Italy’s recently approved Growth Decree introduces new tax measures to support investments and the need for Italian companies to obtain alternative new financing. One of the most innovative measures of the Growth Decree is the introduction of European Long-term Investment Funds (ELTIFs).
European Long-term Investment Funds
ELTIFs are regulated by Regulation (EU) 2015/760 (Regulation 2015/760) and have been set up with the aim to raise and channel capital towards long-term investment in European small and medium enterprises (SMEs). They are innovative funds which reflect the need for alternative funding structures to provide SMEs with long-term financing, whereby capital raised through ELTIFs can be addressed to finance long-term projects of small-cap entities such as start-ups and innovative companies.
ELTIFs might have an active role in the financing of Italian SMEs through the subscription of bonds issued by the latter, granting financing or securities in favor of the latter.
Article 36-bis of the Growth Decree introduces a new tax regime for investments in ELTIFs that fulfil specific requirements as clarified below. The new tax regime may help to generate positive economic results for both the European and Italian economy, possibly replacing the success of the Long-term Individual Savings Plan (PIR) introduce by the Budget Law for 2017. In this respect, these funds are not subject to the qualitative limits of investment recently introduced for the PIR and, considering their European nature, they benefit from European regulatory and financial stability.
The Growth Decree introduces a tax benefit for Italian resident individuals investing in ELTIFs: any income arising directly from investments in ELTIFs or indirectly from investments in mutual funds which invest their entire portfolio of assets in ELTIFs, and any capital gain arising from the disposal or the redemption of the above units or shares of ELTIFs, are not subject to tax.
The tax exemption applies for the fiscal period 2020 and only in direct or indirect investments in ELTIFs not exceeding 150,000 euros ($168,245) per year and 1.5 million euros overall when the following conditions are met:
- the assets collected by the ELTIFs manager do not exceed 2 million euros for each year, up to a total amount of 6 million euros for each manager;
- the ELTIFs invest at least 70% of their capital in eligible investments, as defined by Article 10 of Regulation 2015/760, related to eligible portfolio undertakings (as defined in Article 11 of Regulation 2015/760) that are resident in the territory of the state or in EU member states or in states party to the Agreement on the European Economic Area, with a permanent establishment in the territory of the state.
The investment must be held for at least five years (“vesting period”).
If the disposal of the fund’s shares or units is before the vesting period, the income derived from the transfer and that arising during the investment period is subject to a “recapture mechanism,” therefore subject to taxation according to the standard fiscal rules, unless the equivalent value is invested in another ELTIF within 90 days of disposal or redemption. In this case, the relevant payment must be made by the 16th day of the fourth month following the month of disposal.
The recapture mechanism also applies in the event of the ELTIF not complying with the European rules on eligible investments and concentration limits set out in Regulation 2015/760.
Also, shares or units held in ELTIFs are not subject to inheritance and gift taxes as provided for in Legislative Decree No. 346 of October 31, 1990.
In the context of technological and digital transformation processes within Italian companies the Growth Decree reintroduces the 30% extra-depreciation regime (i.e. up to a total of 130% tax depreciation) that was initially not extended for fiscal year 2019 by the Budget Law for 2019.
It applies to entities investing in new tangible assets as from April 1, 2019 to December 31, 2019 (or June 30, 2020, provided that the purchase orders are accepted by the seller by December 31, 2019 and at least 20% of the price is paid by the same date).
The tax depreciation regime implies that the companies investing in eligible assets can exercise an off-account deduction (variazione in diminuzione), through a consequent adjustment equal to the cost-plus (costo maggiorato) paid for such new tangible assets. The enhanced depreciation is allowed up to a maximum of 2.5 million euro investments.
The Growth Decree amends the patent box regime with the aim of making the procedure for requesting the patent box simpler for Italian taxpayers. As of 2019, Italian taxpayers will have the chance to calculate and determine the amount of tax benefit deriving from qualified intellectual properties (IPs) without filing a ruling with the Italian tax authorities as in the previous rules.
Italian companies that decide to opt for the new filing method are required to identify and separate the portion of income derived from IP in three equal installments to be included in the tax return of the fiscal year of the election and in the two following.
The Growth Decree also provides for a specific penalty regime. If the Italian tax authority challenges the patent box tax benefit, no penalties should apply if the taxpayer is able to prepare and file with the tax office all the available documentation supporting the methods and criteria adopted to identify the IP income. Taxpayers who have already filed a ruling with the Italian tax authority without having concluded the agreement can decide to opt for the new regime.
The Growth Decree introduced new tax measures to support investments and the need for Italian SMEs to obtain alternative new financing. In particular:
- the patent box regime does not require a time-consuming and complex tax ruling procedure to obtain the grant of a tax exemption of income referable to qualified intangible and IPs, therefore under the new provision the taxpayer calculates the tax benefit directly in the tax return;
- the tax depreciation regime, in place until financial year 2018, has been extended to financial year 2019 consenting a depreciation of 130% of the cost of investments in new tangible assets;
- finally, the Growth Decree introduced an important tax incentive for Italian retail investors of ELTIFs whose assets are mostly invested in qualified Italian-based innovative enterprises. This measure may represent an alternative funding opportunity for Italian SMEs and replicate the success of Italian PIR.
Francesco Bonichi is a Tax Partner and Elisa Cesetti is a Senior Consultant at EY Italy.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.