a result, undertakings for collective investment may grant financing out of their own assets (literally, they may invest in "receivables," including those receivables arising from financing extended out of their assets).
Scope of the Substitute Tax Regime on Medium- and Long-Term Loans Broadened. As a rule, certain qualifying lenders may elect to subject medium- and long-term loans to a 0.25 percent (2 percent in some cases) lump-sum tax (so-called substitute tax, or Imposta Sostitutiva) that replaces the indirect taxes generally applicable to the loan and the loan documents. The election is available only if the loan has a maturity exceeding 18 months and is made in Italy. The Imposta Sostitutiva is levied on the amount made available.
If the lender makes this election, the loan and the loan documents are exempt from any registration tax, cadastral tax, mortgage tax, or stamp duty that would otherwise apply. The exemption applies not just to the loan itself, but also to all deeds, documents, agreements, and formalities incident to the medium- and long-term loan, its execution, amendment, and redemption, as well as to any guarantees of whatever nature granted by anyone at any time and their subrogation, substitution, postponement, and cancellation.
This elective regime is very favorable if the loan is secured by mortgage because, absent the election, a 2 percent mortgage tax would apply on the maximum amount secured by the mortgage. Subject to very limited statutory exceptions and "scattered" court decisions, banks were basically the only lenders that could qualify for, and thus elect to apply, Imposta Sostitutiva. In addition, the Italian Tax Authorities have often taken the position that the Imposta Sostitutiva regime does not cover the subsequent transfers or assignments of the loan and of the related security package. These transfers and assignments were therefore subjected to the ordinary indirect taxes.
The Law Decree broadened the scope of application of the Imposta Sostitutiva regime in two important ways:
- The pool of qualifying lenders now includes also (i) Italian securitization vehicles, (ii) insurance companies that are incorporated and licensed under the laws of an EU Member State, and (iii) undertakings for collective investment (e.g., investment funds) that are set up in an EU Member State or in an EEA country allowing for an adequate exchange of information with Italy (currently, only Iceland and Norway); and
- The exemption from indirect taxes will also cover any subsequent transfer or assignment of the loan, of the receivables therefrom, and of any related security package.
Repeal of the Interest Withholding Tax on Certain Cross-Border Loans. As a rule, if a nonresident lender grants a loan to an Italian resident borrower, the interest paid on the loan is subject to a 26 percent withholding tax in Italy unless the lender is eligible for the exemption under the Italian laws that implemented the EU Interest and Royalties Directive. The withholding tax may be reduced (usually to 10 percent) or, in very few cases, it may be zeroed under the double tax treaties entered into by Italy, where applicable.
The Law Decree repealed the interest withholding tax in the case of cross-border loans that meet certain requirements. As a result, no withholding tax will now be levied on the interest if (i) the loan is a medium or long-term loan; (ii) the borrower is an enterprise (e.g., an Italian commercial partnership, a resident company, or the Italian permanent establishment of a nonresident enterprise); and (iii) the lender is any of the following:
- A bank established under the laws of an EU Member State;
- An insurance company established and licensed under the laws of an EU Member State, or
- An unleveraged undertaking for collective investment (e.g., an investment fund) that is set up in an EU Member State or in an EEA country allowing for an adequate exchange of information with Italy (i.e., Iceland and Norway).
Because the new rules state that the borrower must be an enterprise, the withholding tax exemption should not apply when the borrower is an Italian undertaking for collective investment (e.g., an Italian investment fund). Moreover, it will have to be clarified in due course whether the withholding tax exemption is available if the borrower is an Italian static holding company.
Granting of Financing by Securitization Vehicles
The Italian Securitization Law has been amended to extend its scope to securitization transactions carried out through the granting of one or more financing by securitization vehicles as well.
The segregation regime (or "remoteness") that is applicable by operation of law to securitization transactions carried out under the Italian Securitization Law has been broadened. In particular, no actions by third-party creditors, other than the noteholders themselves, are now allowed on the amounts collected and deposited from time to time by the securitization vehicle or by the servicer on bank accounts dedicated to securitization transactions held with a depository bank. As a result, in a bankruptcy scenario involving the depository bank, the sums deposited on a segregated bank account opened with the depository bank (i) are not subject to the suspensions of payment otherwise provided by the Italian Bankruptcy Law, and (ii) are automatically transferred back to the securitization vehicle without the need to file any petition with the bankruptcy receiver. The reimbursement of the amounts owed to the securitization vehicle takes place out of any distribution plan prepared by the bankruptcy receiver and also includes any amounts due to the securitization vehicle following the bankruptcy.
In the case of a securitization transaction carried out by a securitization vehicle through financing, and starting from the date the financing is actually extended, no enforcement actions by third-party creditors, other than the noteholders, may be undertaken against the receivables arising from the securitization transaction and/or on any amount paid by the borrower to the securitization vehicle.
The servicer of the securitization must assess the correctness of the financing transaction as well as its compliance with the applicable laws.
Withholding Tax Exemption on Bond Interest Broadened
The Law Decree has broadened the scope of Decree no. 239 of April 1, 1996, which already provided that the interest paid to eligible nonresident investors on certain debt-like securities is exempt from tax in Italy. In particular, no withholding tax is levied if the beneficial owner of the interest is resident in a white-listed country and has no permanent establishment in Italy. White-listed countries are countries or territories that allow for an adequate exchange of information with Italy. They are listed in a regulation issued by the Ministry of Finance and periodically updated.
