Click here for printer friendly page

Tax and legal issues 2000

Italian corporate income tax and investment rules underwent significant reforms in 2000 with new provisions applicable to the private equity and venture capital industry. The resulting regulations are summarised here by AIFI.

Since 1997, and more recently in the year 2000, the Italian government has been deeply reforming corporate income tax and investment instrument rules. The main regulations resulting from the tax and legal reform are summarised below.

Ordinary corporate income tax (IRPEG)

The ordinary corporate income tax rate (IRPEG) will decrease from the actual 37 per cent to 36 per cent, for the fiscal year 2001 and 2002, and permanently to 35 per cent for 2003 and the following years.

Dual income tax (DIT)

DIT is aimed at fostering the capitalisation of corporations, ie to privilege equity over indebtedness. DIT should result in a reduction of the total IRPEG (corporate income tax) ordinarily due by corporations at the rate of 37 per cent (reduced to 36 per cent and 35 per cent by the year 2003); in fact, taxable profits will be subject to the following different rates:

• a reduced IRPEG tax rate of 19 per cent which is applicable to the amount of profit corresponding to the average return rate of the capital increase of the company in each year as compared to the net equity of the balance sheet relative to 1996 accounting year, without considering the profit of the same period. From the year 2001 the net equity increase must be multiplied by 1.4.
• the ordinary IRPEG tax rate of 37 per cent (reduced to 36 per cent and 35 per cent by the year 2003) which is applicable to the remaining part of the profits.

The residual part of the profit that in one tax period cannot benefit from the reduced rate may increase the taxable profits subjects to the reduced rate in the following years, but not later than the fifth.

The average rate of return of the capital increase is established within 3l March of each year by the Ministry of Finance in accordance with the Treasury Department, taking into account the interest rate of public and private bonds in the Italian market. The average rate of return can be increased by up to three per cent.

The capital increase will be determined as the mathematical difference between the increasing and decreasing variations of the net equity.

A specific benefit is provided for those companies that are going to be quoted on the Stock
Exchange. In fact, for those companies the rate of IRPEG, reduced on the basis of the DIT provisions, is seven per cent (rather than 19 per cent). These reductions will be applied for the subsequent three tax periods after first quotation on the Stock Exchange.

Regional tax on productive activities (IRAP)

The aim of this new tax, which replaces the Local Income Tax (ILOR), the net equity tax, health contributions on employees' wages and salaries and other minor taxes and duties, is to enhance
capitalisation of companies and discourage indebtedness, in line with the principles governing other new regulations (the dual income tax, for example) recently approved by our Government.

Stock companies, partnerships and entities, individual entrepreneurs, the self-employed, State and private entities, non-resident companies and entities are subject to IRAP. On the contrary, investment and pension funds are excluded from the tax.

IRAP has come into force in 1998 and is fixed at the normal rate of 4.25 per cent, although each region is allowed to increase the tax rate by up to one per cent, starting from the third year after its introduction.

In general, the IRAP tax basis is the difference between the production value and the production costs, although this latter does not include labour costs, fees paid to third parties in relation to quasi-employment contracts and occasional professional services, allowance to cover risk on bad debt, capital losses, interest expense. As far as IRAP is concerned, capital gain, dividend and interest income are not included in the taxable income.

IRAP is a tax which is not deductible for IRPEG tax purposes.

Substitute tax on capital gains

The government has introduced in 1997 a new law, particularly relevant for the venture capital and private equity industry, regarding transfers of participation in controlled or affiliated companies. These provisions have been further improved in 2000 with law 342.

At the taxpayer's discretion, instead of ordinary taxation, a 19 per cent substitute tax rate has been provided for the taxation of capital gain realised from the sale of participation in controlled or affiliated companies (a company is affiliated when the party holds at least the 20 per cent of the voting shares).

The application of such substitute tax at the 19 per cent rate allows the capital gain to be excluded from the ordinary taxation regime.

The substitute tax at the 19 per cent rate is also applicable to capital gains realised from the sale of controlled or affiliated companies following an IPO on a regulated stock market.

Italian closed-end funds taxation

Closed-end funds are not liable to ordinary income taxes (IRPEG and IRAP) but to a 12.5 per cent substitute tax rate on the performance of the fund including realised and unrealised investments*. Losses due to negative performance of the fund can be carried forward in the following years.

Individual resident investors are fully exempted from taxation on proceeds received from the fund. Corporate entities resident in Italy are fully taxable on proceeds received from the fund, but a 15 per cent tax credit is granted.

All non-resident investors are fully exempted from Italian taxation and in order to recover the substitute tax paid by the fund they are entitled to receive from the management company a 15 per cent reimbursement in cash calculated on the net proceeds received from the fund. Funds subscribed exclusively by foreign investors are totally exempt from ordinary income taxes and from the substitute tax.

Italian closed-end funds regulation

In 1998 the Italian government approved a new Finance Act (Legislative Decree 28 February 1998, n. 58, better known as the “Draghi Act”) concerning the whole financial sector and, among others, financial brokerage activity, open-end and closed-end investment funds, SICAVs, and specific rules applying to quoted companies. The act has also introduced, for the first time in Italy, a complete set of corporate governance provisions. In accordance with the new regulations the Ministry of Treasury, the Bank of Italy and Consob issued the implementing provisions.

In particular, the Draghi Act introduced several innovations in the discipline of asset management, creating the SGR (Società di Gestione del Risparmio), which is allowed to manage both individual portfolios and funds. When the SGR operates as management company only for closed-end funds, it is requested to have a minimum capital of E1m.

Regulation concerning the investment policy, the rules for closed-end funds exclusively dedicated to qualified investors and the criteria against which the average value of the fund's shares shall be determined, have been issued by the Ministry of Treasury and the Bank of Italy during the second half of 1999.

The new regulation, according to an AIFI proposal, provides specific rules for closed-end funds dedicated to qualified investors raised through a private placement as opposed to retail funds raised through a public offering. The new regulation has removed the prohibition to acquire majority participation and other constraints. The main limitations which still remain enforceable are related to the minimum diversification required to the fund, thus the fund must not invest more then the 20 per cent of its total asset in the same company and/or more than the 30 per cent in companies belonging to the same group.

Funds dedicated to qualified investors are not subject to general asset management limitations upon agreement of the Bank of Italy. For this kind of fund, the draw down of the committed capital in accordance with the investment requirement of the fund is also allowed. 

* Only if fund's quotas are held by less than 100 subscribers and less than 50 per cent of these subscribers are not qualified investors (see scheme below), proceeds coming from relevant stocks (>50 per cent of the acquired company) are subject to a 27 per cent substitute tax rate

Scheme on the new Italian closed-end funds regulation

The Italian Venture Capital and Private Equity Association (AIFI) promotes, develops and represents institutional, venture capital and private equity activity in Italy. The organisation is composed of private equity and venture capital investors who purchase, manage and divest unquoted companies.

Copyright © AIFI 2000