How safe is the new Italian Investment Management Exemption safe harbour?
1. The IME safe harbour in a nutshell
The 2023 Budget Law1 amended the domestic definition of permanent establishment ("PE") contained in Article 162 of the Italian Tax Code ("ITC")2 and introduced the Investment Management Exemption ("IME") safe harbour. The IME safe harbour sets out a non-rebuttable presumption according to which an Italian or non-Italian tax resident entity or individual ("Asset Manager") who habitually, and also with discretionary powers, in the name and/or on behalf of a non-resident investment vehicle ("Foreign Vehicle") or of its controlled entities: (i) enters into contracts for the purchase, sale or negotiation of financial instruments, including derivatives and equity/capital participations, and receivables; or (ii) contributes, including with preliminary and ancillary activities, to the conclusion of the above mentioned transactions, is considered, subject to certain conditions, to be "independent". As a consequence, no PE of the Foreign Vehicle nor of its non-resident controlled entities can be considered to exist in Italy.
The following conditions must be met for the IME safe harbour to apply under Article 162(7-quater) of the ITC:
i. the Foreign Vehicle and its controlled entities shall be established in a jurisdiction included in the list under Article 11(4)(c) of Legislative Decree no. 239 of 1 April 1996 – "White-List Countries", i.e., jurisdictions that allow for an adequate exchange of tax information with Italy;
ii. the Foreign Vehicle shall meet the independence requirements established under the relevant Ministerial Decree;
iii. the Asset Manager shall not hold directorship or supervising offices neither in the Foreign Vehicle nor in its controlled entities;
iv. the Asset Manager shall not hold a participation in the economic results of the Foreign Vehicle higher than 25% (also considering the participations held by parties pertaining to the same group of the Asset Manager). The relevant decree establishes the methods for calculating such participation;
v. the Asset Manager which provides services within the context of agreements with related parties shall receive a remuneration for those services that is supported by transfer pricing documentation which is adequate according to Article 1(6) of Legislative Decree no. 471 of 18 December 1997. The application of Article 110(7) to such remuneration shall be determined in accordance with the guidelines issued by the Italian Tax Authority ("ITA").
It is also worth pointing out that, provided that the relevant requirements are met, the IME safe harbour also prevents the possibility that a "material" PE is configured in Italy.3
2. The IME Ministerial Decree
Following a public consultation, where stakeholders provided their feedback on a draft of the decree, the Italian Ministry of Economy and Finance published the implementing decree on 4 March 2024 (“the Decree”). It set out the independence requirements of the Foreign Vehicle vis-à-vis its investors, as well as the criteria to assess the independence of the Asset Manager vis-à-vis the Foreign Vehicle and its controlled entities.
According to Article 1(2) of the Decree, the following categories of Foreign Vehicles shall be considered independent:
(a) collective investment undertakings ("CIUs") established in an EU Member State or in an EEA State allowing for an adequate exchange of information with Italy which complies with EU Directive 2009/65 ("UCITS Directive"), or whose Asset Manager is subject to forms of supervision in its State of establishment under Directive 2011/61/EU ("AIFM Directive");
(b) CIUs established in a White-list Country4 if: (i) the assets are gathered from a plurality of investors, managed collectively in the interest of investors and independently from the latter, according to a predetermined investment policy; and (ii) the CIUs or their Asset Managers are subject to prudential supervision and regulations substantially equivalent to those of either the UCITS or the AIFM Directives;
(c) entities established in a White-list Country and subject to prudential supervision, which exclusively or mainly invest capital raised from third parties based on a predetermined investment policy, subject to the following conditions:
1) no party holds a participation in the capital or in the net assets of more than 20%. Participations held by parties which are "closely linked"5 are also included in this computation while participations without administrative rights are not relevant;6
2) the capital raised by such entities is collectively managed in the interest of their investors and independently from them.
