28 January, 2018

Guide on the Regulatory Framework of Alternative Investment Funds in Italy

What legislation governs the establishment and operation of Alternative Investment Funds?

Italian AIF’s are regulated mainly by:

  • Legislative Decree of 24 February 1998, No. 58 on Consolidated Law on Finance (Testo Unico della Finanza, TUF);
  • Bank of Italy Regulation of 19 January 2015, on the collective portfolio management (Regolamento sulla Gestione Collettiva del Risparmio);
  • Ministerial Decree 5 March 2015, n. 30 implementing art. 39 TUF;
  • Bank of Italy, CONSOB and ESMA communications, orientations and guidelines.
  • The Italian Securities and Exchange Commission (Commissione Nazionale per la Società e la Borsa (CONSOB)) Regulation no. 11971 of 14 May 1999, containing the Regulation on issuers (CONSOB Regulation).
  • The Bank of Italy and CONSOB Act of 29 October 2007, concerning the Regulation on the organisation and intermediary procedures providing investment services or collective investment management services (Joint Regulation).
  • Delegated Regulation (EU) no. 231/2013, with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.

Of course, all Italian AIFs are impacted operationally by Directive 2011/61/EU on Alternative Investment Fund Managers (the “AIFM Directive”).

Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

All Italian AIF managers must be authorized by Bank of Italy after consultation with CONSOB (the Italian Financial Services Authority). The authorization shall be granted by Bank of Italy within 90 calendar days beginning from the day of filing the application. Bank of Italy can suspend one or more times the term if it requires additional documents and/or information. Generally, the authorization procedure should not exceed 120 days.

Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?

AIFs themselves need not to be authorized, but their regulations must be approved by Bank of Italy.

Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds) and if so how?

Ministerial Decree 5 March 2015, n. 30 distinguishes between 4 types of Italian AIFs:

  • Italian Open-ended AIF;
  • Italian Closed-ended AIF;
  • Italian Real estate AIF; and
  • Italian Reserved AIF (please note that reserved funds can be open-ended and/or closed-ended).

Italian Open-ended AIF’s

The capital of an Italian Open-ended AIF can be invested in:

  1. financial instruments traded on a regulated market; and/or
  2. bank deposits.

It can also invest in financial instruments not traded on a regulated market, if the amount of the investment does not exceed 20% of the capital.

The investors have the right to request redemption of the units/shares of the capital of an Open-ended AIF at least once a year. Furthermore, the AIF must calculate the value of the units/shares every year, or any time new units/shares are issued. The investors have the right to receive the redemption within 15 days from the request.

Italian Closed-ended AIF’s

The capital of an Italian Closed-ended AIF can be invested in:

  1. immovable assets, immovable property rights (including rights resulting from property leasing contracts with translational nature and concessionary relationships) and holdings in real estate companies, units in other real estate AIFs;
  2. credits and debt securities, including receivables associated to the UCI capital (in other word such closed-ended AIFs can be invested in credits and debt securities and, at the same time, the can provide financing to any third parties); and/or
  3. other assets for which there is a market and which have a value determinable with certainty at least every 6 months.

The redemption of the units/shares of the capital of a Closed-ended AIF takes place at maturity of the fund. In this respect, please note that the ​​regulation of the AIF may allow the anticipated redemption of the unit/shares in the following cases: (i) at the initiative of the AIF’s manger, to all the participants, proportionally to the shares owned by each participant; (ii) at the request of a single participant, for an amount: (iia) not higher than the sums acquired through new subscription; (iib) not higher than the value of the loans received by the AIF, even though they do not exceed 10% of the AIF’s value.

The law does not establish a minimum or maximum duration period for a Closed-ended AIF, although these types of AIFs usually mature after 5-10 years.

Italian Real estate AIF’s

Italian Real estate AIF are Closed-ended AIF that can invest in:

  1. immovable assets, immovable property rights (including rights resulting from property leasing contracts with translational nature and concessionary relationships) and holdings in real estate companies, units in other real estate AIFs.

The value of this type of real estate investment cannot be lower than 2/3 of the gross value of all the investments made by the AIF, reduced to 51% if at least 20% of the capital of the AIF is invested in securitization transactions involving immovable assets, immovable property rights, or credits secured by mortgage.

