We have witnessed significant growth and some changes in the financial services sector in Italy over the past year.
One interesting development is that banks and insurance companies, many of which are part of large international banking groups or financial conglomerates, have begun outsourcing their core services and parts of their non-core businesses to third parties called consorzio.
This trend of outsourcing to consorzio is partially driven by tax advantages available via a special VAT exemption regime on services rendered by the consorzio to its members - provided further conditions are met - regardless of the nature of such services (i.e. whether it is a financial or insurance service or a service of another nature). However, the possibility of setting up a consorzio which may supply VAT exempt services to its members is even more valuable for banks and insurance companies, whose right to deduct input VAT is significantly or completely reduced, as the services rendered to their clients are also VAT exempt.
A consorzio, which can be set up by a contractual arrangement or incorporated as a proper company, is basically the joint organisation of two or more companies (the "members" of the consorzio) set up for the purpose of regulating or carrying out certain activities of the business of its members. For example, a consorzio may be engaged in the supply of goods and services to its members. The main objective of the members of the consorzio in this case is to obtain a cost savings on the supply of goods and services. The consorzio is generally not in business to make a profit and its members do not set up the consorzio for the purpose of making a lucrative investment.
If the consorzio is set up by contractual arrangement, then it does not have a so called "legal identity", although it can have an organisational structure and governing bodies, as well as acquire rights and undertake obligations vis à vis third parties on behalf of its members. In this case, the members will have joint and unlimited liability with respect to all such obligations.
If, on the other hand, the consorzio is incorporated as a joint-stock company, it will have a "legal identity" and its members will benefit from the usual limited liability legal regime. This type of consorzio operates as a company and is subject to rules which govern companies, including corporate governance rules. The only difference between a consorzio and a typical company is that the consorzio does not necessarily pursue a lucrative business purpose and therefore is not expected to make profits or distribute dividends, even though to a certain extent it may provide goods and services to third parties other than its members.
As mentioned above, the form of the consorzio (either as a contractual arrangement or as a company) allows the members to benefit from the special VAT exemption regime applicable on services rendered to its members, regardless of the specific nature of such services and whether they are normally subject to VAT or not.
In addition to the nature of the person supplying these services, which must be set up in the form of a consorzio, the VAT exemption regime applies if the following further conditions are met:
- the members of the consorzio have met an average VAT deductibility ratio lower than 10% in the three preceding years; and
- services are supplied at cost and no mark-up is applied.
As clarified by the Italian tax authorities, members may be based both in Italy and in another EU Member State; it remains uncertain, however, if non-European members may join the consorzio without jeopardising the possibility of applying the favourable exemption regime. In particular, it is not clear if their participation may result in the loss of the right to supply VAT exempt services by the consorzio as a whole (even to its EU based members) or if this consequence may be limited to those services specifically rendered to the non-EU based members (also assuming that services supplied to non-EU based companies would in most cases be out of the scope of VAT as a result of the customer being outside the EU). It is therefore worth considering the possibility of creating structures in which members are all EU based, at least until further official interpretations are released.
Prior to this provision, Italian law provided for a similar exemption for services with an ancillary character, being supplied within banking or insurance groups, or, in general, within groups of companies carrying out mainly VAT exempt activities. This legislation has however been repealed by the new regime, which appears to be more in line with the European VAT directive and somewhat wider than the previous one, as it is not limited to ancillary services but is applicable to every service rendered by the consorzio. Furthermore, under the previous regime the exemption applied also for services rendered by and between group companies, whilst the new regime requires an independent entity - like the consorzio.
This issue, together with other considerations (e.g. synergies which may be reached within a group or, on the contrary, between different groups of companies), has already resulted in several functional reorganisations for banking and insurance groups, in view of the benefit that may be derived from the exemption regime for services rendered by the consorzio. Norton Rose Group has advised some of its insurance and banking group clients on such reorganisations and we expect that others will follow in the near future.