According to the Decree, the above categories of Foreign Vehicles are relevant for the purposes of determining the conditions under which the Asset Manager shall be considered as independent from the Foreign Vehicle itself.7
In the case of Foreign Vehicles under Article 1(2)(a) and (b) of the Decree, the Asset Manager is regarded as independent without the need to meet further requirements. In other words, the features of CIUs under Article 1(2)(a) and (b) of the Decree ensure by themselves that the Asset Manager is independent from the investors and hence from the fund. On the other hand, in the case of Foreign Vehicles under Article 1(2)(c), the Asset Manager may be regarded as independent from the Foreign Vehicle only if the Asset Manager and its employees or directors:
(i) does not hold any managing or supervisory offices with general operational responsibilities in the corporate bodies of the Foreign Vehicle or of its non-resident directly or indirectly controlled companies. To this end, the attribution of executive powers via specific mandates approved by the management body and granted to an individual for specific actions has no relevance; and
(ii) does not hold a participation in the economic results of the Foreign Vehicle higher than 25% including also: (i) participations held by parties belonging to the same group of the Asset Manager or that are linked by a control relationship with the Asset Manager; (ii) the leverage (if any) produced by the ownership chain; and (iii) the pro-rata return derived from any investment in the Foreign Vehicle and its controlled subsidiaries, as well as the return which exceeds the pro-rata return from investment (e.g. carried interest entitlements).
3. The IME Transfer Pricing Guidelines
For the IME safe harbour to apply, the Asset Manager which provides services within the context of agreements with related parties shall receive a remuneration for those services that is supported by transfer pricing documentation which is adequate according to Article 1(6) of Legislative Decree no. 471 of 18 December 1997. Article 162(7-quater) (d) ITC delegated the ITA to issue guidelines to properly determine the application of Article 110(7) ITC to such remuneration. Following a public consultation, where stakeholders provided their feedback on a draft of the guidelines, the ITA released the transfer pricing guidelines on 28 February 2024 ("IME TP Guidelines"). The IME TP Guidelines clarify which transfer pricing method is considered to be the most appropriate method to determine the arm's length remuneration of the Italian Asset Manager. In this respect, the IME TP Guidelines identify two types of services: investment management services and services which are related and instrumental to investment management services.
Investment management services include:
(i) management activities, such as the purchase, sale or trading of financial instruments, including derivatives, equity interest, and credits;
(ii) administrative activities regarding the capital raised among investors, such as (i) legal and accounting services related to the management of the assets; (ii) the provision of information to clients; (iii) the valuation and pricing of the assets under management (also for tax purposes); (iv) monitoring the compliance with the applicable regulations; (v) keeping the investors' register; (vi) the distribution of proceeds; (vii) the issuance and redemption of shares/quotas; (viii) the settlement of contracts; and
(iii) marketing activities, such as any offer or promotional message in any manner addressed, both directly and indirectly, to investors, with the purpose of promoting the subscription or the purchase of shares or quotas.
Services which are related and instrumental to investment management services include:
(i) activities aimed at promoting and developing investment management services, such as investment advisory services; and
(ii) activities that are ancillary to investment management services, such as (i) economic and financial research and analysis; (ii) drafting, transmitting and communicating economic and financial data and information; (iii) providing and managing IT or data processing services; (iv) managing real estate properties; (v) administrative and accounting services.
As regards investment management services, the IME TP Guidelines clarify that the Comparable Uncontrolled Price ("CUP") method is the most appropriate method to be applied. Where the CUP method cannot be reliably applied and provided that: (i) both parties involved in the transaction bear the same economically significant risks; and (ii) the parties separately assume economically significant and closely related risks, then the Profit Split Method shall be considered as the most appropriate method to be applied. If it can be properly demonstrated that neither the CUP nor the Profit Split methods can be reliably applied, one of the other TP methods described in the OECD Transfer Pricing Guidelines and the relevant ministerial decree8 should be used, except for those that use a financial indicator based on costs. Notwithstanding the above, if, as a result of the accurate delineation of the transaction, it is appropriately demonstrated that, based on all the relevant facts and circumstances, the provision of the services at hand does not involve the assumption of economically significant risks, the arm's length remuneration of the transaction at hand may be assessed by selecting any TP method described in the OECD Transfer Pricing Guidelines and the relevant Italian ministerial decree9, including those that use a financial indicator based on costs.
As regards the services which are related and instrumental to investment management services, the IME TP Guidelines clarify that the arm's length remuneration of the transaction may be assessed by selecting one of the methods described in the OECD Transfer Pricing Guidelines and the relevant ministerial decree10, including methods that use a financial indicator based on costs. In the opposite scenario, where the accurate delineation of the transaction leads to the conclusion is that the provision of the services does indeed involve the assumption of economically significant risks, the arm's length remuneration of the transaction shall be assessed according to the clarifications provided by the IME TP Guidelines in relation to the investment management services.