Italian Reserved AIF’s

Italian Reserved AIFs are alternative investment funds reserved exclusively:

  1. to professional investors; and/or
  2. to non-professional investors. who subscribe AIF’s shares/units for an amount of at least € 500,000; this threshold does not apply to the shares/units subscribed by the directors and/or employees of the AIFM.

An Italian Reserved AIF can be Open-ended or Closed-ended.

What does the authorisation process involve?

Bank of Italy (after consulting CONSOB) will authorize an AIFM when the following conditions, inter alia, are met:

  • the company has adopted the form of a private limited liability company by shares (società per azioni or S.p.A);
  • the company has its registered office and head office in Italy;
  • the minimum share capital, as required by Bank of Italy, has been fully paid up;
  • all persons performing administrative, management and supervisory functions satisfy certain integrity, experience, professionalism, fairness and independence requirements;
  • all shareholders holding at least 10% of the voting rights of the company satisfy certain integrity, fairness and financial soundness requirements (for a detailed description, please see below Section IV of this Memorandum);
  • ensure a sound and prudent management of the company, considering, among others, the quality of the shareholders, the financial soundness of the same shareholders, the capacity of the company to comply with the provisions governing its activities, the suitability of the structure of the group to allow effective supervision, the absence of reasonable suspicion that the shareholders are related to money laundering or terrorist financing;
  • the structure of the group of which the company is part is not prejudicial to the effective supervision of the company;
  • filing, together with the memorandum and articles of association, a Program of Initial Operations (“PAI”) and a Report on the Organizational Structure (“RSO”).

Authorization will be denied if upon verification of the above conditions, Bank of Italy deems that the sound and prudent management of the company is not ensured.

The application to obtain approval of an AIF regulation from Bank of Italy must annex:

  • The Fund regulation;
  • An affidavit from the depositary bank in which the bank states the it is authorized by Bank of Italy di provide depositary services;
  • An affidavit from the AIFM showing that it assessed that the depositary bank fulfils the autonomy requirements.

The regulation is deemed to be approved 60 days after the date of receipt of the application by the Bank of Italy complete with all necessary documentation.

Are there local residence or other local qualification requirements?

The AIFM must have its registered office and head office in Italy.

What service providers are required?

The AIFM must enter into an agreement with a depositary bank to safekeep the assets of the fund.

The statutory audit must be devolved to an independent audit firm (revisore legale dei conti) enrolled in the relevant public register.

What co-operation or information sharing agreements have been entered into with other governments or regulators?

The list of agreements and cooperation actions is available on the website of the Ministry of Economy and Finance (http://www.finanze.gov.it/opencms/it/fiscalita-comunitaria-e-internazionale/convenzioni-e-accordi/).

Fund Structures

What are the principal legal structures used for Alternative Investment Funds?

Under Italian law, the setting-up of alternative investments funds is reserved to companies authorized by Bank of Italy (having consulted CONSOB) to operate either as:

  • AIF’s asset management company (“SGR”), or as;
  • AIF’s fixed share capital investment company (“SICAF”).

The main difference between the two schemes is the contractual relationship between the company and its investors. Particularly, a SICAF is closed-ended undertaking for collective investments (“UCI”) incorporated as private limited liability company by shares (società per azioni), whose share capital is fixed, having as its exclusive corporate purpose the collective investment of the assets raised by offering its shares and other hybrid financial instruments to the public; the sub-funds are established by the SICAF and the investors become shareholders of the SICAF itself. As a consequence, investors will have governance rights on the SICAF and may have a voice on the investment strategies of the funds, by exercising their voting right within the SICAF.

Instead, under a SGR scheme, the funds are set-up by the SGR and the investors will purchase only units of the funds, without becoming shareholders of the SGR. Consequently, the investors do not have any voting rights whatsoever in relation to the management of the funds; the investors, by subscribing the funds’ units, will establish a contractual relationship only with the SGR.

Limited liability of investors

Investors will not be liable beyond the amount of their contributions.

Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds?

