Executive summary

The Italian Minister of Economy and Finance decree (Decree) dated 22 February 2024 was published on the Official Gazette No. 53 of 4 March 2024. The Decree is aimed at implementing the provisions added to the Italian consolidated income tax code (ITC) in December 2022 that introduced the so-called Investment Management Exemption (IME) regime.

The Decree substantially confirms what was foreshadowed by the relevant draft, released for public consultation between 16 October and 27 October 2023.

The IME regime is a protective regime under which a foreign investment vehicle and its direct or indirect subsidiaries are able to claim that they have no Italian permanent establishment (PE) if the asset/investment manager, or an advisor operating in Italy on their behalf or for their benefit, can be assumed to be acting independently from them under the terms of the relevant law provision.

Detailed discussion

Investment Management Exemption regime

As highlighted in our EY Global Tax Alert, Italian draft ministerial decree provides implementation rules for Investment Management Exemption regime, dated 19 October 2023, the IME regime was introduced by Law No. 197 of 29 December 2022 (2023 Italian budget law), which added paragraphs 7-ter, 7-quater and 7-quinquies to Article 162 of the ITC.

Article 162(7-ter) of the ITC introduced a legal presumption that, subject to the conditions laid down by paragraph 7-quater, a person, whether an Italian resident or not (also a nonresident operating in Italy through a permanent establishment), who habitually concludes in the name of or on behalf of the investment vehicle or its subsidiaries contracts for the purchase, sale or negotiation of, or contributes to the purchase, sale or negotiation of financial instruments, participations and credits, will be considered to be independent of the foreign investment vehicle.

Article 162(7-quater) of the ITC provides for the conditions under which the legal presumption introduced of paragraph 7-ter applies. These conditions are summarized as follows:

1. The foreign investment vehicle (and its direct or indirect subsidiaries) is resident/established in a foreign State that allows an adequate exchange of information with Italy under Ministerial Decree 4 September 1996, as amended from time to time (White List).
2. The investment vehicle qualifies as an independent vehicle under the Decree.
3. The asset/investment manager or advisor operating in Italy does not hold any role in the management and control bodies of the foreign investment vehicle, or any of its direct and indirect subsidiaries and does not hold an interest granting more than 25% of the profit of the foreign investment vehicle — this percentage is computed according to the criteria set forth by the Decree.
4. The remuneration received by the asset/investment manager/advisory company for its management or advisory activity, if stemming from an intercompany transaction, is supported by documentation qualifying for local requirements under Article 1(6) of Legislative Decree No. 471 of 18 December 1997. Under Article 1(255) of the 2023 Italian budget law, the Italian Tax Authorities (ITA) were required to issue transfer pricing (TP) guidelines related to this remuneration. A draft was released for public consultation on 3 November 2023, and the ITA published the TP guidelines on 29 February 2024 (watch for a detailed discussion of these guidelines in a forthcoming EY Global Tax Alert).

If the IME regime does not apply, the ITA must perform a case-by-case assessment to determine whether the asset/investment management activities carried out in Italy may trigger an Italian permanent establishment.

Article 162(9-bis) of the ITC also clarifies that, under the above-mentioned conditions, a foreign investment vehicle is not necessarily deemed to have a "fixed place of business" at its disposal in Italy merely because a resident entity carries out an activity, on its own premises and with its own personnel, that may trigger benefits for foreign investment vehicle.

In this context, the Decree has not only provided rules aimed at implementing Article 162(7-quater)(b and c) of the ITC, but also introduced a sort of rule of order for the purpose of applying four conditions depicted above, depending on the features of the foreign investment vehicle involved.