4. Key issues in the application of the IME safe harbour
The implementing Decree and the IME TP Guidelines have addressed a number of relevant issues related to the application of the IME safe harbour, in particular as regards the types of Foreign Vehicles covered by the Safe Harbour and the TP methods to be used to remunerate the activities carried out in Italy via subsidiary or a PE. At the same time, there are still issues which would benefit from additional clarifications. These issues are outlined below.
4.1. Coverage of non-resident management companies
It is not clear whether the safe harbour applies only in relation to non-resident funds (and their controlled entities) or whether it also covers non-resident management companies. The doubt arises from the Explanatory Notes to the 2023 Budget Law and to the IME Ministerial Decree state that the notion of "Foreign Vehicle" also includes "institutional investors" and refer to the Circulars of the ITA which expressly include management companies in the notion of "institutional investor". That said, it is recognized that including foreign management companies within the scope of the IME safe harbour could generate practical complexities, especially with regard to the assessment of the requirements provided for by the IME safe harbour. On the other hand, a restrictive interpretation would have the effect of significantly reducing the scope of the IME Safe Harbour, especially in light of the (questionable, to say the least) approach that claims the existence of permanent establishment during audits to then proceed with TP-based settlement.
A compromise solution could be to clarify that, while the concept of "investment vehicle" refers only to funds and not to their non-resident management companies, if these management companies have a presence in Italy through a resident subsidiary acting as a sub-investment manager or advisory company, and the activities carried out in Italy are remunerated in accordance with the provisions of the IME TP Guidelines, there would be no use in ascertaining the existence of a PE at the level of the non-resident management company. This is because the income attributable to any such permanent establishment would coincide with that of the Italian subsidiary, already subject to tax in Italy. This is all the more consistent (almost self-evident) in the case where the foreign management company has a presence in Italy not in the form of a subsidiary but in the form of a permanent establishment.
4.2. The application of the IME Safe Harbour when there is no taxable presence in Italy
The ITC and the Decree provide for the application of the IME safe harbour even if the non-resident Asset Manager does not have a taxable presence in Italy (i.e., it does not operate in Italy through a subsidiary or a permanent establishment). Indeed, Article 162(7-ter) of the ITC refers to "entities, resident or non-resident also operating through its permanent establishment in the State". Similarly, Article 3(2) of the Decree provides that "an entity, non-resident in the State, which carries out activities on behalf of the non-resident investment vehicle or its direct or indirect subsidiaries, may also operate in the same territory through a permanent establishment." Accordingly, and leaving aside systemic considerations, it should be clarified that in such a case the requirement that the remuneration derived by the Asset Manager is supported by transfer pricing documentation which is adequate according to the Italian rules does not apply.
4.3. The notion of "plurality of investors"
As mentioned above, in order to benefit from the IME Safe Harbour Foreign Vehicles under Article 1(2)(a) and (b) of the Decree shall have a "plurality of investors", while in the case of Foreign Vehicles under Article 1(2)(c) of the Decree, no investor should have a participation in the capital or net assets of the Foreign Vehicle that exceeds 20%. In this respect, it should be clarified that even a single investor would satisfy such requirement provided that the investment is made by the latter in the interest of several investors. This is particularly relevant in the case of so-called Master-Feeder structures and is in line with the position of the Bank of Italy that, in order to classify a CIU as such, stated that the requirement of a plurality of investors is met "[…] even in the presence of a single investor where the investment is made by the latter in the interest of several investors (e.g. master-feeder structures, funds of funds, possibility of participating in a UCI through an intermediary authorized to provide investment services pursuant to Article 21(2) of the Consolidated Law on Finance)".11 Similarly, with specific reference to the investment funds’ industry, the ITA12 recognized that a collective investment fund shall still be considered as such (hence, shall be considered as having a plurality of investors), even in cases where it has a single investor which carries out the investment in the interest of several investors. In other words, it should be clarified that in a number of cases a look-through approach should be adopted.