In Open-ended AIFs, the investors have the right to request redemption of the units/shares of the capital of an Open-ended AIF at least once a year. Furthermore, the AIF must calculate the value of the units/shares every year, or any time new units/shares are issued. The investors have the right to receive the redemption within 15 days from the request.

In exceptional cases specifically indicated in the AIF regulation or in the AIFM by-laws, the right to receive the redemption can be suspended for not more than one month. The suspension must be immediately communicated to Bank of Italy and CONSOB.

In Closed-ended funds, the investors have the right to request redemption of the units/shares of the capital of a Closed-ended AIF at maturity of the fund. The maturity can be postponed, for no more than 3 years, if provided for in the AIF regulation or in the AIFM by-laws. The postponement must be immediately communicated to Bank of Italy and CONSOB.

The AIF regulation or the AIFM by-laws can also establish the cases in which the right to request redemption can be anticipated.

Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds?

There are no restrictions, apart from the ones provided for by the fund’s management rules, if any.

Marketing

What are the key content requirements for marketing materials, whether due to legal requirements or customary practice?

Marketing materials must be accurate, clear and not misleading.

What restrictions are there on marketing Alternative Investment Funds?

  • Marketing in Italy of Italian closed-ended retail AIFs conducted by an Italian AIFM. The Italian AIFM must notify CONSOB of its intention to market the Italian closed-ended retail AIFs. The Italian AIFM can begin the marketing after receiving the notification by CONSOB.
  • Marketing in Italy of EU closed-ended retail AIFs conducted by an Italian AIFM. The Italian AIFM must transmit a marketing request to CONSOB, which must authorise the request within 20 days, if the conditions are met.
  • Marketing in Italy of EU closed-ended retail AIFs conducted by an EU AIFM. The authorisation procedure described above for EU closed-ended retail AIFs conducted by Italian AIFMs applies. In addition, the passport procedure (that is, the competent authority of the home member state of the AIFM must notify CONSOB of the AIFM’s intention to market the AIF in Italy) applies too.

Can Alternative Investment Funds be marketed to retail investors?

Open-ended and Closed-ended AIFs can be marketed to retail investors as long as they’re not Reserved AIFs.

What qualification requirements must be carried out in relation to prospective investors?

Consob Regulation No. 16190 of 29 October 2007 (“Regolamento Intermediari”) defines a “client” as the individual or company to whom the intermediary provides investment services. It identifies three categories of clients: (i) retail clients; (ii) professional clients and (iii) qualified counterparties.

Retail clients are all “customers whom do not qualify as professional customers or qualified counterparties”. Professional clients are (i) those specifically identified as such by CONSOB (so called “Professional Client by Law”) and (ii) those who request to the fund manager be qualified as professional clients.

The fund manager is required to assess the client’s characteristics and its ability to be classified as Professional Client.

Are there additional restrictions on marketing to public bodies such as government pension funds?

Generally speaking public bodies are classified as retail investors.

However, Italian law also defines professional public clients. Professional public clients by law are the Government and Bank of Italy. Instead, professional public clients on request are Regions, the Autonomous Provinces of Trento and Bolzano, the subjects referred to in art. 2 of Legislative Decree no. 267/2000, as well as national and regional public entities, provided that they meet the following requirements:

  • a final revenue ascertained in the last approved management accounts of more than € 40 million;
  • they have carried out transactions in the financial market of a nominal or notional value greater than € 100 million in the three years prior to the conclusion of the contract;
  • presence in the staff of financial management personnel who have acquired adequate skills, knowledge and experience in investment services, including collective management and financial instruments.

Are there any restrictions on the use of intermediaries to assist in the fundraising process?

The intermediary must be authorized to provide investment services in relation the marketing of the AIFs. The use of intermediaries so licensed is not restricted.

Are there any restrictions on the participation in Alternative Investments Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)?

There are no specific restrictions on the participation by financial institutions besides the measures designed to contain systemic risk.

Investments

Are there any limitations on the types of investments that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise?