Before the enactment of the Law Decree, nonresident holders could benefit from a withholding tax exemption on interest paid on the following securities:
- Bonds, bond-like securities, and commercial papers that were issued by Italian-resident banks, regardless of whether these securities were listed on a regulated market;
- Bonds, bond-like securities, and commercial papers, whether listed or not, that were issued by resident companies the shares of which were traded on regulated markets or multilateral trading facilities of an EU Member State or an EEA country included in the Italian white list (i.e., Iceland and Norway); and
- Bonds, bond-like securities, and commercial papers that, although issued by non-listed resident companies, were listed on a regulated market or a multilateral trading facility of an EU Member State or an EEA country included in the Italian white list (i.e., Iceland and Norway).
The Law Decree has added a new item to the list of exemptions—interest on bonds, bond-like securities, and commercial papers issued by non-listed resident companies will be exempt from Italian withholding tax if the security holder is a "qualified investor" under article 100 of the Italian Unified Financial Act (e.g., banks, broker-dealers, investment funds, pension funds, etc.), regardless of whether the security is listed. It is not clear whether the exemption is available only in the event the entire bond issuance is subscribed to by "qualified investors."
Finally, the Law Decree has introduced a blanket withholding tax exemption that applies to interest deriving from any type of bond, bond-like security, and commercial paper and paid to:
- Undertakings for collective investment, whether set up in Italy or in another EU Member State, if: (i) their units are entirely held by "qualified investors" under article 100 of the Italian Unified Financial Act, and (ii) more than 50 percent of their assets are the aforesaid debt securities and commercial papers; and
- Italian securitization vehicles, if: (i) their notes are entirely held by "qualified investors" under article 100 of the Italian Unified Financial Act; and (ii) more than 50 percent of their assets are the aforesaid debt securities and commercial papers.
The exact interaction between these two new withholding tax exemptions is not completely clear at this stage and will need to be further investigated.
All these measures aim at facilitating private placements by Italian private companies. The goal is to make Italian private companies less reliant on bank debt and lift the obstacles that they face when seeking to fund their operations.
The contents of the Law Decree must be confirmed by the Italian Parliament during the law conversion process (and changes and fine-tuning may be expected), and this will have to be monitored in the next few weeks. Also, despite the many important changes introduced by the Law Decree, a fronting position by banks (which are required to identify the potential borrowers as well as to retain a significant interest in the relevant financing transactions) is in many cases still required.
The full scope and reach of the new measures will have to be carefully assessed also in light of the forthcoming implementing regulations. But, on the whole, the changes introduced by the Law Decree are very significant and will open the Italian lending market to qualifying entities other than banks and financial intermediaries. Qualified investors (including foreign investment funds) will be able to extend financing in Italy through securitization transactions without the need to apply for a banking license first. In addition, the investments made by foreign investors through securitization structures will benefit from significantly favorable tax and segregation regimes.
For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.
Alessandro E. Corno
Private Equity, Milan
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.
 The Law Decree was published in the Italian Official Gazette No. 144 of June 24, 2014, and it has been in force since the day immediately following its publication (i.e., June 25, 2014). Please note that the Law Decree must be converted into law within 60 days from the date of its publication in the Italian Official Gazette; otherwise, it will cease to be effective with retroactive effect. In this respect, please note that amendments to the Law Decree may be made by the Parliament during the conversion process.
 Law No. 130 of April 30, 1999, as amended and restated from time to time.
 The definition of "Italian insurance companies" is set out under Article 1, letter (u), of Legislative Decree No. 209 of September 7, 2005, as amended and restated from time to time.
 In this respect, please note that article 114 of the Italian Banking Law as amended by the Law Decree seems to limit to Italian insurance companies the possibility to carry out lending activity in Italy vis à vis the public.
 In the case of undertakings for collective investment established under the laws of an EEA country, the mentioned favorable tax provisions apply only to the extent that the relevant EEA country allows an adequate exchange of information with Italy.
 The breach is a criminal offence under Italian law.
 The lending activity toward consumers and micro-enterprises continues to be reserved to authorized banks and financial institutions.
 Legislative Decree No. 385 of September 1, 1993, as amended and restated from time to time.
 The definition of "qualified investors" set forth under CONSOB Regulation October 29, 2007, No. 16190, which implements the Italian Unified Financial Act on intermediaries includes, inter alia, (i) entities authorized and regulated to operate on financial markets, both Italian and foreign (e.g., banks, investment firms, other authorized or regulated financial institutions, insurance companies, and pension funds); (ii) large enterprises (i.e., enterprises satisfying at least two of the following requirements: (a) total assets of at least Euro 20,000,000, (b) net revenues of at least Euro 40,000,000, and (c) own capital resources of at least Euro 2,000,000); (iii) institutional investors whose principal activity is investment in financial instruments, including securitization entities; and (iv) other investors who request to be treated as professional clients provided that certain requirements set forth by the Italian Unified Financial Act are met.
 Such implementing regulations should establish, among others, applicable retention thresholds and minimum capital requirements.
 Legislative Decree No. 58 of February 24, 1998, as amended and restated from time to time.
 Until June 30, 2014, the withholding tax was rate 20 percent.
 In the case of a bank account opened by the servicer, the segregation regime applies only up to those amount credited on the issuer's bank account to be transferred to the relevant securitization vehicles under the securitization transactions managed by the servicer.
 Royal Decree No. 267 of March 16, 1942, as amended and restated from time to time.