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Direct investments in credits by European Alternative Investment Funds in Italy

18 Febbraio 2016

Giancarlo Castorino, Francesco Romeo e Marcello Legrottaglie, King & Wood Mallesons

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On February 16, 2016 the Italian Government enacted the law decree no. 18 dated 14 February 2016 (the New Law Decree)[1] that introduced, inter alia, certain provisions aimed at integrating the normative framework adopted few years ago (and started by the implementation of the directive 2011/61/EU, the AIFM Directive) in order to stimulate the Italian economy and increase the availability of non-banks debt financing to Italian companies.

Hereinafter we will provide a brief outline of the provisions of the New Law Decree authorising European Alternative Investment Funds (the EU AIFs) to invest in credits in Italy (also through the direct lending), with no requirement for a specific establishment, and, in addition, benefitting from significant tax improvements previously reserved to banks and Italian only Alternative Investment Funds (the Italian AIFs).

1. Background

The lending activity in Italy has been traditionally reserved to banks and those financial institutions, lodged with a specific register held by the Bank of Italy, which are subject to regulatory and prudential provisions substantially mirroring those applicable to the banks set forth in the legislative decree no. 385 dated 10 September 1993 (the Italian Banking Law).

On March 4, 2014 the Italian Government enacted the legislative decree no. 44 (the AIFM Law) that implemented the AIFM Directive and laid the foundations for the lending deregulation process in Italy.

In fact, the AIFM Law introduced significant innovations in the legislative decree no. 58 dated February 24, 1998 (regulating, inter alia, the collective investment undertakings, the TUF), in particular amending the definition of collective investment undertakings (organismi di investimento collettivo del risparmio – OICR) provided therein and, substantially, authorising Italian AIFs to invest in credits also granting facilities using their own assets[2].

The following steps were taken: (i) the Bank of Italy, on January 19, 2015, released the regulation on the investment management services, that provides terms and conditions under which Italian AIFs may invest in credits, even granted out of their assets, and (ii) the Italia Ministry of Economy and Finance, on March 5, 2015, adopted the decree no. 30, concerning the main features of Italian AIFs, that introduced the investment in credits activity among those that the funds are entitled to exercise.

Nevertheless, pursuant to the laws and regulations outlined above, the reform of the lending activity was applicable exclusively to Italian AIFs.

2. The New Law Decree and the direct lending in Italy by EU AIFs

The New Law Decree, under article 17, directly amends the TUF introducing a new section – dedicated to debt funds – composed of three new articles: 46-bis, 46-ter and 46-quater.

Article 46-bis TUF just confirms the previous reform implemented under the AIFM Law providing, inter alia, that Italian AIFs may invest in credits, even granted out of their assets, pursuant to the provisions set forth in the TUF and in the relevant implementing regulations.

Article 46-ter TUF[3] represents the most important innovation authorising also EU AIFs (i.e., not being Italian AIFs and, therefore, not established in Italy) to invest in credits, even granting facilities using their own assets (or, for example, purchasing receivables), in Italy pursuant to the following conditions:

  1. the relevant EU AIF is authorised by the competent authority in its Country of origin to invest in credits;
  2. the relevant EU AIF is established as a close-ended fund and its regulation, in particular with reference to the rules of participation to the fund, is similar to that applicable to the Italian AIFs investing in credits; and
  3. the law and regulations applicable in the Country of origin of the relevant EU AIF concerning the risks mitigation (including those concerning financial leverage) are equivalent to those applicable to the Italian AIFs investing in credits. This equivalence may be verified also taking into account exclusively the provisions of the regulation or the by-laws of the fund, provided that the relevant compliance is ensured by the competent authority of the Country of origin of the EU AIF.

Moreover, pursuant to the above mentioned provision, the manager of the EU AIF intending to invest in credits in Italy must inform the Bank of Italy: the lending activity may be commenced after a period of 60 days starting from the date of the above communication during which the Italian banking authority may forbid the investment in credits by that entity.

Article 46-quater TUF refers to the provisions of the Italian Banking Law – concerning the transparency of the contractual terms and conditions, the relationship with clients and the administrative sanctions – that shall be applicable to both Italian AIFs and EU AIFs.

Therefore, as a result of the innovations above, EU AIFs have been granted direct lending capability in Italy (as well as the ability to purchase receivables) also benefitting from the recent and significant tax reforms briefly summarized below:

  1. application of the “sostitutiva” tax regime which is considered a key requirement for real estate finance transactions. Hence, medium and long term loans granted by EU AIFs may benefit, upon option, from an umbrella tax regime of 0.25% on the advanced amount of the loan which replaces ordinary and higher taxes such as stamp duties, cadastral and mortgage taxes (the latter being not lower than 3% of the secured obligations); the same regime is applicable in the event that EU AIFs purchase the relevant receivables); and
  2. disapplication of the withholding tax applicable by Italian borrowers on facilities interests paid to foreign creditors equal to 26%[4].

Accordingly, cross-border financing (as well as purchasing of receivables, including portfolios of credits, securitisation transactions, acquisition on the secondary market and syndication activities) will be facilitated (not being reserved to a restricted number of entities) and more cost effective at the same time, fostering the relevant competitiveness of the Italian market and rendering negotiations of the relevant agreements easier and less burdensome (e.g., no need to agree on gross-up basket).


[1] The New Law Decree was published in the Italian official gazette (Gazzetta Ufficiale) on February 15, 2016 and it is effective starting from February 16, 2016. The New Law Decree has to be converted into law within 60 days otherwise it will cease to have effect on a retroactive basis. During the conversion process it could be subject to amendments.

[2] Ref. Article 1, paragraph 1, lett. k), TUF.

[3] Please note that pursuant to the last paragraph of this article 46-ter the special regime applicable to the lending activity of EU AIFs will be specified by the implementing regulations to be issued by the Bank of Italy.

[4] Or such other percentage as determined by any applicable bilateral treaty – if any – entered into by and between Italy and the relevant Country or European directive.

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