• TAX FLASH NEWSLETTER 27 December 2022

    Posted on: 27/12/2022






    The draft 2023 Budget Bill (Art. 49) introduces the Italian version of the Investment Management Exemption (“IME”) amending significantly the Italian tax legislation that defines the concept of “permanent establishment” (Income Taxes Consolidation Act 1986, Art. 162).


    Broadly, the proposed IME sets out safe harbour rules which are designed to exempt non-resident investment vehicles and their controlled entities from Italian taxation, where these employ an Italian resident asset/investment manager to undertake investment transactions on their behalf.


    The Italian IME combined with the already enacted generous tax breaks for highly skilled individuals moving to Italy (broadly, 70% income exemption or alternatively a flat tax of 100k euros on foreign income and gains) would provide a new great opportunity for the investment management industry.



    The Proposal for the Italian IME


    Under the general rule of the Italian tax legislation that defines the concept of “permanent establishment”, any non-resident enterprise undertaking activities in Italy through a fixed place of business or by appointing a non-independent agent to carry out those activities will create a PE subject to Italian tax on the business income attributable to that PE.


    The special rule to be introduced by the Budget Bill 2023 (Income Taxes Consolidation Act 1986, Art. 162, para 7ter) by year-end, provides that no Italian PE of a non-resident investment vehicle would arise if certain conditions are met with reference to the activities of an asset/investment manager.


    Therefore, a manager either Italian resident or not, who is appointed to carry out investment management activities through a fixed place of business in Italy in the name and on behalf of a non-resident vehicle or its controlled entities, will be deemed to act as an independent agent (Income Taxes Consolidation Act 1986, Art. 162, para 7quater) even if that manager has discretionary powers and habitually:


    a) enter into purchase or sale agreements or negotiating financial instruments, including equity interests, derivatives and receivables; or
    b) contribute, also through preliminary and ancillary/preparatory activities, to the execution of those transactions.


    The conditions for the PE exemption are as follows:


    1. The non-resident investment vehicle and its non-Italian resident controlled companies must be resident or established in jurisdiction that allow an adequate exchange of information with the Italian authorities (so called “white-list jurisdictions”);


    2. The non-resident investment vehicle, its controlled companies and the investment manager would need to meet the independence requirements that will be identified by a Decree of the Ministry of Finance;


    3. The asset/investment manager, carrying out its activities in Italy, must not:

    a) Hold any board or other company’s supervisory body position of the non-resident investment fund and its directly or indirectly controlled companies;
    b) Have a beneficial entitlement of more than 25% of the investment fund’s economic results (also considering profit entitlements held other entities of the fund group).


    4. The Italian tax resident asset/investment manager or the PE of the non-resident is remunerated at arm’s length for the services provided to other entities of the fund group and proper transfer pricing documentation is prepared. The Italian Revenue Agency will issue guidance on how to determine the arm’s length remuneration.



    Preliminary comments


    The new IME rules are very welcome as they would contribute to a wider effort by the Italian Government to attract talent to live and work in Italy and to help the creation of a well-equipped European hub for the financial services industry.


    With reference to condition 4 above, it is worth noting that advanced ruling request can be submitted.


    The provision has not provided an ad hoc definition of what constitutes an investment vehicle or asset/investment manager allowing for the moment a wider interpretation that includes “institutional investors” as defined by the Legislative Decree No. 239/1996, Art. 6(1)(b)) as entities carrying out investment activities for themselves or on behalf of the public (generally including e.g. investment funds, sovereign funds and UCITs) and established in white-list jurisdictions.


    To this respect, it is worth nothing that under the current Italian tax legislation (Income Taxes Consolidation Act 1986, Art. 73), investment funds are treated as entities that generate non-business income (as opposed to business income) and, thus, out of scope of the PE rule. On this basis, the IME legislation proposed has no relevance unless the non-resident is carrying out business activities in Italy.


    Ultimately, as far as the PE implications of existing investment fund structure are concerned, the draft Budget Bill 2023 does not clearly identify for which tax year the new rules are going to be effective allowing therefore, subject to further confirmation, retrospective effects.






    DISCLAIMER: This newsletter merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi. The newsletter does not replace individual legal consultation. Macchi di Cellere Gangemi assumes no liability whatsoever for the content and correctness of the newsletter.




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