Under Italian Law, specifically Ministerial Decree 5 March 2015, n. 30, the capital of an Alternative Investment Fund (“AIF”) can be invested in one or more of the following categories:

  1. financial instruments traded on a regulated market;
  2. financial instruments not traded on a regulated market;
  3. bank deposits;
  4. immovable assets, immovable property rights (including rights resulting from property leasing contracts with translational nature and concessionary relationships) and holdings in real estate companies, units in other real estate AIFs;
  5. credits and debt securities, including receivables associated to the UCI capital;
  6. other assets for which there is a market and which have a value determinable with certainty at least every 6 months.

Disclosure of Information

 What are the reporting requirements in relation to Alternative Investment Funds?

AIFMs must communicate to Bank of Italy:

  • information related to relevant operations carried out;
  • administrative documents (e.g. minutes of the shareholders’ meeting that resolves an amendment of the articles of association);
  • information related to modifications to the corporate governance system;
  • accounting documents;
  • every year, a description of the corporate group;
  • every year, information related to the shareholders:
  • every year, the financial statements;
  • reports of the supervisory body.

Furthermore, Bank of Italy and Consob, to the extent of their duties, may require to communicate data and information and to transmit documents and records in the manner and within the time limits they establish.

The independent statutory auditors shall notify the Bank of Italy and Consob without delay of the acts or facts that may (i) constitute a serious violation of the provisions governing the activity of the AIFM, (ii) jeopardize the continued existence of the AIFM or (iii) result in an adverse opinion or a qualified opinion on the annual accounts or interim statements of AIFMs.

The board of statutory auditors shall inform the Bank of Italy and Consob without delay of any act or fact it comes to know of in the performance of its duties that may constitute a management irregularity or a violation of the provisions governing the activity of AIFM.

Is the use of side letters restricted?

The use of side letters is not restricted as long as their existence is disclosed to the other investors.

Taxation

What is the tax treatment of the principal forms of Alternative Investment Funds?

The tax treatment of the main forms of AIF is as follows:

  • They are not subject to income tax;
  • They are subject to the Italian regional tax on productive activity (IRAP) only in the limits of the difference between active commissions and passive commissions;

Withholding taxation is limited to certain capital gains.

What is the tax treatment of the principal forms of investment manager / adviser?

For FIA managers / consultants, the Italian legislator has not provided any ad hoc rules.

Therefore, the Consolidated Text of the Laws on Income Tax (TIUR) applies.

Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest?

No.

What is the tax treatment of (a) resident, (b) non-resident, and (c) pension fund investors in Alternative Investment Funds?

The tax treatment of investors is differentiated, depending on:

  • whether the investment relates to securities or real estate; and
  • the residence of the investor.

Therefore:

  1. Resident investor participating in a non-Real Estate AIF: Withholding tax on periodic income of 26%;
  2. Resident investor participating in a Real estate AIF:
  3. Institutional Participants / Non-Institutional Participants with Unqualified Investments: Withholding tax on periodic income of 26%;
  4. Non-institutional participants with qualifying holdings: Perceived incomes contribute to the formation of the participant’s income.
  5. Non-Resident investor participating in a non-Real Estate AIF:
  6. Non-taxable regime for non-resident individuals as defined in art. 6 of Legislative Decree n. 239/1996 (Persons residing in white list jurisdictions, international bodies or entities established under international agreements enforced in Italy; Foreign institutional investors, even though not subject to taxation, set up in white list jurisdictions; Central banks or bodies that also manage foreign State’s official reserves);
  7. Withholding tax on periodic income of 26% for other non-resident individuals.
  8. Non-Resident investor participating in a Real estate AIF:
  9. Resident investor participating in a Real estate AIF for Pension Funds or UCITS of white list jurisdictions; international bodies or entities established under international agreements enforced in Italy; Central banks or bodies that also manage foreign State’s official reserves);
  10. Withholding tax on periodic income of 26% for other non-resident individuals

Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund?

It is not necessary, but it is highly advised.

What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard?

The Italian Tax Authority must annually exchange information automatically with the other tax authorities of other countries in accordance with the Common Reporting Standard, based on common rules concerning the automatic exchange of information on financial accounts, including AIF.

Are there any other material tax issues?

No.

What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations?

Most of the BEPS recommendations have already been implemented or will be in the near future.

Contact us for more information.

 

 

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