On August 20, 2014, the Decreto Competitività (as converted into Law with amendments, the “Decree”)1, was published in the Italian Official Gazette (Gazzetta Ufficiale della Repubblica Italiana). The Decree is part of a broader reform package aimed at supporting the competitiveness of Italian entities. White & Case was part of the working group providing advice on the Decree.
The following is a summary of the key changes introduced by the Decree.
Italian companies may now borrow from non-bank entities, and tax advantages apply to Qualifying Financings2.
- Italian insurance and securitization companies may now lend directly to Italian entities;
- Withholding tax exemption extended to Qualifying Financings granted to entities by banks, unleveraged UCITS3 and insurance companies located in European white list jurisdictions; and
- “Substitute tax”4 regime extended to transfers of receivables or contracts and related security interests in the secondary market.
Changes in the tax regime applicable to the issuance of bonds which are privately placed and not listed
- Withholding tax exemption extended to interest and other payments on unlisted bonds held exclusively by Qualified Investors5; and
- Withholding tax exemption extended to interest and other payments on bonds effected in favour of securitization companies and European collective investment undertakings.
Multiple voting rights shares
- Introduction of multiple voting right shares
The new provisions partially amend previous reforms contained in the Decreto Sviluppo6 and the Decreto Destinazione Italia7. See our prior Client Alerts published in December 2012, June 2012, December 2013 and January 2014.
Detailed Discussion of Decree
Access to non-bank direct lending and tax advantages for Qualifying Financings
Italian insurance and securitization companies may now lend directly to Italian entities
The Decree allows Italian insurance and securitization companies to lend money (in any form such as loans, bonds or other credit facilities but excluding through the issuance of guarantees) to enterprises (other than micro enterprises8) subject to certain conditions9.
These provisions allow entities other than banks and financial intermediaries to extend financings directly through primary market transactions (i.e. by means of directly originating loans rather than purchasing bank loans and bonds on the secondary market).
We expect this change will allow Italian companies to take advantage of new funding opportunities arising from direct access to the greater liquidity of insurance companies and the greater flexibility of securitization structures; however the Decree still limits the applicability of this new regulatory regime to specified Italian entities and does not expressly include credit funds10.
In addition, the Decree does not expressly allow non-Italian insurance companies and credit funds to extend financings in the primary market, which was expected in light of the new tax measures discussed below11.
Withholding tax exemption extended to Qualifying Financings granted to entities by banks, unleveraged UCITS and insurance companies located in European white listed jurisdictions
The Decree extends the withholding tax exemption regime on interest (currently reserved exclusively to Italian resident lenders) paid to EU credit institutions, EU insurance companies, and unleveraged UCITS established within the EU or in an EEA white list jurisdiction12.
This change should favor lending to Italian enterprises, allowing them to have access to a greater number of financing sources. However, we expect that the new measures will not achieve its goal unless non-Italian insurance companies and credit funds are granted the right to finance Italian borrowers.
”Substitute tax” (Imposta Sostitutiva) regime extended to transfers of receivables or contracts and related security interests
The Decree extends the availability of the “substitute tax” (Imposta Sostitutiva) regime (currently applicable only to an initial transfer of receivables) to any secondary transfer of receivables or contracts in connection with Qualifying Financings and to transfers of related security interests13.
It also extends the “substitute tax” (Imposta Sostitutiva) regime to insurance companies, EU or EEA UCITS and securitization companies authorized to carry out lending activities.
These new provisions extend the favorable tax regime to a variety of security interests and financing sources, providing greater flexibility in structuring secured transactions and thereby expanding the funding base for Italian borrowers14.
Changes in the tax regime applicable to the issuance of bonds distributed in the context of unlisted private placements
Withholding tax exemption extended to interest and other payments on unlisted bonds held exclusively by Qualified Investors
The Decree extends the withholding tax exemption regime under Decree 23915 to interest and other payments on bonds issued by unlisted entities16 that are not traded on regulated markets or multilateral trading facilities (“MTF”), provided that the bonds in question are held exclusively by Qualified Investors. This requirement applies not only to the distribution of bonds on the primary market but also to transfers on the secondary market. In order to benefit from the above exemption, evidence that the bonds are being held by a Qualified Investor would have to be available, in the absence of which the issuer and investor would lose the benefit of the favorable fiscal regime.
Accordingly, under the new tax regime, the issuer would benefit from the deductibility of interest and expenses17 and the investor would benefit from the withholding tax exemption if the bonds are either (i) listed at their issue date on a regulated market or MTF or (ii) held until maturity, in both the primary and secondary markets, by Qualified Investors18.
Although the new provisions would in theory allow Italian companies to enter into unlisted private placement transactions, we currently expect that the provision requiring the bonds to be held exclusively by Qualified Investors until maturity will lead companies to list the bonds since a company cannot police the transfers of bonds on the secondary market.
Withholding tax exemption extended to interest and other payments on bonds effected in favor of securitization companies and European collective investment undertakings
The Decree extends the withholding tax exemption regime to securities issued in the context of securitization transactions to the extent that (i) such securities are held by Qualified Investors and (ii) at least 50% of the securitization companies’ assets are invested in bonds.
The purpose of this provision is to apply the same tax regime to securities issued in the context of securitization transactions which applies to the assets of such companies when those assets consist of bonds.
The Decree also clarifies that the withholding tax exemption for payments made to UCITS invested in by Qualified Investors only applies if at least 50% of the UCITS’ assets are invested in bonds.
Introduction of multiple voting rights shares
The Decree also allows companies’ by-laws to provide for the issuance of shares with multiple voting rights.
Private companies are allowed to issue multiple voting rights shares with up to three votes per share (voto plurimo), while listed companies are allowed to issue shares with up to two votes per share (voto maggiorato). In both cases, in order to benefit from such rights shares will have to be held for a minimum period of 24 months by the same holder.
With respect to listed companies, expect for limited circumstances (such as estate succession and mergers of shareholders) the multiple voting right is not transferred together with the relevant shares. The resolution resolving upon the introduction of the voto maggiorato in the by-laws of listed companies will not allow dissenting shareholders to withdraw from the company. If a private company has shares with voto plurimo, such company may continue to maintain such shares upon listing. Please note that Consob is required to adopt implementing rules by December 31, 2014.
We expect that in certain limited situations the Decree will encourage private companies, companies that intend to go public or listed companies which are already public to issue equity with multiple voting rights, in the knowledge that they can reduce their economic rights below 50% while still maintaining voting control.