4.4. Prudential supervision and regulations substantially equivalent
The wording of the Decree is not entirely clear, in particular as regards the concept of "prudential supervision" and how to evaluate the substantial equivalence with the UCITS or AIFM Directives. In fact, the terms "supervision", "prudential supervision" and "regulation" are often used interchangeably in relevant Italian tax legislation and ITA pronouncements and guidance.13 Therefore, it seems that they should not be interpreted literally and according to their technical meaning but rather in light of the overall rationale of the IME Safe Harbour, i.e., to apply when the typical conditions of a collective investment fund structure are met, namely the plurality of investors and the autonomy of the investment manager vis-à-vis the investors, together with the existence of regulatory supervision. This is also confirmed by the fact that the Explanatory Report to the Decree expressly excludes from the notion of Foreign Vehicle "entities in which the independence of the investment manager from investors is not fulfilled, such as, e.g. family offices and club deals". Accordingly, the existence of regulation/supervision by the competent authority would be sufficient to consider the Foreign Vehicle as "independent". As a consequence, it should be clarified that the terms shall be interpreted according to the long-standing practice of the ITA, based on which the requirement should be regarded as fulfilled if either at the level of the relevant fund or at the level of its Asset manager (i) the commencement of the activity has been subject to prior authorization by a competent authority; and (ii) the carrying out of the activity is subject to periodic controls by such authority, according to the applicable regulatory framework.
4.5. The participation in the capital or net assets of the Foreign Vehicle not higher than 20%
As mentioned above, according to Article 1(2)(c) of the Decree, a Foreign Vehicle shall be considered independent if and to the extent that, inter alia, no party holds a participation in its capital or net assets of more than 20%, including in this computation also participations held by parties which are closely linked. Article 1(2)(c)(1) of the Decree does not expressly state which is the entity in respect of which the condition of the 20% participation in the capital or net assets should be computed. Therefore, while it is clear that in terms of the holder of the participation this refers to any party, the question arises regarding whether the analysis shall be made at the level of the fund, or also at the level of its Asset Manager. It seems relatively clear that the requirements should be verified at the level of the Foreign Vehicle due to the fact that Article 1 of the Decree is headed "Non-resident investment vehicle" and contains the conditions that need to be met in order to consider the investment vehicle as independent. In other words, what matters for the purposes of Article 1(2) of the Decree is the independence of the Foreign Vehicle. This is also implicitly confirmed by the fact that the requirements to assess the independence of the Asset Manager are included in a different Article of the Decree (namely, Article 2), headed "Requirements of the independent agent".
In addition, as mentioned above Article 1(3) of the Decree states that "[…] The application of the 20 per cent threshold is temporarily suspended when the investment vehicle raises additional capital or reduces existing capital, provided that the suspension does not exceed 12 months […]". In this context, it is also relevant to assess how such requirement has to be evaluated in the case of a newly established investment vehicle. In fact, while Article 1(4) of the Decree regulates the only case where the Foreign Vehicle raises additional capital or reduces existing capital, nothing is said regarding where the Foreign Vehicle is in the launching phase. The rationale of the provisions is quite clear and intuitive as it ensures that the increasing or decreasing fluctuations do not entail the lack of the requirement under Article(1)(2)(c)(1) (i.e., the 20% threshold). Even in the absence of an explicit provision, the same rationale should apply even in the case where the Foreign Vehicle raises its initial capital.
4.6. The concept of "participation to the economic results" of the Foreign Vehicle
Where a Foreign Vehicle falls within the scope of Article 1(2)(c) of the Decree, an additional condition to apply the IME Safe Harbour is that the Asset Manager (and the parties belonging to the same group) does not hold a participation to the economic results of the Foreign Vehicle higher than 25%. In such a context, a question arises regarding whether the performance fee paid by the Foreign Vehicle to the Asset Manager (and to parties belonging to the same group) should be taken into account for the purposes of the threshold. Such fees paid by the Foreign Vehicles are a form of contractually agreed remuneration for the asset management activities carried out on behalf of the Foreign Vehicles. Further, they are not embedded in a participating instrument and are in fact regulated by the agreements entered into between the Foreign Vehicle and the Asset Manager.
It should be clarified that the participation to the economic result of an entity shall be linked to the existence of an instrument issued in relation to an underlying investment. In this context, it is worth noting that several Italian tax law provisions that include a reference to the concept of "participation to the economic results" refer to the existence of an instrument (shares, quotas, units, etc.) held by the party entitled to such economic rights. This is also confirmed by the Decree which states that carried interest entitlements are relevant for the purposes of the calculation thus seeming to support the view that performance fees paid without an underlying investment should not be taken into account for purposes of the calculation. Finally, it is worth pointing out that similar conclusions have been reached by the United Kingdom tax Authorities in relation to the UK IME regime14.
5. Concluding remarks
The IME safe harbour presents significant potential to offer certainty and predictability for the asset management industry. Coupled with powerful incentives to attract human capital, it can become an enticing value proposition for asset managers considering relocation, particularly if certain interpretative issues are clarified swiftly.
