On 24 June 2014, by means of Decree 91/2014 (the “Competitiveness Decree”), the Italian government introduced provisions aimed at offering incentives for foreign investment in Italy and increasing Italian businesses’ access to credit. The amendments impact two of the main aspects of financing: indirect taxation and application of withholding tax on interest payments. (See further David Marino, Agostino Papa and Nicoletta Alfano, “Acts to Encourage Competition in the Provision of Finance” Real Estate Gazette (Issue 18, 2014) page 14 (hard copy) and page 22 (soft copy) for a general overview of the provisions aimed at opening up the Italian lending market.)
Medium- to long-term financing (that is, loans that mature after a period of more than 18 months), the related formalities, as well as the execution, modification and redemption of such loans, and any related guarantee or security, subrogation, replacement, postponement, splitting or cancellation, including the assignment of receivables related to such loans, may in certain cases be exempted from registration tax, stamp duty, mortgage and cadastral taxes and governmental tax.
Under Presidential Decree No. 601 of 29 September 1973, article 15 ff, it is possible to opt for the application of a substitute tax levied at the rate of 0.25 per cent of the principal amount of the loan. This is an umbrella tax that replaces the ordinary indirect taxation of security such as mortgages, pledges or assignment of receivables. Such taxation is ordinarily applied at a proportional rate (for example, 2 per cent in the case of mortgages, 0.5 per cent in the case of pledges or assignment of receivables), thus imposing a significant tax burden on the borrower. The substitute tax not only reduces the amount of taxation to be paid when financing is initially taken out, but it also covers any subsequent borrowing and also additional guarantees forming part of the security package.
The main conditions to be met in order to benefit from the application of the substitute tax are the following:
- the loan must be granted by an Italian bank (or by an entity carrying on bank activity pursuant to Italian law), by the Italian branch of a European bank, or by a European bank which does not have a branch in Italy;
- the original maturity date of the loan agreement must be later than 18 months after the signing date; and
- the relevant loan agreement must be signed in Italy or executed therein.
The Competitiveness Decree has extended the application of the substitute tax so that it also applies where loans for terms longer than 18 months and one day are advanced by, among others, European Union insurance companies set up and authorized under their national regulations.
On this basis, direct lending by investors can also benefit from the substitute tax, and thus avoid registration tax, and mortgage and cadastral taxes on the security package.
This extension, together with the exemption from Italian withholding tax on interest payments made by Italian borrowers to European banks and insurance companies, also provided by the Competitiveness Decree, should reduce the obstacles in the way of foreign investors financing Italian entities.
With particular reference to the real estate sector, where most investments are financed through mortgage loans, the reservation of the substitute tax benefit to banks had the effect of reducing access to credit. Since August 2014, when the Competitiveness Decree came into force, foreign investors financed by insurance companies have also benefitted from a substantial reduction of the tax burden in the case of financing with security packages.