The following table summarizes the main features of the IME, depending on the type of foreign investment vehicle involved:

Definition of foreign investment vehicles

Article 1(1) of the Decree, aimed at implementing Article 162(7, 7-ter and 7-quater) of the ITC, simply and substantially recalls Article 162(7-ter) of the ITC by stating that:

[A] person, Italian resident or non-Italian resident (also operating in Italy through a permanent establishment), who, in the name [of] or on behalf of the same vehicles or of companies controlled, directly or indirectly, by such investment vehicles, and even if with discretionary powers, habitually concludes contracts of purchase, sale, negotiation or otherwise contributes, also through preliminary or ancillary transactions, to the purchase, sale or negotiation of financial instruments, including derivatives and including equity interests or assets, and loans, is considered to be independent from investment vehicles not resident in the territory of the State indicated in paragraph 2.

The explanatory report published alongside the draft Decree should still depict a valid interpretation of the current Decree, given that few changes were made to the draft released for public consultation. The explanatory report clarifies that the IME also applies where the independent agent acts in Italy in the name of or on behalf of nonresident entities directly or indirectly controlled by the investment vehicle if the controlled entities are resident in a foreign State included in the White List (refer to Article 1(3) of the Decree).

For the purposes of the IME regime, the Decree adopts a broad definition of foreign investment vehicle, covering any entity with a main purpose to carry out and manage investments on its own behalf or on behalf of third parties and that:

• Raises capital from a plurality of investors
• Adopts a predetermined investment policy
• Is subject to forms of supervision in the foreign State where the investment vehicle is established

As confirmed by the explanatory report, the IME regime refers to investments of a financial nature that have as essential features the use of capital, the promise/expectation of financial return and the assumption of a risk directly related to the use of capital.

Independence requirement for foreign investment vehicles

Article 1(2) of the Decree is aimed at implementing Article 162(7-quater)(b) of the ITC through the definition of the independence requirement for investment vehicles established in a foreign State included in the White List. The following investment vehicles are deemed to meet the independence requirement:

1. Undertakings for collective investment (UCI) established in a Member State of the European Union (EU) or the European Economic Area (EEA) that either comply with Directive 2009/65/EC of the European Parliament and of the Council of Europe and of the Council of 13 July 2009 (UCITS IV Directive) or have a manager who is subject to supervision in the State where it is established under Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 (alternative investment fund managers directive or AIFMD)
2. UCIs, other than those referred to in (a) above, that:
1. Raise capital from a plurality of investors and manage assets as a pool in the interest of the investors and independently from them according to a predetermined investment policy
2. Are directly subject to, or have a management entity subject to, prudential supervision and have governing regulations that are substantially equivalent to UCITS IV Directive or AIFMD
3. Entities, other than those referred to in points (a) and (b) above, that are subject to prudential supervision, with an exclusive or principal purpose to invest the capital raised from third parties in accordance with a predetermined investment policy, and in which the following conditions are met:
1. No person holds more than 20% of share capital or assets, including shareholdings held by persons linked by close ties within the meaning of Article 1(6-bis.3) of Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation).
2. The capital raised is managed upstream in the interests of the investors and autonomously from them.
In this respect, the explanatory report clarifies that the manner in which the relevant entity is set up is irrelevant (i.e., whether the entity is set up as a body corporate or a contractual form).

Under Article 1(4) of the Decree, the 20% threshold, relevant for letter (c)(i), above, is computed as follows: (1) participations without administrative rights are excluded; (2) the application of the 20% threshold is temporarily suspended whenever the investment vehicle raises additional capital or reduces existing capital and for no more than 12 months each time; and (3) if the vehicle begins the liquidation activities to redeem units or shares to investors, the 20% threshold ceases to apply.

As stated in the explanatory report, the independence requirement may fail to be met for foreign investment vehicles established as family offices or club deal.

Independence requirement of asset/investment manager/advisory company

Article 2 of the Decree has confirmed that if:

• The foreign investment vehicles qualify among those regulated by Article 1(2)(a or b) of the Decree and they are resident/established in a foreign State included in the White List
• The entities directly or indirectly controlled by the foreign investment vehicles are themselves resident in a foreign State included in the White List

In those cases, the IME regime will apply without the need to verify that the asset/investment manager/advisory company is independent. This because, based on the features of the foreign investment vehicle/structure, it is assumed that the asset/investment manager/advisory company is independent without having to assess whether the conditions set out in Article 162(7-quater)(c) of the ITC are met, provided that the condition set out in Article 162(7-quater)(d) of the ITC is met.