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1Reference is made to Article 1(255) of Law no. 197 of 29 December 2022.
2Presidential Decree No. 917 of 22 December 1986.
3 In this respect, Article 162(9-bis) ITC provides that "At the occurrence of conditions referred to in paragraph 7-quarter, the fixed place of business available to a resident company that carries out its business there, using its own staff, is not considered, for the purposes of paragraph 1, at the disposal of the investment vehicle (…) for the sole reason that the resident company's activity brings a benefit to the aforementioned vehicle".
4Reference is made to the list under Article 11(4), letter c) of Legislative Decree no. 239 of 1 April 1996.
5According to Article 1(6-bis 3) of Legislative Decree of 24 February 1998, No. 58, "Close links" means a situation in which two or more natural or legal persons are linked: (a) by a 'participation', which means the ownership, direct or by way of control, of 20 percent or more of the voting rights or capital of an undertaking; (b) by a 'control' link, which means the relationship existing between a controlling undertaking and a controlled undertaking, in all the cases referred to in Article 22(1) and (2) of Directive 2013/34/EU, or a similar relationship existing between any natural or legal person and an undertaking, in which case any controlled undertaking of a controlled undertaking shall be considered a controlled undertaking of the controlling undertaking; (c) a durable link between any or all of those persons and the same person which is a controlling relationship.
6 The application of the 20% threshold is temporarily suspended when the investment vehicle raises additional capital or reduces existing capital, provided that the suspension does not exceed 12 months. From the moment the vehicle commences liquidation activities in order to redeem the units or shares to investors, the 20% threshold does not have to be applied.
7For the sake of completeness, it shall be noted that for the purposes of assessing the independence of the Italian investment manager, the Decree clarifies that no relevance shall be given to the fact that the activity carried out in Italy is subject to regulatory restrictions under the relevant regulatory framework (i.e., it is of no relevance in this context that the Italian investment manager is not itself licensed in Italy).
8See the Decree of the Italian Ministry of Economy and Finance published on 14 May 2018.
9ibid.
10ibid.
11See the Regulation on Collective Asset Management issued by the Bank of Italy on 19 January 2015 (as amended and supplemented from time to time).
12 See Ruling No. 285/2023 in which it stated that "As clarified in the Bank of Italy's regulation on collective asset management, the plurality requirement may be deemed to be satisfied even in the presence of a single investor if the investment is made by him in the interest of a plurality of investors (e.g. funds of funds)". In line with Resolution 137/E/2005, the ITA added that "a fund, to be classified as such, therefore requires a plurality of subscribers, unless the sole holder represents a plurality of interests to represent collective management".
13For example, relevant clarifications have been provided by the ITA with respect to the tax regime under Article 7(3), of Law Decree No. 351/2001 as regards the proceeds distributed by Italian real estate investment funds. On this point, see Resolution No. 78/2017, Ruling No. 43/2018, No. 44/2018, No. 147/2018, No. 430/2019, No. 409/2021, No. 652/2021, No. 285/2023, No. 265/2023. With regard to the provision of Article 32(3) of Law Decree 78/2010 related to the application of the Italian tax regime available for real estate investment funds to funds not directly participated by a plurality of investors, See Circular Letter No. 2/E/2012. With respect to the provisions of Article 27(3) of Presidential Decree 600/1973, see Ruling No. 327/2023. Concerning the provisions of Article 26(5-bis), Presidential Decree No. 600/1973, see Ruling No. 423/2019.
14 In fact, the UK tax Authorities have clarified that the fees paid to the asset manager are not relevant for the purposes of verifying the fulfilment of the condition according to which the asset manager "(…) must not have a beneficial entitlement to more than 20% of the non-resident’s chargeable profit arising from transactions carried out through the investment manager (…)". The same reasoning is applied to cases where the asset manager is granted with options to acquire any securities or interests in the foreign vehicle. Indeed, such options are considered in the context of the relevant threshold only when exercised, i.e., when the underlying security is effectively held by the asset manager. Indeed, the requirements provided Italian IME regime closely follow the UK model, up to the point that they are considered by some authors as an attempt to implement a legal transplant of such regime into the Italian tax system. See for example D. Frescurato, V.A. Moretti & F. Bortolameazzi, "The Italian Investment Manager Exemption: All That Glitters Is Not Gold", 24 Fin. & Cap. Mkts 1 (2023), Journal Articles & Opinion Pieces IBFD.
