The Italian government recently published long awaited legal reforms, designed to improve the competitiveness of Italian businesses and the economy in general: Law Decree No. 91/2014 of 24 June 2014 ("Decree 91") is now in full force and effect after publication on 20 August 2014 of the conversion law No. 116 of 11 August 2014.

The reforms include some of the boldest changes seen by the Italian loan market for years, and are expected to facilitate credit conditions and to diversify the offering from foreign investors and non-bank lenders.

However, at this stage there remains substantial uncertainty on the wider implications of the new measures, and it will be interesting to see how these measures will be implemented.

Paving the way for lending by debt funds

Decree 91 amends the definition of Undertaking for Collective Investment ("UCI") to include those who invest in credit, including credit made available by utilisation of the UCIs' own assets.

This change in law dovetails with the Finance Ministry's proposed new regulation on criteria for investment by UCIs, mandated under article 39 of Legislative Decree 24 February 1998 No. 58 (the "Finance Act"), by way of implementation in Italy of Directive 2011/61/EU (AIFMD). UCIs are now permitted to engage in lending in Italy subject to the conditions set out in the draft Bank of Italy Regulation on Collective Investment Schemes. Amongst other things, the new rules require UCIs investing in credit receivables to participate in the Bank of Italy's Centrale dei Rischi, the Bank's central credit information system, and the Bank of Italy may require the information flow with theCentrale dei Rischi to be intermediated by a licensed bank or registered financial institution. It is expected that, to engage in direct lending, UCIs will be required to put in place appropriate mechanisms and models for the evaluation and managment of credit risk. Certain additional limitations will also apply which we will be able to expand upon once the results of the relevant open consultations are known. It would also appear that additional conditions may still be enacted because certain aspects relating to how such financings will be regulated have not yet been addressed in full. 

In particular the definition of UCIs in the Finance Act does not contain any jurisdictional limitations on where a UCI should be organised in order to be a permitted lender. As a result, the requirements for foreign UCIs are unclear. Initial views suggest that EU UCIs authorised to lend in their home jurisdiction are permitted to carry out this activity in Italy as well if the Alternative Investment Fund Manager (AIFM) is passported into Italy, even though such requirement is not expressly stated. Accordingly we recommend that until the specific rules and common practice are established, any AIFM should engage in preliminary consultations with the Bank of Italy before making any significant Italian loan investments.

Exemption from withholding tax

The new rules also include striking developments in the rules on taxation of loans to Italian borrowers, which may have even more of an immediate effect in practice.

By way of background, Italian withholding tax is generally levied at 26% of the amount payable by way of interest or financial remuneration, after subsequent increases from 12.5% and then from 20% over the last few years. This rate is subject to any treaty against double taxation between Italy and the lenders' home jurisdiction. As a result, in the past fronting bank and other financial structures have been commonly used to facilitate non-Italian lenders advancing funds to an Italian borrower in order to structure around the application of Italian withholding tax.

The good news is that Decree 91 exempts from withholding tax interest and other proceeds having a financial nature payable in respect of medium to long term loans (i.e. loans for a term in excess of 18 months) by Italian borrowers to (i) credit institutions based in a EU Member State, (ii) insurers regulated under the law of a EU Member State, or (iii) UCIs which are not leveraged funds and are organised in a EU Member State or a EEA State included in the Finance Ministry's white list.

This development should facilitate syndication and secondary market transactions, as before now borrowers have been understandably reluctant to allow (or bear the increased costs ensuing from) inclusion of foreign credit institutions.  

Substitutive tax on loan transfers  

Imposta sostitutiva is the incentive tax regime available for medium-long term loans documented in Italy, and consists of a one-off levy payable on utilisation or availability of credit facilities, at the rate of 0.25% of the principal amount of the facility.

It is called a "substitutive" tax because, where it is payable, the credit and security documents are exempt from registration and other indirect taxes.

The measure is beneficial for secured transactions, which, depending on the circumstances, may trigger registration tax at 0.5% of the amount of the secured claims for each security document, or mortgage tax in respect of land or property charges, at 2% of the amount of the secured claims.

It is a one-off tax because it will cover subsequent amendments, restatements and adjustments to the finance documentation but, so far, not the transfer of the lenders' rights thereunder or the contractual relationship as a whole.

However, Decree 91 provides that the regime will now also cover post-closing transfers of the loans, as well as the related security and contract documentation. Previously, the unavailability of imposta sostitutiva for such loan transfers had meant that the transfer of a secured loan would trigger substantial tax burdens, in form of all the indirect taxes payable on the security interests under the ordinary regime.

This development is another important contribution to the improvement of the liquidity of the Italian market, at a time when Italian credit institutions are pressed to sell on their loans for supervisory capital concerns, as well as to release capacity for fresh lending.  

Direct lending by Italian insurers, SACE S.p.A and securitisation SPVs  

Decree 91 also amends legislative decree No. 385/1993 (the "Banking Act") to exempt direct lending by Italian regulated insurance companies and SACE S.p.A. (the Italian credit export agency) from the requirement of a banking licence. The exemption does not apply to the issuance of guarantees.

Whilst the involvement of SACE S.p.A. seems consistent with the ECA's role of support to strategic investment, it is less clear why the exemption should be available only to Italian insurance companies and not insurers from other EU Member States. Foreign insurance companies and other non-bank lenders which are not a UCI accordingly will still require a banking licence in order to lend to Italian borrowers.

Decree 91 sets out a number of conditions for the exemption to apply which all now need to be detailed in secondary legislation by IVASS (the Italian regulator of insurance services).

The Italian insurers and SACE S.p.A. must conduct their lending business in compliance with the Bank of Italy's supervisory instructions and reporting requirements, and participate in theCentrale dei Rischi.

Decree 91 also allows securitisation SPVs to lend to businesses (other than to micro-enterprises), provided that they act together with a licenced bank or registered financial intermediary (as described at points 2 and 3 above), and provided that the notes are subscribed for by qualified investors as defined in article 100 of the Finance Act.


Whilst these new developments mark a significant step forwards towards a more efficient and liquid Italian loans market, it remains to be seen how the market will react. In public consultations on the conversion of Decree 91, the Bank of Italy expressed its support for the new rules, and the expectation that they will improve the conditions and availability of credit for Italian businesses in the medium term. It would appear that opening up the loan markets to non-bank Lenders may well encourage the development of alternative financing structures for Italian borrowers, including unitranche transactions.

To discuss how any of these develops may impact your business please contact any of the authors direct or, if you prefer, call your usual Hogan Lovells contact who will introduce you to the team.