Conversely, if the foreign investment vehicles are regulated by Article 1(2)(c) of the Decree, under Article 2 of the Decree, the IME regime cannot be applied unless the asset/investment manager/advisory company can be considered as independent under Article 162(7-quater)(c) of the ITC.

In this latter respect, under Article 2 of the Decree, which implements Article 162(7-quater)(c) of the ITC, a person (acting as the asset/investment manager/advisory company), Italian resident or non-Italian resident (also operating in Italy through a PE), that carries on business in Italy on behalf of or for the account of the foreign investment vehicle or its direct or indirect subsidiaries is deemed to be independent if it, or its employees and directors, fulfill the following conditions:

• The person may not hold roles in the administrative and control bodies of the foreign investment vehicle or of its direct or indirect subsidiaries. For these purposes, the roles under scrutiny are those covering general duties, with the exclusion of any appointment to perform a specific duty (see Article 2(2) of the Decree).
• The person may not hold a stake in the economic results of the foreign investment vehicle exceeding 25% of the total economic results of the latter (see Article 2(3) of the Decree). For these purposes, the following criteria apply:
1. The 25% threshold is computed by taking into account any de-multiplication produced by the investment chain.
2. The 25% threshold also includes any stake in the economic results of the foreign investment vehicle accruing to entities belonging to the same financial group as the person. All entities linked by a controlling relationship are deemed to belong to the same group as the person. The 25% threshold is computed by taking into account the entire share of the economic results of the foreign investment vehicle to which the person is entitled. Therefore, this threshold includes the portion of the profit that exceeds the pro-rata profit of the investments and that is configured as carried interest, calculated on the basis of the maximum percentage that this portion represents of the distributions from the investment vehicle, in light of the provisions of its constituent documents.

Article 3 of the Decree provides for common implementation rules as follows:

• The control requirement relevant for the IME regime is regulated by Article 2359(1) of the Italian civil code — as stated in the explanatory report; for these purposes, any de-multiplication produced by the investment chain should not be taken into account (see Article 3(1) of the Decree):
1. Another company holds, directly or indirectly, the majority of the votes at the shareholders' meeting.
2. Another company holds, directly or indirectly, sufficient votes to exert a decisive influence in the shareholders' meeting.
3. The company is under the relevant influence of another company due to a special contractual relationship.
• The person acting as asset/investment manager/advisory company may either be an Italian resident or a non-Italian resident that operates in Italy through its Italian PE (see Article 3(2) of the Decree).
• For the purpose of applying the IME regime, the person (Italian resident, non-Italian resident or operating in Italy through a permanent establishment) acting as asset/investment manager/advisor in Italy in the name of or on behalf of the foreign investment vehicle or of its direct or indirect subsidiaries, must possess documentation of the remuneration received, suitable to allow the verification of compliance with the arm's-length principle, as set forth in Article 1(6) of Legislative Decree No. 471 of 18 December 1997. The explanatory report clarifies that any adjustments to remuneration made by the ITA have no consequences with regard to the application of the IME regime, but only with regard to the taxation of the person acting as asset/investment manager/advisory company in Italy (see Article 3(3) of the Decree).
• The provisions of the Decree pertain exclusively to the purposes set forth in Article 162 of the ITC; in particular, the IME regime will apply to the independence of the asset/investment manager/advisor regardless of whether, under Italian or EU regulatory law, the activities to be performed in Italy are subject to regulatory law constraints. This means that Article 162 of the ITC will be deemed to apply subject to the conditions it sets out, regardless of whether the activities carried out in Italy qualify from a regulatory law perspective.